|
|
|
|

|UNITED STATES
  SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549
|----------------------------------------------------------------------

|___________________FORM 10-Q
|----------------------------

(Mark One)

| | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       
| | ----------------------------------------------------------------------------------------
| | For the Quarterly Period Ended September 30, 2005                                       
| |                                                                                         
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | For the Transition Period From  to                                                      

Commission File Number 000-22400

STRATEGIC DIAGNOSTICS INC.(Exact name of Registrant as specified in its charter)

____________________________

|Delaware                                 |  | 56-1581761         
|---------------------------------------- |  | -------------------
|(State or other jurisdiction of          |  | (I.R.S. employer   
|incorporation or organization)           |  | identification no.)
|                                         |  |                    
|111 Pencader Drive                       |  |                    
|Newark, 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    No

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes    No

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 September 30, 2005, there were 19,913,453 outstanding shares of the Registrant’s common stock, par value $.01 per share.



|
|
|
|



Back to Contents

STRATEGIC DIAGNOSTICS INC.

EXPLANATORY NOTE

Following a series of discussions with the U.S. Securities and Exchange Commission (the “SEC”), the Company determined on December 15, 2005 that it would change its method of accounting for revenue on certain custom antibody arrangements. The Company changed its revenue recognition policy for custom antibody projects to utilize a methodology whereby revenue is recognized when a project’s specifications have been met and the related antibodies have been shipped, rather than on the percentage-of-completion methodology the Company had used since 1996.

Accordingly, the accompanying consolidated interim financial statements for the three and nine month periods ended September 30, 2005 reflect this change in our accounting methodology.  The accompanying interim financial statements for the three and nine month periods ended September 30, 2004 have been restated to reflect this change in accounting methodology.

Also, we have amended our annual report on Form 10-K for the year ended December 31, 2004 to restate our consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 and the related disclosures, and have amended  our  interim reports on Form 10-Q for the three month periods ended March 31, 2005 and 2004, and the three and six month periods ended June 30, 2005 and 2004 and the related disclosures.

Please refer to Note 2 to the consolidated interim financial statements for additional information on the restatement.

This Form 10-Q should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-K, including any amendments to those filings.

1

---



Back to Contents

STRATEGIC DIAGNOSTICS INC.

INDEX

|Item       |  |         |  |                                                                                                                                | Page
|---------- |  | ------- |  | ------------------------------------------------------------------------------------------------------------------------------ | ----
|           |  |         |  |                                                                                                                                |     
|PART I     |  |         |  | FINANCIAL INFORMATION                                                                                                          |     
|           |  |         |  |                                                                                                                                |     
|           |  | ITEM 1. |  | Financial Statements (Unaudited)                                                                                               |     
|           |  |         |  |                                                                                                                                |     
|           |  |         |  | Consolidated Balance
    Sheets  September 30, 2005 and December 31, 2004 (as restated)                                       | 3   
|           |  |         |  |                                                                                                                                |     
|           |  |         |  | Consolidated Statements
      of Operations  Three months and nine months ended September 30, 2005
    and 2004 (as restated) | 4   
|           |  |         |  |                                                                                                                                |     
|           |  |         |  | Consolidated Statements
    of Cash Flows  Nine months ended September 30, 2005 and 2004 (as restated)                        | 5   
|           |  |         |  |                                                                                                                                |     
|           |  |         |  | Notes to Consolidated Interim Financial Statements                                                                             | 6   
|           |  |         |  |                                                                                                                                |     
|           |  | ITEM 2. |  | Management’s
    Discussion and Analysis of Financial Condition and Results of Operations                                      | 12  
|           |  |         |  |                                                                                                                                |     
|           |  | ITEM 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                     | 18  
|           |  |         |  |                                                                                                                                |     
|           |  | ITEM 4. |  | Controls and Procedures                                                                                                        | 19  
|           |  |         |  |                                                                                                                                |     
|PART II    |  |         |  | OTHER INFORMATION                                                                                                              |     
|           |  |         |  |                                                                                                                                |     
|           |  | ITEM 6. |  | Exhibits                                                                                                                       | 20  
|           |  |         |  |                                                                                                                                |     
|SIGNATURES |  |         |  |                                                                                                                                | 21  

2

---



Back to Contents

PART I.

Item 1. Financial Statements

STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS(in thousands, except share and per share data)(unaudited)

|                                     |  |       |                                                                |   |        |                                                           |   | September 30, |   |   | December 31, | 
|------------------------------------ |  | ----- | -------------------------------------------------------------- | - | ------ | --------------------------------------------------------- | - | ------------- | - | - | ------------ | 
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|                                     |  |       |                                                                |   |        |                                                           |   | 2005          |   |   | 2004         | 
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|ASSETS                               |  |       |                                                                |   |        |                                                          
|Current Assets:                      |  |       |                                                                |   |        |                                                          
|                                     |  |       | Cash and cash equivalents                                      | $ | 9,832  |                                                           | $ | 8,096         |  
|                                     |  |       | Receivables, net                                               |   | 3,398  |                                                           |   | 3,107         |  
|                                     |  |       | Inventories                                                    |   | 3,288  |                                                           |   | 3,218         |  
|                                     |  |       | Deferred tax asset                                             |   | 930    |                                                           |   | 1,071         |  
|                                     |  |       | Other current assets                                           |   | 640    |                                                           |   | 367           |  
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|                                     |  |       |                                                                |   |        | Total current assets                                      |   | 18,088        |   |   | 15,859       | 
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|Property and equipment, net          |  | 3,381 |                                                                |   | 3,605  |                                                          
|Other assets                         |  | 5     |                                                                |   | 2      |                                                          
|Deferred tax asset                   |  | 8,163 |                                                                |   | 8,415  |                                                          
|Intangible assets, net               |  | 6,852 |                                                                |   | 6,992  |                                                          
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|                                     |  |       |                                                                |   |        | Total assets                                              | $ | 36,489        |   | $ | 34,873       | 
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|LIABILITIES AND STOCKHOLDERS' EQUITY |  |       |                                                                |   |        |                                                          
|Current Liabilities:                 |  |       |                                                                |   |        |                                                          
|                                     |  |       | Accounts payable                                               | $ | 393    |                                                           | $ | 868           |  
|                                     |  |       | Accrued expenses                                               |   | 1,355  |                                                           |   | 1,255         |  
|                                     |  |       | Current portion of long term debt                              |   | 211    |                                                           |   | 211           |  
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|                                     |  |       |                                                                |   |        | Total current liabilities                                 |   | 1,959         |   |   | 2,334        | 
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|Long-term debt                       |  | 615   |                                                                |   | 773    |                                                          
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|Stockholders' 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,    |   |        |                                                           |   |               |  
|                                     |  |       |                                                                |   |        | 19,913,453 and 19,379,602 issued and outstanding          |   |               |   |   |              | 
|                                     |  |       |                                                                |   |        | at September 30, 2005 and December 31, 2004, respectively |   | 199           |   |   | 194          | 
|                                     |  |       | Additional paid-in capital                                     |   | 38,043 |                                                           |   | 36,596        |  
|                                     |  |       | Accumulated deficit                                            |   | (4,082 | )                                                         |   | (4,958        | )
|                                     |  |       | Deferred compensation                                          |   | (289   | )                                                         |   | (206          | )
|                                     |  |       | Cumulative translation adjustments                             |   | 44     |                                                           |   | 140           |  
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|                                     |  |       |                                                                |   |        | Total stockholders' equity                                |   | 33,915        |   |   | 31,766       | 
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 
|                                     |  |       |                                                                |   |        | Total liabilities and stockholders' equity                | $ | 36,489        |   | $ | 34,873       | 
|                                     |  |       |                                                                |   |        |                                                           |   |               |   |   |              | 

The accompanying notes are an integral part of these statements

3

---



Back to Contents

STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except share and per share data)(unaudited)

|                                 |   |      |                                     |   |               |                          |   | Three Months        |  |   | Nine Months         | 
|-------------------------------- | - | ---- | ----------------------------------- | - | ------------- | ------------------------ | - | ------------------- |  | - | ------------------- | 
|                                 |   |      |                                     |   |               |                          |   | Ended September 30, |  |   | Ended September 30, | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   | 2005                |  |   | 2004                | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   | (as restated) |                          |   |                     |  |   | (as restated)       | 
|NET REVENUES:                    |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      | Product related                     | $ | 6,094         |                          | $ | 5,583               |  | $ | 18,949              | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               | Total net revenues       |   | 6,094               |  |   | 5,583               | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|OPERATING EXPENSES:              |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      | Manufacturing                       |   | 2,762         |                          |   | 2,583               |  |   | 8,477               | 
|                                 |   |      | Research and development            |   | 664           |                          |   | 508                 |  |   | 2,322               | 
|                                 |   |      | Selling, general and administrative |   | 2,348         |                          |   | 2,114               |  |   | 7,113               | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               | Total operating expenses |   | 5,774               |  |   | 5,205               | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               | Operating income         |   | 320                 |  |   | 378                 | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|Interest income (expense), net   |   | 59   |                                     |   | 17            |                          |   | 130                 |  |   | 31                  | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|Income before taxes              |   | 379  |                                     |   | 395           |                          |   | 1,167               |  |   | 1,102               | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               | Income tax expense       |   | 60                  |  |   | 98                  | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|Net income                       |   |      |                                     |   | 319           |                          |   | 297                 |  |   | 876                 | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|Basic net income per share       | $ | 0.02 |                                     | $ | 0.02          |                          | $ | 0.04                |  | $ | 0.04                | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|Shares used in computing basic   |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      | net income per share                |   | 19,850,000    |                          |   | 19,250,000          |  |   | 19,680,000          | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|Diluted net income per share     | $ | 0.02 |                                     | $ | 0.02          |                          | $ | 0.04                |  | $ | 0.04                | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|Shares used in computing diluted |   |      |                                     |   |               |                          |   |                     |  |   |                     | 
|                                 |   |      | net income per share                |   | 20,063,000    |                          |   | 19,431,000          |  |   | 19,793,000          | 
|                                 |   |      |                                     |   |               |                          |   |                     |  |   |                     | 

The accompanying notes are an integral
part of these statements

4

---



Back to Contents

STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

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

|                                               |   |       |                                                     |   |               |                               |  | Nine Months         |  
|---------------------------------------------- | - | ----- | --------------------------------------------------- | - | ------------- | ----------------------------- |  | ------------------- | -
|                                               |   |       |                                                     |   |               |                               |  | Ended September 30, |  
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|                                               |   |       |                                                     |   |               |                               |  | 2005                |  
|                                               |   |       |                                                     |   | (as restated) |                              
|Cash Flows from Operating Activities:          |   |       |                                                     |   |               |                              
|Net income                                     | $ | 876   |                                                     | $ | 796           |                              
|                                               |   |       | Adjustments to reconcile net income to net          |   |               |                               |  |                     |  
|                                               |   |       | cash provided by operating activities:              |   |               |                               |  |                     |  
|                                               |   |       |                                                     |   |               | Depreciation and amortization |  | 659                 |  
|                                               |   |       |                                                     |   |               | Stock compensation expense    |  | 146                 |  
|                                               |   |       |                                                     |   |               | Deferred income tax provision |  | 291                 |  
|(Increase) decrease in:                        |   |       |                                                     |   |               |                              
|                                               |   |       | Receivables                                         |   | (291          | )                             |  | 137                 |  
|                                               |   |       | Inventories                                         |   | (70           | )                             |  | 122                 |  
|                                               |   |       | Other current assets                                |   | (273          | )                             |  | 39                  |  
|                                               |   |       | Other assets                                        |   | (3            | )                             |  |                    |  
|Increase (decrease) in:                        |   |       |                                                     |   |               |                              
|                                               |   |       | Accounts payable                                    |   | (475          | )                             |  | (77                 | )
|                                               |   |       | Accrued expenses                                    |   | 100           |                               |  | 388                 |  
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Net cash provided by operating activities      |   | 960   |                                                     |   | 2,423         |                              
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Cash Flows from Investing Activities:          |   |       |                                                     |   |               |                              
|                                               |   |       | Purchase of property and equipment                  |   | (322          | )                             |  | (182                | )
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Net cash used in investing activities          |   | (322  | )                                                   |   | (182          | )                            
|Cash Flows from Financing Activities:          |   |       |                                                     |   |               |                              
|                                               |   |       | Proceeds from exercise of incentive stock options   |   | 1,335         |                               |  | 73                  |  
|                                               |   |       | Proceeds from employee stock purchase plan          |   | 17            |                               |  | 11                  |  
|                                               |   |       | Proceeds from  issuance of long and short term debt |   |              |                               |  | 551                 |  
|                                               |   |       | Repayments on financing obligations                 |   | (158          | )                             |  | (599                | )
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Net cash provided by financing activities      |   | 1,194 |                                                     |   | 36            |                              
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Effect of exchange rate changes on cash        |   | (96   | )                                                   |   | 9             |                              
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Net increase in cash and cash equivalents      |   | 1,736 |                                                     |   | 2,286         |                              
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Cash and cash equivalents, beginning of period |   | 8,096 |                                                     |   | 5,158         |                              
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Cash and cash equivalents, end of period       | $ | 9,832 |                                                     | $ | 7,444         |                              
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|Supplemental Cash Flow Disclosure:             |   |       |                                                     |   |               |                              
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|                                               |   |       | Cash paid for taxes                                 |   | 18            |                               |  | 5                   |  
|                                               |   |       |                                                     |   |               |                               |  |                     |  
|                                               |   |       | Cash paid for interest                              |   | 35            |                               |  | 38                  |  
|                                               |   |       |                                                     |   |               |                               |  |                     |  

The accompanying notes are an integral part of these statements

5

---



Back to Contents

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 biotechnology-based detection solutions to a diverse customer base, across multiple industrial and human health markets for applications in food safety, water quality, diagnostics and therapeutics. 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/A for the fiscal year ended December 31, 2004.  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 prior period 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.

6

---



Back to Contents

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 financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated 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 percentage of completion on projects for revenue recognition.  Actual results could differ from these estimates.

Comprehensive Income

Comprehensive income consists of the following for each period:

|                                |   | Three Months Ended |   |   | Nine Months Ended |  
|------------------------------- | - | ------------------ | - | - | ----------------- | -
|                                |   | September 30,      |   |   | September 30,     |  
|                                |   |                    |   |   |                   |  
|                                |   | 2005               |   |   | 2004              |  
|                                |   |                    |   |   |                   |  
|                                |   |                    |   |   | (as restated)     |  
|Net income                      | $ | 319                |   | $ | 297               |  
|                                |   |                    |   |   |                   |  
|Currency translation adjustment |   | (15                | ) |   | (5                | )
|                                |   |                    |   |   |                   |  
|Total comprehensive income      | $ | 304                |   | $ | 292               |  
|                                |   |                    |   |   |                   |  

|2. | RESTATEMENT
            OF
CONSOLIDATED FINANCIAL STATEMENTS
|-- | ------------------------------------------------------------

Following
      a series of discussions with the U.S. Securities and Exchange Commission
      (the SEC), the Company determined on December 15, 2005 that
      it would change its method of accounting for revenue on certain  custom
      antibody arrangements. Accordingly, the Companys financial statements
      for the three and nine month periods ended September 30, 2004
      have been restated. The Company changed its revenue recognition policy
      for custom
      antibody projects  to utilize a methodology whereby revenue is recognized
      when a projects
        specifications have been met and the related antibodies have been shipped,
        rather than on the percentage-of-completion methodology the Company had
        used since 1996. The adjustments required to effect this change in accounting
        primarily impact certain line items as reported in the Consolidated Balance
        Sheet and
        Statement of Operations as follows: accounts receivable because of the
        elimination
        of unbilled
        receivables; revenues because they are now recognized when a project
        is complete; inventories, accrued expenses and manufacturing costs because
        of the deferral
        of costs until the completion of a project; and, taxes because of the
        changes
in net income.


The following schedules reconcile the amounts originally reported in the
Companys consolidated balance sheet as of December 31, 2004, and the consolidated statements of operations for the
three and nine month period ended September 30, 2004 to the corresponding amounts in each of these statements (in thousands).


|                                           |  |   | December 31,  2004 |   |             |      |   |  | December 31,  2004 |  
|------------------------------------------ |  | - | ------------------ | - | ----------- | ---- | - |  | ------------------ | -
|                                           |  |   |                    |   | Adjustments |      |   | 
|                                           |  |   |                    |  
|                                           |  |   | (as reported)      |   |             |      |   |  | (as restated)      |  
|Selected Balance Sheet Amounts:            |  |   |                    |   |             |      |   |  |                    |  
|                                           |  |   |                    |   |             |      |   |  |                    |  
|Receivables, net                           |  | $ | 3,858              |   |             | (751 | ) |  | 3,107              |  
|Inventories                                |  | $ | 3,090              |   |             | 128  |   |  | 3,218              |  
|Other current assets                       |  | $ | 336                |   |             | 31   |   |  | 367                |  
|Total current assets                       |  | $ | 16,451             |   |             | (592 | ) |  | 15,859             |  
|Deferred tax asset                         |  | $ | 8,288              |   |             | 127  |   |  | 8,415              |  
|Intangible assets, net                     |  | $ | 6,996              |   |             | (4   | ) |  | 6,992              |  
|Total assets                               |  | $ | 35,342             |   |             | (469 | ) |  | 34,873             |  
|Accrued expenses                           |  | $ | 1,525              |   |             | (270 | ) |  | 1,255              |  
|Total current liabilities                  |  | $ | 2,604              |   |             | (270 | ) |  | 2,334              |  
|Accumulated deficit                        |  | $ | (4,759             | ) |             | (199 | ) |  | (4,958             | )
|Total stockholders' equity                 |  | $ | 31,965             |   |             | (199 | ) |  | 31,766             |  
|Total liabilities and stockholders' equity |  | $ | 35,342             |   |             | (469 | ) |  | 34,873             |  
|                                           |  |   |                    |   |             |      |   |  |                    |  
|                                          

7

---



Back to Contents

|                                            |  |   | Three Months Ended  September 30,2004 |  |  | Adjustments |   |  | Three Months EndedSeptember 30,2004 | 
|------------------------------------------- |  | - | ------------------------------------- |  |  | ----------- | - |  | ----------------------------------- | 
|                                            |  |  
|                                            |  |   |                                       | 
|                                            |  |   | (as reported)                         |  |  |             |   |  | (as restated)                       | 
|Selected Statement of Operations Amounts:   |  |   |                                       |  |  |             |   |  |                                     | 
|                                            |  |   |                                       |  |  |             |   |  |                                     | 
|Product related revenues                    |  | $ | 5,546                                 |  |  | 37          |   |  | 5,583                               | 
|Total revenues                              |  | $ | 5,546                                 |  |  | 37          |   |  | 5,583                               | 
|Manufacturing expenses                      |  | $ | 2,589                                 |  |  | (6          | ) |  | 2,583                               | 
|Selling general and administrative expenses |  | $ | 2,114                                 |  |  | 0           |   |  | 2,114                               | 
|Total operating expenses                    |  | $ | 5,211                                 |  |  | (6          | ) |  | 5,205                               | 
|Operating income (loss)                     |  | $ | 335                                   |  |  | 43          |   |  | 378                                 | 
|Income (loss) before taxes                  |  | $ | 352                                   |  |  | 43          |   |  | 395                                 | 
|Income tax expense (benefit)                |  | $ | 81                                    |  |  | 17          |   |  | 98                                  | 
|Net income (loss)                           |  | $ | 271                                   |  |  | 26          |   |  | 297                                 | 
|Basic net income (loss) per share           |  |   |                                       |  |  |             |   |  |                                     | 
|applicable to common shareholders           |  | $ | 0.01                                  |  |  | 0.01        |   |  | 0.02                                | 
|Diluted net income (loss) per share         |  |   |                                       |  |  |             |   |  |                                     | 
|applicable to common shareholders           |  | $ | 0.01                                  |  |  | 0.01        |   |  | 0.02                                | 
|                                            |  |   |                                       |  |  |             |   |  |                                     | 

|                                            |   | Nine Months EndedSeptember 30, 2004 |  |  | Adjustments |   | Nine Months EndedSeptember 30, 2004
|------------------------------------------- | - | ----------------------------------- |  |  | ----------- | - | -----------------------------------
|                                            |  
|                                            |   |                                    
|                                            |   | (as reported)                       |  |  |             |   | (as restated)                      
|                                            |   |                                     |  |  |             |   |                                    
|Selected Statement of Operations Amounts:   |   |                                     |  |  |             |   |                                    
|                                            |   |                                     |  |  |             |   |                                    
|Product related revenues                    | $ | 17,316                              |  |  | 29          |   | 17,345                             
|Total revenues                              | $ | 17,316                              |  |  | 29          |   | 17,345                             
|Manufacturing expenses                      | $ | 7,789                               |  |  | 97          |   | 7,886                              
|Selling general and administrative expenses | $ | 6,786                               |  |  | 0           |   | 6,786                              
|Total operating expenses                    | $ | 16,177                              |  |  | 97          |   | 16,274                             
|Operating income (loss)                     | $ | 1,139                               |  |  | (68         | ) | 1,071                              
|Income (loss) before taxes                  | $ | 1,170                               |  |  | (68         | ) | 1,102                              
|Income tax expense (benefit)                | $ | 333                                 |  |  | (27         | ) | 306                                
|Net income (loss)                           | $ | 837                                 |  |  | (41         | ) | 796                                
|Basic net income (loss) per share           |   |                                     |  |  |             |   |                                    
|applicable to common shareholders           | $ | 0.04                                |  |  | 0.00        |   | 0.04                               
|Diluted net income (loss) per share         |   |                                     |  |  |             |   |                                    
|applicable to common shareholders           | $ | 0.04                                |  |  | 0.00        |   | 0.04                               

8

---



Back to Contents

| | 3. | BASIC AND DILUTED INCOME (LOSS) PER SHARE:
| | -- | ------------------------------------------

Basic earnings per share (EPS) is
    computed by dividing net income available for common shareholders 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. Excluded
    from the calculation of diluted shares is the effect of the exercise of options
    or warrants where such effect would be anti-dilutive.

As of September 30, 2005, options to purchase 1,641,000 shares of the Company’s common stock were outstanding, with options to purchase approximately 1,134,000 shares exercisable.  Listed below are the basic and diluted share calculations.

|                                        |  | Three Months Ended |  |  | Nine Months Ended | 
|--------------------------------------- |  | ------------------ |  |  | ----------------- | 
|                                        |  | September 30,      |  |  | September 30,     | 
|                                        |  |                    |  |  |                   | 
|                                        |  | 2005               |  |  | 2004              | 
|                                        |  |                    |  |  |                   | 
|                                        |  |                    |  |  |                   | 
|Weighted avg. common shares outstanding |  | 19,849,603         |  |  | 19,250,125        | 
|                                        |  |                    |  |  |                   | 
|Shares used in computing basic          |  |                    |  |  |                   | 
|net income per share                    |  | 19,849,603         |  |  | 19,250,125        | 
|                                        |  |                    |  |  |                   | 
|                                        |  |                    |  |  |                   | 
|Stock options                           |  | 213,198            |  |  | 180,936           | 
|                                        |  |                    |  |  |                   | 
|Shares used in computing diluted        |  |                    |  |  |                   | 
|net income per share                    |  | 20,062,801         |  |  | 19,431,061        | 
|                                        |  |                    |  |  |                   | 

9

---



Back to Contents

| | 4. | STOCK-BASED COMPENSATION
| | -- | ------------------------

The Company applies the intrinsic-value-based method to account for its fixed-plan stock options.  Compensation expense is recorded on the date of grant only if the current market price of the underlying stock, at that date, exceeded the exercise price.  The Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.”  Under the Company’s employee share option plans, the Company grants employee and outside director stock options at an exercise price equal to the fair market value at the date of grant.  No compensation expense is recorded with respect to such stock option
grants.  Compensation expense with respect to stock awards granted is measured based upon the fair value of such awards and is charged to expense over the vesting period.

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 in each period.

|                                                                                                                                                            |   | Three Months Ended |   |   | Nine Months Ended |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------ | - | - | ----------------- | -
|                                                                                                                                                            |   | September 30,      |   |   | September 30,     |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|                                                                                                                                                            |   | 2005               |   |   | 2004              |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|                                                                                                                                                            |   |                    |   |   | (as restated)     |  
|Net income, as reported                                                                                                                                     | $ | 319                |   | $ | 297               |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|Add: Stock-based employee
    compensation expense included in reported net income (loss), net of related tax effects                                       |   | 53                 |   |   | 18                |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|Deduct: Total stock-based employee
        compensation expense determined under fair value based method for all
        awards, net of related tax effects |   | (158               | ) |   | (291              | )
|                                                                                                                                                            |   |                    |   |   |                   |  
|Net income (loss)as adjusted                                                                                                                               | $ | 214                |   | $ | 24                |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|Earnings per share:                                                                                                                                         |   |                    |   |   |                   |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|Basicas reported                                                                                                                                           | $ | 0.02               |   | $ | 0.02              |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|Basicas adjusted                                                                                                                                           | $ | 0.01               |   | $ |                  |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|Dilutedas reported                                                                                                                                         | $ | 0.02               |   | $ | 0.02              |  
|                                                                                                                                                            |   |                    |   |   |                   |  
|Dilutedas adjusted                                                                                                                                         | $ | 0.01               |   | $ |                  |  
|                                                                                                                                                            |   |                    |   |   |                   |  

| | 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 September 30, 2005 and December 31, 2004, inventories consisted of the following:

|                 |  |   | September 30, 2005 |  |   | December 31, 2004 | 
|---------------- |  | - | ------------------ |  | - | ----------------- | 
|                 |  |   |                    |  |   |                   | 
|                 |  |   |                    |  |   | (as restated)     | 
|Raw materials    |  | $ | 1,427              |  | $ | 1,410             | 
|Work in progress |  |   | 497                |  |   | 633               | 
|Finished goods   |  |   | 1,364              |  |   | 1,175             | 
|                 |  |   |                    |  |   |                   | 
|                 |  | $ | 3,288              |  | $ | 3,218             | 
|                 |  |   |                    |  |   |                   | 

| | 6. | INTANGIBLE ASSETS:
| | -- | ------------------

|At September 30, 2005
    and December 31, 2004, intangible assets consisted of the following: | 
|---------------------------------------------------------------------------------------------- | 
|                                                                                               | 
|                                                                                               | 
|                                                                                               | 
|Goodwill                                                                                       | 
|Other                                                                                          | 
|Less-accumulated amortization                                                                  | 
|                                                                                               | 
|Net intangible assets                                                                          | 
|                                                                                               | 

10

---



Back to Contents

| | 7. | DEBT:
| | -- | -----

On May 5, 2000, the Company entered into a financing agreement with a commercial bank.  This agreement provided for a $4,000 term loan, all of which had been paid on or before December 31, 2002, and for up to a $5,000 revolving line of credit, none of which was outstanding and approximately $2,515 of which was available at September 30, 2005, 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 5.42% at September 30, 2005.

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, $826 of which was outstanding at September 30, 2005, 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 September 30, 2005 was approximately 5.67%.

Under the terms of the above financing, as amended, 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 amended covenants, the Company met all of its financial covenants with respect to this indebtedness at
September 30, 2005 and expects that it will be able to meet all of its financial covenants with respect to this
indebtedness for the remainder of 2005.

As a result of the delay in filing Form 10-Q for the three and nine month
period ended September 30, 2005, the Company was not in compliance with the timely filing covenants of the above
financing. On February 15, 2006, the Company obtained a waiver from the bank for this covenant as of September 30,
2005.

As of September 30, 2005, the outstanding balance on all of the
Company’s commercial bank debt was $826. This indebtedness is secured by substantially all of the
Company’s assets.

11

---



Back to Contents

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 (“we,” 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.

Restatement of 2004 Consolidated Financial Statements

Following a series of discussions with the SEC, the Company determined on December 15, 2005 that it would change its method of
accounting for revenue on certain custom antibody arrangements. Accordingly, the Companys financial statements for the three and nine month
periods ended September 30, 2004 have been restated. The Company changed its revenue recognition policy for custom antibody projects
to utilize a methodology whereby revenue is recognized when a projects specifications  have been met and the related antibodies have been
shipped, rather than on the percentage-of-completion methodology the Company had used since 1996. Please refer to Note 2 to our consolidated
interim financial statements for a further discussion of the restatement.

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.

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.

12

---



Back to Contents

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.

Results of Operations

Three Months Ended September 30, 2005 versus September 30, 2004

Revenues for the third quarter of 2005 increased 9.2% to $6.09 million, compared to $5.58 million for the third quarter of 2004. Included in revenues in the third quarter of 2004 was $37,000 of sales associated with certain “catalog” antibody inventories that were written off in the fourth quarter of 2003 and were therefore recorded with no associated cost of goods sold. Revenue growth in 2005 continued to be offset by previously anticipated reductions in StarLinkTM test kit sales, which decreased by $52,000 to $310,000 in the third quarter of 2005, compared to the same quarter in 2004.

For the third quarter of 2005, gross profit (defined as total revenues less manufacturing costs) increased 11.1% to $3.33 million, compared to $3.00 million in the third quarter of 2004, and gross margins increased from 53.7% in the third quarter of 2004 to 54.7% in the third quarter of 2005. The increase is a result of the benefits the Company is beginning to see from its supply chain improvement initiatives and continuing efforts to minimize low margin business.

Operating expenses for the third quarter of 2005 increased 10.9% to $5.77 million, compared to $5.21 million for the third quarter of 2004. Part of the increase was due to research expenses of $151,000 related to the Company’s investment in the commercialization of new technologies and high throughput production of antibodies and the investment in a software upgrade for the Microtox® test system totaling $79,000.

Research and development spending was $664,000, or 10.9% of net revenues, in the third quarter of 2005, compared to $508,000, or 9.1% of net revenues, in the third quarter of 2004. This level of investment reflects the Company’s continued commitment to customer-centric product development.

Selling, general and administrative expenses were $2.35 million in the 2005 quarter, compared to $2.11 million for the same quarter in 2004. In the third quarter of 2005, the Company recorded $86,000 of costs primarily related to the previously announced closing of its equipment manufacturing facility in July 2005.

13

---



Back to Contents

We recorded interest income, net of interest expense, of $59,000 in the third quarter of 2005 compared to interest income of $17,000 in the prior year third quarter primarily due to higher levels of invested cash during the 2005 period.

Pre-tax income totaled $379,000 for the third quarter of 2005, compared to pre-tax income of $395,000 for the same period in 2004.

Our effective tax rate of 16% for the third quarter of 2005 is below the federal and state statutory rates primarily due to research and development credits and the utilization of foreign net operating losses not previously benefited.

Net income in the third quarter of 2005 was $319,000, compared to $297,000 for the same period in 2004, or $0.02 per diluted share for each quarter.

Nine Months Ended September 30, 2005 vs. September 30, 2004

Revenues for the nine months ended
    September 30, 2005 increased 9.2% to $18.95 million, compared to $17.35 million
    for the same period in 2004. Included in revenues in the nine month period
    ended September 30, 2004 was $249,000 of sales associated with certain “catalog” antibody
    inventories that were written off in the fourth quarter of 2003 with substantially
    no associated cost of goods sold. StarLink sales, as described above,
    decreased to $715,000 for the nine month period ended September 30, 2005,
    compared to $874,000 for the same period in 2004. Sales of the Company’s
    test kits used in agriculture applications continue to be impacted by the
    competitive pressures of a market where new product introduction has slowed,
and existing applications have seen a decrease in testing demand.

Gross profit for the nine months
    ended September 30, 2005 totaled $10.47 million, as compared to $9.46 million
    in the first nine months of 2005, an increase of $1.01 million. Gross margins
increased to 55.3% in 2005 from 54.5% in 2004.

For the nine months ended September
    30, 2005, operating expenses increased 10.1% to $17.91 million, compared to
    $16.27 million in the same period in 2004, partially due to research expenses
of $448,000 related to the Company’s investment in the commercialization of new technologies and high throughput production of antibodies and the investment in a software upgrade for the Microtox® test system totaling $358,000.

For the nine months ended September 30, 2005, research and development spending was $2.32 million, or 12.3%, of net revenues, compared to $1.60 million, or 9.2%, for the same period in 2004.

Selling, general and administrative
    expenses were $7.11 million for the nine months ended September 30, 2005,
    compared to $6.79 million for the same period in 2004.

We recorded interest income, net of interest expense, of $130,000 for the nine months ended September 30, 2005 compared to $31,000 for the nine months ended September 30, 2004, due to higher levels of invested cash during the 2005 period.

14

---



Back to Contents

Pre-tax income totaled $1.17 million
    for the nine months ended September 30, 2005, compared to $1.10 million for
the same period in 2004.

Our effective tax rate of 25% for
    the nine months ended September 30, 2005 is below the federal and state statutory
    rates primarily due to research and development credits and the utilization
of foreign net operating losses not previously benefited.

Net income in the nine months ended
    September 30, 2005 was $876,000, or $0.04 per diluted share, compared
    to $796,000 for the same period in 2004, or $0.04 per diluted share.Diluted
    shares totaling 19,793,000 and 19,605,000 were used in the computation for
the first nine months of 2005 and 2004, respectively.

Product Groups

Food Safety Products- Food safety revenues were $2.32 million in the third quarter of 2005, compared to $1.74 million in the third quarter of 2004, an increase of 33.2%. For the nine months ended September 30, 2005, food safety revenues were $6.68 million, compared to $5.39 million for the same period in 2004, an increase of 23.9%. These increases were driven by food pathogen test sales in the third quarter of 2005 and the nine months ended September 30, 2005, which were up 111.8% and 119.7%, respectively, compared to the same periods of 2004.

Water and Environmental Products Revenue decreased 15.3% to $1.09 million for the third quarter of 2005, compared to $1.29 million for the same quarter in 2004, and decreased 9.0% to $3.95 million for the nine month period ended September 30, 2005, compared to $4.34 million for the same period in 2004. The previously announced US Biosystems (now Genapure) initiative was commercially launched to the Florida market in July 2005 and the Company is aggressively working with our partner to gain traction in other markets. Although the Company’s efforts to develop new channels to market, add new products and add sales professionals began to have a positive impact on revenues in the 2nd quarter of 2005, they were not yet
enough to offset this product group’s historically high customer attrition rate.

Antibody Products- Antibody
    revenues increased 5.1% to $2.68 million for the third quarter of 2005 compared
    to $2.55 million for the same quarter in 2004, and increased 9.2% to $8.32
    million in the nine months ended September 30, 2005, compared to $7.62 million
    for the same period in the prior year. The increase in the first nine months
    of 2005 over the same period in 2004 is reflective of the improvement in
    the business from the steep decline in revenues in 2004 associated with the
    completion of several large, one-time customer projects in 2003, and the
discontinuation of low margin business early in 2004.

Liquidity and Capital Resources

The net cash provided by operating activities of $960,000 for the nine months ended September 30, 2005 was primarily the result of the earnings before interest, taxes, depreciation and amortization (EBITDA) reduced by decreases in accounts payable and accrued expenses.

15

---



Back to Contents

Net cash used in investing activities of $322,000 for the nine months ended September 30, 2005 was driven by capital expenditures primarily for laboratory and manufacturing equipment, partially related to the Company’s investment in the commercialization of new technologies and high throughput production of antibodies, and facility improvements. This compares to net cash used in investing activities of $182,000 for the same period in 2004, which was driven by capital expenditures for the period primarily related to purchases of office and manufacturing equipment.

Net cash provided by financing activities of $1.19 million for the nine months ended September 30, 2005 was driven by proceeds from the exercise of stock options, which was partially offset by net repayments of outstanding debt.  The $36,000 provided by financing activities for the same period in 2004 was primarily the result of acquiring a $551,000 loan to finance our 2004 business insurance program, net of debt repayments.

Our working capital, current assets
    less current liabilities, increased $2.60 million to $16.13 million at September
30, 2005 from $13.53 million at December 31, 2004, primarily due to the Company’s
positive cash flow from operations and proceeds from the exercise of stock options
for the 2005 period. Outstanding debt decreased $158,000 from $984,000 at December
31, 2004 to $826,000 on September 30, 2005, due to scheduled repayments.

On May 5, 2000, we entered into a financing agreement with a commercial bank.  This agreement provided for a $4.00 million term loan, all of which had been paid on or before December 31, 2002, and for up to a $5.00 million revolving line of credit, none of which was outstanding and approximately $2.52 million of which was available at September 30, 2005, 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 our funded debt to EBITDA, and is subject to a borrowing base determined by our eligible accounts receivable.  Our annual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was approximately 5.42% at September 30, 2005.

On December 13, 2001, we entered into an agreement with a commercial bank to finance the construction of new facilities at our Windham, Maine location.  This agreement provided for up to $1.5 million in financing, $826,000 of which was outstanding at September 30, 2005, 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 our funded debt to EBITDA.  Payments are due monthly, with equal amortization of principal payments plus interest.  Our annual effective rate of interest on this loan at September 30, 2005 was approximately 5.67%.

Under the terms of the above financing,
    as amended, we are 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. We met all of our financial covenants with respect to
    this indebtedness at September 30, 2005 and expect that we will be able to
    meet all of our financial covenants with respect to this indebtedness for
    the remainder of 2005. As a result of the delay in filing Form 10-Q as of
    and for the quarter ended September 30, 2005, the Company was not in compliance
    with its timely filing covenant. On February 15, 2006, the Comapny obtained
    a waiver from the bank for the covenant as of September 30, 2005.

16

---



Back to Contents

For the nine months ended September
    30, 2005, we satisfied all of our cash requirements from cash provided by
    operating activities and cash available and on-hand. At September 30, 2005,
    we had $615,000 in long-term debt and stockholders’ equity
    of $33.92 million. We have no material commitments for capital expenditures
    at September 30, 2005.

Based upon our cash on hand, credit facilities, current product sales and the anticipated sales of new products, we believe we have, or have access to, sufficient resources to meet our operating requirements at least through October 2006. Our ability to meet our long-term capital needs will depend on a number of factors, including compliance with existing and new loan covenants, the success of our current and future products, the focus and direction of our research and development programs, competitive and technological advances, future relationships with corporate partners, government regulation, our marketing and distribution strategy, our successful sale of additional common stock and/or our successfully locating and obtaining other financing,
and the success of our plan to make future acquisitions.  Accordingly, no assurance can be given that we will be able to meet the future liquidity requirements that may arise from these inherent and similar uncertainties.

Non-GAAP Financial Measures

EBITDA measures are presented as we believe this provides investors and our management with additional information to assess our 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, our EBITDA calculations may differ from the EBITDA calculations of other companies.

The calculation of our EBITDA measure (as discussed above), and the reconciliation of our EBITDA measure to net cash provided by operating activities for the nine months ended September 30, 2005 and 2004, respectively, is as follows:

17

---



Back to Contents

|                                          |  |   | Nine Months Ended September 30, |  
|----------------------------------------- |  | - | ------------------------------- | -
|                                          |  |   |                                 |  
|                                          |  |   | 2005                            |  
|                                          |  |   |                                 |  
|Net cash provided by operating activities |  | $ | 960                             |  
|Changes in assets and liabilities:        |  |   |                                 |  
|Receivables                               |  |   | 291                             |  
|Inventories                               |  |   | 70                              |  
|Other current assets                      |  |   | 273                             |  
|Other assets                              |  |   | 3                               |  
|Accounts payable                          |  |   | 475                             |  
|Accrued expenses                          |  |   | (100                            | )
|Stock compensation expense                |  |   | (146                            | )
|Interest income, net                      |  |   | (130                            | )
|                                          |  |   |                                 |  
|EBITDA                                    |  | $ | 1,696                           |  
|                                          |  |   |                                 |  

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

We have exposure to changing interest rates, and are currently not engaged in hedging activities.  Interest on approximately $826,000 of outstanding indebtedness is at a variable rate of between 2% to 3% over the published London Interbank Offered Rate (LIBOR), based upon our ratio of funded debt to EBITDA, and was 3% over LIBOR on average for the year.  At our current level of indebtedness, each 1% change in the variable interest rate will have an effect of $8,300 on our annual interest expense charges.

We conduct operations in the United Kingdom.  The consolidated financial statements are presented 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 our consolidated financial results.  Historically, the effects of translation have not been material to the consolidated financial results.

18

---



Back to Contents

Item 4.   Controls and Procedures

(a)      Evaluation of Disclosure Controls and Procedures

Following a series of discussions with the U.S. Securities and Exchange Commission, the Company determined on December 15, 2005 that it would change its method of accounting for revenue on certain custom antibody arrangements. The Company changed its revenue recognition policy for custom antibody projects to utilize a methodology whereby revenue is recognized when a project’s specifications have been met and the related antibodies have been shipped, rather than on the percentage-of-completion methodology the Company had used since 1996.

As a result of the ongoing consideration of the appropriate accounting methodology leading up to the December 15, 2005 determination, the Company did not file this Form 10-Q for the third quarter of 2005 by the required filing date.

The Company has amended its annual report on Form 10-K for the year ended December 31, 2004 to restate its consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 and the related disclosures, and has amended its interim reports on Form 10-Q for the three month periods ended March 31, 2005 and 2004, and the three and six month periods ended June 30, 2005 and 2004, and the related disclosures. The consolidated interim financial statements for the three and nine month periods ended September 30, 2004 have also been
restated.

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 on that evaluation, the Chief Executive
    Officer and Chief Financial Officer concluded that our disclosure controls
    and procedures as of the end of the period covered by this report were not
    functioning effectively 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.

Subsequent to September 30, 2005,
    management has instituted additional annual review procedures for revenue
    recognition and software capitalization accounting policies to ensure that
    we continually evaluate such policies and their compliance with generally
    accepted
    accounting
    principles.

19

---



Back to Contents

PART II  OTHER INFORMATION

Item 6.Exhibits

|10.1 |  |  | Strategic Diagnostics Inc. Change of Control Severance Agreement (Management Contract or Compensatory Plan)                                                                     | 
|---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|     |  |  |                                                                                                                                                                                 | 
|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 | 

20

---



Back to Contents

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: March 16, 2006 | /s/ Matthew H. Knight                                                                           
|                     |                                                                                                 
|                     | Matthew H. Knight                                                                               
|                     | President, Chief Executive Officer(Principal Executive Officer)                                 
|                     |                                                                                                 
|Date: March 16, 2006 | /s/ Anthony J. Simonetta                                                                        
|                     |                                                                                                 
|                     | Anthony J. Simonetta                                                                            
|                     | Vice President  Finance and Chief Financial Officer(Principal Financial and Accounting Officer)

21

---