** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

** **

----

** **

**FORM 10-Q**

** **
| **x**                                                                                                                                                                                                                                                               | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                          | ** ** | ** **                                                                                               |
| **For  the Quarterly Period Ended March 31, 2008**                                                                                                                                                                                                             |
| ** **                                                                                                                                                                                                                                                          | ** ** | ** **                                                                                               |
| **o**                                                                                                                                                                                                                                                               | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                          | ** ** | ** **                                                                                               |
| **For the  Transition Period From                      to                    ** |

** **

**CommissionFile Number 000-22400**

 

**STRATEGIC DIAGNOSTICS INC.**

(Exact name of Registrantas 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 checkmark whether the Registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes: x         No: o

 

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

 

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

 

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

 

Yes: o          No: x

 

As of March 31,2008, there were 20,480,950 outstanding shares of the Registrant’s commonstock, par value $.01 per share.

 

 

----

 

**STRATEGICDIAGNOSTICS INC.**

** **

**INDEX**

 
| **Item**                                                                                            | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------|------------|----------|
| PART I FINANCIAL INFORMATION                                                                   |       |     |
| ITEM 1. Financial Statements                                                                        |       |     |
| Consolidated Balance Sheets – March 31, 2008 and  December 31, 2007                  |       | 2        |
| Consolidated Statements of Operations – Three months  ended March 31, 2008 and 2007       |       | 3        |
| Consolidated Statements of Cash Flows – Three months  ended March 31, 2008 and 2007       |       | 4        |
| Notes to Consolidated Interim Financial Statements                                                  |       | 5        |
| ITEM 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       | 12       |
| ITEM 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |       | 16       |
| ITEM 4. Controls and Procedures                                                                     |       | 17       |
| PART II  OTHER INFORMATION                                                                     |       | 18       |
| ITEM 6. Exhibits                                                                                    |       | 18       |
| SIGNATURES                                                                                          |       | 18       |

 

1

----

 

**PART I. – FINANCIAL INFORMATION**

** **

**ITEM 1. FINANCIAL STATEMENTS**

** **

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES**

** **

**CONSOLIDATEDBALANCE SHEETS(in thousands, except share and per share data)(unaudited)**

** **
| ** **                                                                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                           | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ASSETS                                                                                                                                                               |       |               |       |                  |       |
| Current Assets :                                                                                                                                                     |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                            | ** ** | **$**              | **12,461** | ** **            | $          | 12,988 |   |
| Receivables, net                                                                                                                                                     | ** ** | **3,565**          | ** ** | 4,110                 |       |
| Inventories                                                                                                                                                          | ** ** | **3,999**          | ** ** | 4,204                 |       |
| Deferred tax asset                                                                                                                                                   | ** ** | **1,186**          | ** ** | 1,201                 |       |
| Other current assets                                                                                                                                                 | ** ** | **1,154**          | ** ** | 521                   |       |
| Total current assets                                                                                                                                                 | ** ** | **22,365**         | ** ** | 23,024                |       |
|                                                                                                                                                                 |       |               | ** ** |                  |       |
| Property and equipment, net                                                                                                                                          | ** ** | **5,539**          | ** ** | 5,481                 |       |
| Other assets                                                                                                                                                         | ** ** | **6**              | ** ** | 7                     |       |
| Deferred tax asset                                                                                                                                                   | ** ** | **7,380**          | ** ** | 7,389                 |       |
| Goodwill, net                                                                                                                                                        | ** ** | **4,190**          | ** ** | 4,201                 |       |
| Intangible assets, net                                                                                                                                               | ** ** | **1,788**          | ** ** | 1,847                 |       |
| Total assets                                                                                                                                                         | ** ** | **$**              | **41,268** | ** **            | $          | 41,949 |   |
|                                                                                                                                                                 |       |               | ** ** |                  |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                            |       |               | ** ** |                  |       |
| Current Liabilities :                                                                                                                                                |       |               | ** ** |                  |       |
| Accounts payable                                                                                                                                                     | ** ** | **$**              | **486**    | ** **            | $          | 569 |   |
| Accrued expenses                                                                                                                                                     | ** ** | **1,094**          | ** ** | 1,866                 |       |
| Deferred revenue                                                                                                                                                     | ** ** | **75**             | ** ** | 5                     |       |
| Current portion of long-term debt                                                                                                                                    | ** ** | **611**            | ** ** | 611                   |       |
| Total current liabilities                                                                                                                                            | ** ** | **2,266**          | ** ** | 3,051                 |       |
|                                                                                                                                                                 |       |               | ** ** |                  |       |
| Long-term debt                                                                                                                                                       | ** ** | **1,488**          | ** ** | 1,640                 |       |
| Other non-current liabilities                                                                                                                                        | ** ** | **131**            | ** ** | 130                   |       |
| Total non-current liabilities                                                                                                                                        | ** ** | **1,619**          | ** ** | 1,770                 |       |
|                                                                                                                                                                 |       |               | ** ** |                  |       |
| Stockholders’ Equity:                                                                                                                                           |       |               | ** ** |                  |       |
| Preferred stock, $.01 par value, 20,920,648  shares authorized, no shares issued or outstanding                                                                      |       | **—**         | ** ** | —                |       |
| Common stock, $.01 par value, 35,000,000  shares authorized, 20,480,950 and 20,410,540 issued and outstanding at March  31, 2008 and December 31, 2007, respectively |       | **205**            | ** ** | 205                   |       |
| Additional paid-in capital                                                                                                                                           | ** ** | **39,860**         | ** ** | 39,594                |       |
| Accumulated deficit                                                                                                                                                  | ** ** | **(2,842**         | **)**      | (2,830                | )          |
| Cumulative translation adjustments                                                                                                                                   | ** ** | **160**            | ** ** | 159                   |       |
| Total stockholders’ equity                                                                                                                                      | ** ** | **37,383**         | ** ** | 37,128                |       |
| Total liabilities and stockholders’ equity                                                                                                                      | ** ** | **$**              | **41,268** | ** **            | $          | 41,949 |   |

 

The accompanying notes are an integral part of these statements.

** **

**2**

----

** **

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS(in thousands, except share and per share data)(unaudited)**

 
| ** **                                                    | ** ** | **Three Months**         | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                    | ** ** | **Ended March 31,** | ** ** |
| ** **                                                    | ** ** | **2008**                      | ** ** | **2007** | ** ** |
|                                                          |       |                          |       |   |   |
| Revenues                                                      | ** ** | **$**                         | **7,155**  | ** ** | $ | 6,647 |   |
|                                                          |       |                          | ** ** |   |   |
| OPERATING EXPENSES:                                           |       |                          | ** ** |   |   |
| Manufacturing                                                 | ** ** | **3,122**                     | ** ** | 2,577 |   |
| Research and development                                      | ** ** | **940**                       | ** ** | 697 |   |
| Selling, general and administrative                           | ** ** | **3,178**                     | ** ** | 2,662 |   |
| Total operating expenses                                      | ** ** | **7,240**                     | ** ** | 5,936 |   |
|                                                          |       |                          | ** ** |   |   |
| Operating income (loss)                                       | ** ** | **(85**                       | **)**      | 711 |   |
|                                                          |       |                          | ** ** |   |   |
| Interest income, net                                          | ** ** | **62**                        | ** ** | 110 |   |
|                                                          |       |                          | ** ** |   |   |
| Income (loss) before taxes                                    | ** ** | **(23**                       | **)**      | 821 |   |
|                                                          |       |                          | ** ** |   |   |
| Income tax expense (benefit)                                  | ** ** | **(11**                       | **)**      | 331 |   |
|                                                          |       |                          | ** ** |   |   |
| Net income (loss)                                             | ** ** | **(12**                       | **)**      | 490 |   |
|                                                          |       |                          | ** ** |   |   |
| Basic net income (loss) per share                             | ** ** | **$**                         | **(0.00**  | **)** | $ | 0.02 |   |
|                                                          |       |                          | ** ** |   |   |
| Shares used in computing basic net income  (loss) per share   |       | **20,440,000**                | ** ** | 20,209,000 |   |
|                                                          |       |                          | ** ** |   |   |
| Diluted net income (loss) per share                           | ** ** | **$**                         | **(0.00**  | **)** | $ | 0.02 |   |
|                                                          |       |                          | ** ** |   |   |
| Shares used in computing diluted net income  (loss) per share |       | **20,440,000**                | ** ** | 20,319,000 |   |

 

The accompanying notes are an integral part of these statements.

 

3

----

 

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (in thousands) (unaudited)**

** **
| ** **                                                                               | ** ** | **Three Months**         | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                               | ** ** | **Ended March 31,** | ** ** |
| ** **                                                                               | ** ** | **2008**                      | ** ** | **2007** | ** ** |
|                                                                                     |       |                          |       |   |   |
| Cash Flows from Operating Activities :                                                   |       |                          |       |   |   |
| Net income (loss)                                                                        | ** ** | **$**                         | **(12**    | **)** | $ | 490 |   |
| Adjustments to reconcile net income (loss)  to net cash (used in) operating activities : |       |                          | ** ** |   |   |
| Depreciation and amortization                                                            | ** ** | **326**                       | ** ** | 297 |   |
| Share-based compensation expense                                                         | ** ** | **252**                       | ** ** | 82 |   |
| Deferred income tax provision                                                            | ** ** | **35**                        | ** ** | 273 |   |
| (Increase) decrease in :                                                                 |       |                          | ** ** |   |   |
| Receivables                                                                              | ** ** | **545**                       | ** ** | (158 | ) |
| Inventories                                                                              | ** ** | **205**                       | ** ** | (550 | ) |
| Other current assets                                                                     | ** ** | **(633**                      | **)**      | (636 | ) |
| Other assets                                                                             | ** ** | **—**                    | ** ** | (25 | ) |
| Increase (decrease) in :                                                                 |       |                          | ** ** |   |   |
| Accounts payable                                                                         | ** ** | **(83**                       | **)**      | 22 |   |
| Accrued expenses                                                                         | ** ** | **(772**                      | **)**      | (329 | ) |
| Deferred revenue                                                                         | ** ** | **70**                        | ** ** | 21 |   |
| Other non-current liabilities                                                            | ** ** | **1**                         | ** ** | 82 |   |
| Net cash used in operating activities                                                    | ** ** | **(66**                       | **)**      | (431 | ) |
|                                                                                     |       |                          | ** ** |   |   |
| Cash Flows from Investing Activities :                                                   |       |                          | ** ** |   |   |
| Purchase of property and equipment                                                       | ** ** | **(325**                      | **)**      | (366 | ) |
| Net cash used in investing activities                                                    | ** ** | **(325**                      | **)**      | (366 | ) |
|                                                                                     |       |                          | ** ** |   |   |
| Cash Flows from Financing Activities :                                                   |       |                          | ** ** |   |   |
| Proceeds from exercise of incentive stock  options                                       | ** ** | **—**                    | ** ** | 302 |   |
| Proceeds from employee stock purchase plan                                               | ** ** | **17**                        | ** ** | 6 |   |
| Repayments on financing obligations                                                      | ** ** | **(152**                      | **)**      | (53 | ) |
| Net cash provided by (used in) financing  activities                                     | ** ** | **(135**                      | **)**      | 255 |   |
|                                                                                     |       |                          | ** ** |   |   |
| Effect of exchange rate changes on cash                                                  | ** ** | **1**                         | ** ** | (51 | ) |
|                                                                                     |       |                          | ** ** |   |   |
| Net decrease in Cash and Cash Equivalents                                                | ** ** | **(527**                      | **)**      | (593 | ) |
|                                                                                     |       |                          | ** ** |   |   |
| Cash and Cash Equivalents, Beginning of  Period                                          | ** ** | **12,988**                    | ** ** | 10,892 |   |
|                                                                                     |       |                          | ** ** |   |   |
| Cash and Cash Equivalents, End of Period                                                 | ** ** | **$**                         | **12,461** | ** ** | $ | 10,299 |   |
|                                                                                     |       |                          | ** ** |   |   |
| Supplemental Cash Flow Disclosure :                                                      |       |                          | ** ** |   |   |
|                                                                                     |       |                          | ** ** |   |   |
| Cash paid for taxes                                                                      | ** ** | **1**                         | ** ** | 53 |   |
|                                                                                     |       |                          | ** ** |   |   |
| Cash paid for interest                                                                   | ** ** | **33**                        | ** ** | 10 |   |

 

The accompanying notes are an integral part of these statements

 

4

----

 

**STRATEGICDIAGNOSTICS INC. AND SUBSIDIARIES**

** **

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

** **

**1.****                         DESCRIPTIONOF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**Business**

 

Strategic DiagnosticsInc. and its subsidiaries (the “Company”) develops, manufactures and marketsantibody products and analytical test kits to a diverse customer base, acrossmultiple industrial and human health markets. By applying its corecompetencies of creating custom antibodies and assay development, the Companyproduces unique, sophisticated diagnostic testing and reagent systems that areresponsive to customer diagnostic and information needs. Customers benefit withquantifiable “return on investment” by reducing time, labor and/or materialcosts. All this is accomplished while increasing accuracy, reliability andactionability of essential test results. The Company is focused on sustainingthis competitive advantage by leveraging its expertise in immunology, proteomics,bio-luminescence and other bio-reactive technologies to continue its successfulcustomer-focused research and development efforts.

 

**Basis ofPresentation and Interim Financial Statements**

 

The accompanyingunaudited consolidated interim financial statements of the Company have beenprepared by the Company pursuant to the rules and regulations of theSecurities and Exchange Commission regarding interim financial reporting.Accordingly, they do not include all the information and footnotes required byU.S. generally accepted accounting principles for complete financial statementsand should be read in conjunction with the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007. In the opinion of management,the accompanying consolidated interim financial statements include alladjustments (all of which are of a normal recurring nature) necessary for afair presentation of the results of operations.

 

**RevenueRecognition**

 

Revenues composedof sales of immunoassay-based test kits and certain antibodies andimmunochemical reagents are recognized upon the shipment of the product andtransfer of title, or when related services are provided. Revenues associatedwith such products or services are recognized when persuasive evidence of anorder exists, shipment of product has occurred or services have been provided,the price is fixed and determinable and collectibility is reasonably assured.Management is required to make judgments based on actual experience aboutwhether or not collectibility is reasonably assured.

 

The Company entersinto contracts related to the production of custom antibodies, which providefor the performance of defined tasks for a fixed price, with delivery of theproduct upon completion of production. The standard time to complete a projectis typically longer than 30 days but less than 12 months, and effort isexpended over the life of the project. Revenues related to sales of customantibody projects are recognized when a project’s specifications have been metand the related materials have been shipped.

 

Fees associatedwith products and services added on to a custom antibody project subsequent todelivery of the initial project are billed monthly and recognized as revenue asthe services and other deliverables are provided.

 

**Use ofEstimates**

 

The preparation ofthe consolidated interim financial statements requires management of theCompany to make a number of estimates and assumptions relating to the reportedamount of assets and liabilities, disclosure of contingent assets andliabilities at the date of the consolidated interim financial statements, andthe reported amounts of revenues and expenses during the period. Theseestimates include those made in connection with assessing the valuation ofaccounts receivable, inventories and deferred tax assets. Actual results coulddiffer from these estimates.

 

5

----

 

**NewAccounting Pronouncements**

 

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS No. 157”).   SFAS No. 157 provides guidance forusing fair value to measure assets and liabilities and is intended to respondto investors’ requests for expanded information about the extent to which acompany measures assets and liabilities at fair value, the information used tomeasure fair value and the effect of fair value measurements on income. SFAS No. 157applies whenever other standards require (or permit) assets or liabilities tobe measured at fair value but does not expand the use of fair value to any newcircumstances. SFAS No. 157 also requires expanded disclosure of theeffect on income for items measured using unobservable data, establishes a fairvalue hierarchy that prioritizes the information used to develop thoseassumptions and requires separate disclosure by level within the fair valuehierarchy. The provisions of SFAS No. 157 are effective for interimfinancial statements issued for fiscal years beginning after November 15,2007, or the Company’s fiscal 2008. The Company adopted SFAS No. 157effective January 1, 2008, and as of March 31, 2008, had no assets orliabilities to which this standard applied.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities Includingan amendment of SFAS No. 115” (“SFAS No. 159”).  SFAS No. 159 allows entities to choose,at specified election dates, to measure eligible financial instruments andcertain other items at fair value that are not otherwise required to bemeasured at fair value. If a company elects the fair value option for aneligible item, changes in that item’s fair value in subsequent reportingperiods must be recognized in current earnings. SFAS No. 159 is effectivefor fiscal years beginning after November 15, 2007, in the case of theCompany, fiscal 2008.  The Companyadopted SFAS No. 159 effective January 1, 2008 and has elected not tovalue any financial instruments or other items at fair value.

 

In June 2007, the FASB issued EITF No. 07-3,“Accounting for Nonrefundable Advance Payments for Goods or Services Receivedfor Use in Future Research and Development Activities” (“EITF No. 07-3”).  EITF No. 07-3 requires companies thatmake nonrefundable advance payments for future research and developmentactivities to capitalize the payment, and recognize the expense as the goodsare delivered or services are performed. EITF No. 07-3 is effective for fiscal years beginning after December 15,2007, (in the case of the Company, fiscal 2008), but is to be appliedprospectively to new contracts entered into on or after the effectivedate.  The Company has adopted EITF No. 07-3effective January 1, 2008 and there was no material effect on itsconsolidated financial position, results of operations or cash flows.

 

                                                             InNovember 2007, the EITF of the FASB reached a consensus on Issue No. 07-1,”Accountingfor Collaborative Arrangements” (“EITF No. 07-1”). EITF No. 07-1defines a collaborative arrangement as a contractual arrangement in which theparties are: (1) active participants to the arrangement; and (2) exposedto significant risks and rewards that depend upon the commercial success of theendeavor. The issue also addresses the appropriate income statementpresentation for activities and payments between the participants in acollaborative arrangement as well as for costs incurred and revenue generatedfrom transactions with third parties. EITF No. 07-1 is effective for theCompany for the reporting period beginning January 1, 2009. The Company isin the process of evaluating the impact of the adoption of EITF No. 07-1on its consolidated financial statements

 

In December 2007, the FASB issued SFAS No. 141(Revised), “BusinessCombinations,” (“SFAS No. 141(R)”), which replaces SFAS No. 141, “BusinessCombinations,” and requires an acquirer to recognize the assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree at theacquisition date, measured at their fair values as of that date, with limitedexceptions. This statement also requires the acquirer in a business combinationachieved in stages to recognize the identifiable assets and liabilities, aswell as the noncontrolling interest in the acquiree, at the full amounts oftheir fair values. SFAS No. 141(R) makes various other amendments toauthoritative literature intended to provide additional guidance or to confirmthe guidance in that literature to that provided in this statement. Thisstatement applies prospectively to business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning on or after December 15, 2008.  We expect toadopt this statement on January 1, 2009.  SFAS No. 141(R)’simpact on accounting for business combinations is dependent upon futureacquisitions the Company may make.

 

6

----

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements — An Amendment of ARB No. 51” (“SFAS No. 160”).SFAS No. 160 amends Accounting Research Bulletin No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary. SFAS No. 160requires consolidated net income to be reported at amounts that include theamounts attributable to both the parent and the noncontrolling interest. Thestandard also requires disclosure on the face of the consolidated statement ofincome, of the amounts of consolidated net income attributable to the parentand to the noncontrolling interest. In addition this standard establishes asingle method of accounting for changes in a parent’s ownership interest in asubsidiary that do not result in deconsolidation and requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated.SFAS No. 160 also includes expanded disclosure requirements regarding theinterests of the parent and its noncontrolling interest. SFAS No. 160becomes effective for fiscal periods beginning after December 15, 2008.The Company expects to adopt this statement on January 1, 2009.  As the Company currently does not have anoncontrolling interest in a subsidiary, the effect of SFAS No. 160, ifany, will be dependent on changes in the Company’s current business structure.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, An Amendmentof FASB Statement No. 133” (“SFAS No. 161”). This statement isintended to improve transparency in financial reporting by requiring enhanceddisclosures of an entity’s derivative instruments and hedging activities andtheir effects on the entity’s financial position, financial performance, andcash flows. SFAS No. 161 applies to all derivative instruments within thescope of SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities”  as well as related hedgeditems, bifurcated derivatives, and nonderivative instruments that aredesignated and qualify as hedging instruments. Entities with instrumentssubject to SFAS No. 161 must provide more robust qualitative disclosuresand expanded quantitative disclosures. SFAS No. 161 is effectiveprospectively for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008, with early applicationpermitted. The Company currently does not engage in hedging activities, nordoes it hold any derivative instruments, therefore the effect of SFAS No. 161,if any, will be dependent on changes in the Company’s current financialstructure.

 

**ComprehensiveIncome (Loss)**

 

Comprehensiveincome (loss) consists of the following for each period:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March 31,**               | ** ** |
| ** **                        | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                              |       |                             |       |   |   |
| Net income (loss)                 |       | $                                | (12        | ) | $ | 490 |   |
|                              |       |                             |       |   |   |
| Currency translation adjustment   |       | 1                                |       | (51 | ) |
|                              |       |                             |       |   |   |
| Total comprehensive income (loss) |       | $                                | (11        | ) | $ | 439 |   |

 

7

----

 

**2.****                         BASIC ANDDILUTED INCOME PER SHARE**

 

Basic earnings pershare (EPS) is computed by dividing net income available for commonstockholders by the weighted-average number of common shares outstanding duringthe period. Diluted EPS is similar to basic EPS, except that the dilutiveeffect of converting or exercising all potentially dilutive securities is alsoincluded in the denominator. The Company’s calculation of diluted EPS includesthe dilutive effect of exercising stock options into common shares.  For the period ended March 31, 2008, theeffect of converting stock options into 181,821 common share equivalents wasexcluded, because it was antidilutive.

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **March 31,**               | ** ** |
| ** **                                                 | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                       |       |                             |       |   |   |
| Weighted avg. common shares outstanding                    |       | 20,439,528                       |       | 20,208,666 |   |
|                                                       |       |                             |       |   |   |
| **Shares used in computing basic net income per  share**   |       | **20,439,528**                   |       | **20,208,666** |   |
|                                                       |       |                             |       |   |   |
| Stock options                                              |       | —                           |       | 110,426 |   |
|                                                       |       |                             |       |   |   |
| **Shares used in computing diluted net income per  share** |       | **20,439,528**                   |       | **20,319,092** |   |

 

**3.****                         SHARE-BASEDCOMPENSATION**

 

The Company has astock incentive plan (the “2000 Plan”), which authorizes the granting ofincentive and nonqualified stock options and restricted stock. Under the 2000Plan, executives, key employees and outside directors receive awards of optionsto purchase common stock or restricted stock. Incentive stock options aregranted at not less than 100% of fair market value at the date of grant (110%for stockholders owning more than 10% of the Company’s common stock).Nonqualified stock options are granted at not less than 85% of fair marketvalue at the date of grant. A maximum of 4,000,000 shares of common stock areissuable under the 2000 Plan. Stock options granted under the 2000 Plan have amaximum contractual term of 10 years. The 2000 Plan provides for acceleratedvesting if there is a change of control (as defined in the 2000 Plan).

 

The Company alsohas an Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligiblefull-time employees to purchase shares of common stock at 90 percent of thelower of the fair market value of a share of common stock on the first or lastday of the quarter. Eligible employees are provided the opportunity to acquireCompany common stock during each quarter. No more than 661,157 shares of commonstock may be issued under the ESPP. Such stock may be unissued shares ortreasury shares of the Company or may be outstanding shares purchased in theopen market or otherwise on behalf of the ESPP. Under SFAS 123R, the Company’sESPP is compensatory. Therefore, the Company is required to recognizecompensation expense related to the discount from market value of shares soldunder the ESPP.

 

Certain additionaloptions have been granted outside the 2000 Plan. These options generally followthe provisions of the 2000 Plan.  TheCompany issues new shares to satisfy option exercises, the vesting ofrestricted stock units and shares purchased under the ESPP.

 

8

----

 

Share-basedcompensation expense recorded in the three month periods ended March 31,2008 and 2007 is summarized as follows:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **March 31,**               | ** ** |
| ** **                             | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                   |       |                             |       |   |   |
| Stock options                          |       | $                                | 137        |   | $ | 36 |   |
| Employee stock purchase plan           |       | 2                                |       | 3 |   |
| Restricted stock units                 |       | 113                              |       | 43 |   |
|                                   |       |                             |       |   |   |
| Total share-based compensation expense |       | $                                | 252        |   | $ | 82 |   |

 

The deferredincome tax benefit related to share-based compensation expense for the quartersended March 31, 2008 and 2007 was $55 and $18 respectively.  Share-based compensation expense is acomponent of selling, general and administrative expense, and is recorded as anon-cash expense in the operating activities section of the Company’sConsolidated Statement of Cash Flows.

 

The intrinsicvalue of options exercised during the three month periods ended March 31,2008 and 2007 was $0 and $179, respectively. Proceeds received from the exercise of stock options and from employeepayments into the ESPP totaled $0 and $17, respectively, in the three monthperiod ended March 31, 2008 and $302 and $6, respectively, in the threemonth period ended March 31, 2007. These amounts are recorded in the cashflows from financing activities section of the Company’s Consolidated Statementof Cash Flows.

 

Information withrespect to the activity of outstanding stock options granted under the 2000Plan and options granted separately from the 2000 Plan for the three monthsended March 31, 2008 is summarized as follows:

 
| ** **                                     | ** ** | ** **         | ** ** | ** **           | ** ** | ** **                | ** ** | ** ** | ** ** | **Weighted**               | ** ** | **Aggregate**  | ** ** |
|------------------------------------------------|------------|--------------------|------------|----------------------|------------|---------------------------|------------|------------|------------|----------------------------|------------|----------------|------------|
| ** **                                     | ** ** | **Number**         | ** ** | ** **           | ** ** | ** **                | ** ** | ** ** | ** ** | **Average Remaining** | ** ** | **Instrinsic** | ** ** |
| ** **                                     | ** ** | **of Shares** | ** ** | **Price Range** | ** ** | **Contractual term** | ** ** | **Value**  | ** ** |
|                                           |       |               |       |                 |       |                      |       |       |       |                       |       |           |       |
| Balance, December 31, 2007                |       | 1,251,620          |       | $                    | 2.50       |                      | **-**      |       | $          | 6.94                       |       |           |       |   |   |
|                                           |       |               |       |                 |       | ** **                |       |       |       |                       |       |           |       |
| Granted                                        |       | 164,720            |       | $                    | 3.74       |                      | **-**      |       | $          | 4.60                       |       |           |       |   |   |
|                                           |       |               |       |                 |       | ** **                |       |       |       |                       |       |           |       |
| Balance, March 31, 2008                   |       | 1,416,340          |       | $                    | 2.50       |                      | **-**      |       | $          | 6.94                       |       | 6.0  years     |       | $ | (175 | ) |
|                                           |       |               |       |                 |       | ** **                |       |       |       |                       |       |           |       |
| Vested and excercisable atMarch 31,  2008 |       | 1,155,514          |       | $                    | 2.50       |                      | **-**      |       | $          | 6.94                       |       | 5.2  years     |       | $ | (31 | ) |
|                                           |       |               |       |                 |       | ** **                |       |       |       |                       |       |           |       |
| Expected to vest as ofMarch 31,  2008     |       | 1,388,972          |       | $                    | 2.50       |                      | **-**      |       | $          | 6.94                       |       | 5.9  years     |       | $ | (160 | ) |
|                                                |            |                    |            |                      |            |                           |            |            |            |                            |            |                |            |  |  |  |  |  |  |

 

During the threemonth period ended March 31, 2008, there were 164,720 options granted witha weighted average grant date fair value, based on a Black-Scholes calculation,of $2.20 per share.  The assumptions usedin the Black-Scholes model are as follows, based upon a weighted average:dividend yield 0%, expected volatility 49.15%, risk-free interest rate 2.90%and an expected life of 5.68 years.  TheCompany uses the Simplified Method for expensing stock options, where theexpected life of the option is computed using the sum of the average vestingperiod and the contractual life of the option and dividing by 2, for allperiods presented.

 

9

----

 

The followingtable provides additional information about the Company’s stock optionsoutstanding and exercisable at March 31, 2008:

 
| ** **               | ** ** | ** **         | ** ** | ** **                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|--------------------------|------------|--------------------|------------|---------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **               | ** ** | ** **         | ** ** | ** **                | ** ** | ** **                   | ** ** | **Weighted Average**    | ** ** | ** ** | ** ** | **Wtd. Average** | ** ** |
| **Range of**        | ** ** | **Number of** | ** ** | **Remaining**             | ** ** | **Exercise**                 | ** ** | **Number of**           | ** ** | **Exercise** | ** ** |
| **Exercise Prices** | ** ** | **Shares**         | ** ** | **Contractual Life** | ** ** | **Price**                    | ** ** | **Shares**                   | ** ** | **Price** | ** ** |
|                     |       |               |       |                      |       |                         |       |                         |       |   |   |   |   |   |   |
| $                        | 2.50       |               | -          |                      | $          | 2.61                         |       | 61,000                       |       | 6.0  Years |   | $ | 2.52 |   | 61,000 |   | $ | 2.52 |   |
| $                        | 2.88       |               | -          |                      | $          | 4.69                         |       | 1,342,090                    |       | 6.0  Years |   | $ | 3.90 |   | 1,081,264 |   | $ | 3.81 |   |
| $                        | 5.17       |               | -          |                      | $          | 6.94                         |       | 13,250                       |       | 3.4  Years |   | $ | 5.49 |   | 13,250 |   | $ | 5.49 |   |
| $                        | 2.50       |               | -          |                      | $          | 6.94                         |       | 1,416,340                    |       | 6.0  Years |   | $ | 3.85 |   | 1,155,514 |   | $ | 3.76 |   |

 

A summary of thestatus of the Company’s unvested restricted stock as of December 31, 2007and changes during the three month period ended March 31, 2008 ispresented below.

 
| ** **                                      | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | ** **               | ** ** |
|-------------------------------------------------|------------|------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **Grant Date**       | ** ** | **Aggregate**            | ** ** |
| ** **                                      | ** ** | **Shares** | ** ** | **Fair Value**       | ** ** | **Intrinsic Value** | ** ** |
|                                            |       |       |       |                      |       |                     |       |
| Non-vested RSU’s at December 31, 2007 |       | 96,116     |       | $                         | 4.39       |                     |       |   |
| Granted                                         |       | 69,590     |       | $                         | 4.57       |                     |       |   |
| Vested                                          |       | (23,194    | )          | $                         | 4.13       |                     |       |   |
|                                            |       |       |       |                      |       |                     |       |
| Non-vested RSU’s at March 31, 2008    |       | 142,512    |       | $                         | 4.52       |                     | $          | 644 |   |
|                                            |       |       |       |                      |       |                     |       |
| Expected to vest at March 31, 2008         |       | 132,172    |       | $                         | 4.52       |                     | $          | 598 |   |

 

During the threemonth period ended March 31, 2008, there were 69,590 shares of restrictedstock granted at a fair value of $4.57. At March 31, 2008, there were142,512 shares of restricted stock outstanding with a fair value (based on themarket price for the stock at the date of grant) totaling $644 and a weightedaverage remaining term of 2.2 years. Restricted stock granted is generallyscheduled to vest over periods of two to four years. The cost of the grant ischarged to operations over the vesting period. The total unamortized fair valueof non-vested restricted stock that is expected to vest at March 31, 2008was $469.

 

10

----

 

**4.****                         INVENTORIES**

 

The Company’sinventories are valued at the lower of cost or market. For inventories thatconsist primarily of test kit components, bulk serum and antibody products,cost is determined using the first in, first out method. For inventories thatconsist of costs associated with the production of custom antibodies, cost isdetermined using the specific identification method. At March 31, 2008 andDecember 31, 2007, inventories consisted of the following:

 
| ** **       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------|------------|--------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|             |       |               |       |                  |       |
| Raw materials    |       | $                  | 1,283      |                  | $          | 1,354 |   |
| Work in progress |       | 1,055              |       | 903                   |       |
| Finished goods   |       | 1,661              |       | 1,947                 |       |
| Net inventories  |       | $                  | 3,999      |                  | $          | 4,204 |   |

 

**5.****                         INTANGIBLEASSETS**

 

At March 31,2008 and December 31, 2007, intangible assets consisted of the following:

 
| ** **                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** ** | ** ** |
|---------------------------------|------------|--------------------|------------|-----------------------|------------|------------|------------|
| ** **                      | ** ** | **2008**           | ** ** | **2007**              | ** ** | **Lives**  | ** ** |
| Goodwill                        |       | $                  | 4,763      |                  | $          | 4,774      |       | N/A |   |
| Less - accumulated amortization |       | (573               | )          | (573                  | )          |       |       |
| Net goodwill                    |       | $                  | 4,190      |                  | $          | 4,201      |       |   |   |
|                            |       |               |       |                  |       |       |       |
| ** **                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **2008**           | ** ** | **2007**              | ** ** | **Lives**  | ** ** |
| Intangible assets               |       | 3,134              |       | 3,134                 |       | 2-20       |       |
| Less - accumulated amortization |       | (1,346             | )          | (1,287                | )          |       |       |
| Net intangible assets           |       | $                  | 1,788      |                  | $          | 1,847      |       |   |   |

 

**6.****                         DEBT**

 

On May 5,2000, the Company entered into a financing agreement with a commercial bank,which was amended on August 10, 2007. This agreement provides for up to a $5,000 revolving line of credit,none of which was outstanding and all of which was available at March 31,2008.  The revolving line of credit bearsa variable interest rate of between 100 basis points and 225 basis points overthe one month LIBOR rate depending upon the ratio of the Company’s funded debtto EBITDA.  The Company’s annualeffective rate of interest on this line of credit, taking into account thevariable interest rate and LIBOR, was approximately 4.13% at March 31,2008.

 

On December 13,2001, the Company entered into an agreement with a commercial bank to financethe construction of new facilities at its Windham, Maine location. This agreementprovided for up to $1,500 in financing, $298 of which was outstanding at March 31,2008, and is repayable over seven years, with principal payments that began on October 1,2002. The loan bears a variable interest rate of between 100 basis points and275 basis points over the one month LIBOR rate depending upon the ratio of theCompany’s funded debt to EBITDA, as defined. Payments are due monthly, withequal amortization of principal payments plus interest. The Company’s annualeffective rate of interest on this loan at March 31, 2008 wasapproximately 4.13%.

 

On August 21,2007, the Company entered into an agreement with a commercial bank to financethe construction of new facilities at its Windham, Maine location. Thisagreement provided for up to $2,000 in 

 

11

----

 

financing, $1,800 of which was outstanding at March 31,2008, and is repayable over five years, with principal payments that began on October 1,2007. The loan bears a fixed interest rate of 5.96% with equal amortization ofprincipal payments plus interest.

 

Under the terms ofthe above financings, the Company is required to meet certain quarterlyfinancial covenants that include a ratio of EBITDA to current maturities ofdebt plus interest and cash paid for taxes greater than 1.50 and a ratio offunded debt to EBITDA not to exceed 3.25. The Company met all of its financial covenants with respect to thisindebtedness at March 31, 2008 and expects that it will be able to meetall of its financial covenants with respect to this indebtedness for at leastthe next twelve months.

 

As of March 31,2008, the outstanding balance on all of the Company’s commercial bank debt was$2,099. This indebtedness is secured by substantially all of the Company’s assets.

 

**7.****                         INCOMETAXES**

 

TheCompany adopted the provisions of Financial Accounting Standards Board (FASB)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement 109” (“FIN 48”) on January 1, 2007 andthere was no material effect on the consolidated financial statements.  As a result, there was no cumulative effectrelated to adopting FIN 48.  Thisstatement clarifies the criteria an individual tax position must satisfy forsome or all of the benefits of that position to be recognized in a company’sfinancial statements.  FIN 48 prescribesa recognition threshold of more-likely-than-not, and a measurement attributefor all tax positions taken or expected to be taken on a tax return, in orderfor those tax positions to be recognized in the financial statements.

 

Asof January 1, 2008, the Company provided a liability for approximately$580 of unrecognized tax benefits, of which $513 would impact the Company’seffective tax rate if recognized.  Forthe quarter ended March 31, 2008, unrecognized tax benefits increased $7to $587, of which approximately $520 would impact the Company’s effective taxrate if recognized.

 

TheCompany is subject to U.S. Federal and United Kingdom income tax, as well asincome taxes of multiple state jurisdictions. The Company recognizes interest and penalties related to uncertain taxpositions in income tax expense.  Uponadoption of FIN 48 and at March 31, 2008, the Company had no interest orpenalties accrued related to uncertain tax positions, due to available netoperating loss carryforwards.

 

For federal purposes,post-1992 tax years remain open to examination as a result of earlier netoperating losses being utilized in recent years.  For state purposes, the statute oflimitations remains open in a similar manner for states that have generated netoperating losses.

 

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

**Forward-LookingStatements**

 

This Form 10-Qcontains certain forward-looking statements reflecting the current expectationsof Strategic Diagnostics Inc. and its subsidiaries (the “Company” or “SDI”).These statements include, among others, statements regarding: the Company’sintentions with respect to future spending on research and development; thedevelopment, market acceptance and sales of tests for food-borne pathogens andrelated growth media; the size and nature of demand in the markets for theCompany’s products and related effects on operating results; the need for waterquality and toxicity tests; approval and validation by third parties of theCompany’s food pathogen tests; the performance of the Company’s testingproducts; sales of the Company’s antibodies; timing of new productintroductions and other information that may be predictive of future operatingresults; the Company’s ability to reduce operating expenses; and the Company’sability to improve operating results thus enabling it to meet future loancovenants. 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 areintended to identify said forward-looking statements. Investors are cautionedthat all forward-looking statements involve risks and uncertainties, which maycause actual results to differ from those anticipated at this time. Such risksand uncertainties include, without limitation, changes in demand for products,delays in product 

 

12

----

 

development, delays in market acceptance of newproducts, retention of customers, attraction and retention of management andkey employees, adequate supply of raw materials, inability to obtain or delaysin obtaining third party approvals, or required government approvals, theability to meet increased market demand, competition, protection ofintellectual property, non-infringement of intellectual property, seasonality,the ability to obtain financing and other factors more fully described in theCompany’s public filings with the U.S. Securities and Exchange Commission,including, without limitation, its Annual Report on Form 10-K for the yearended December 31, 2007.

 

**Background**

 

TheCompany is a leading provider of biotechnology-based detection solutions for abroad range of food, water, agricultural, industrial, environmental andscientific applications. By applying its core competencies of proprietaryantibody and assay development, the Company produces unique, sophisticateddiagnostic testing and reagent systems that are responsive to customerdiagnostic and information needs. Customers benefit from a quantifiable “returnon investment” by reducing time, labor, and/or material costs associated withapplications for which the Company’s products are used. This is accomplishedwhile increasing accuracy, reliability and actionability of essential testresults. The Company is focused on sustaining this competitive advantage byleveraging its expertise in immunology, proteomics, bio-luminescence and otherbio-reactive technologies to continue its successful customer-focused researchand development efforts. Recent innovations in high throughput production ofantibodies from genetic antigens will complement the Company’s establishedleadership in commercial and custom antibody production for the research, humanand animal diagnostics, and pharmaceutical industries, and position the Companyfor broader participation in proteomics research and discovery.

 

Our antibody productgroup provides a wide array of antibodies and antibody services, includinghybridoma development, genomic antibody development, calibrators, antigens andreagents and the production of monoclonal and polyclonal antibodies. Theseantibodies are incorporated into test kits we manufacture as described aboveand diagnostic and therapeutic products, and used in clinical research.

 

Our food safetyproduct group markets tests for food pathogens, tests to detect specific traitsin genetically engineered plants, tests to detect Genetically Modified (GM)traits in food ingredients and food fractions and tests to detect naturallyoccurring fungi in grains (mycotoxins).

 

Our water qualityproduct group includes tests to detect toxicity in drinking water, industrial processwater and wastewater, and tests to detect specific traits in soil and otherwaste matter for use at environmental remediation projects, hazardous wasteoperations and other applications.

 

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

 

**Resultsof Operations**

 

*ThreeMonths Ended March 31, 2008 versus Three Months Ended March 31, 2007*

 

Revenues for thefirst quarter of 2008 increased 7.7% to $7.2 million, compared to $6.6 millionfor the same period in 2007. The increase in revenues in the first quarter of2008 was primarily the result of a 36.3% increase in sales of food pathogenproducts and a 14.9% increase in the sale of antibody products when comparingthe first quarter of 2008 to the first quarter of 2007.

 

Operating expensesfor the first quarter of 2008 increased 22.0% to $7.2 million, compared to $5.9million for the first quarter of 2007.  This increase is primarily attributable to a 34.9% increase in researchand development costs, a 21.1% increase in manufacturing costs and a 19.4%increase in selling, general and administrative costs, all as described below.

 

Gross profits(defined as total revenues less manufacturing costs) for the first quarter of2008 were $4.0 million compared to $4.1 million for the same period in 2007.Gross margins were 56.4% and 61.2% for the first quarters of 2008 and 2007,respectively. The decrease in margins and related increase in manufacturingcosts was primarily attributable to decreased levels of production (creating ahigher cost per unit) in the Company’s test kit 

 

13

----

 

business, and increased costs of production in the antibodybusiness due to the expansion of the Maine antibody production facility.

 

Research anddevelopment spending was $940,000, or 13.1% of net revenues, in the firstquarter of 2008, compared to $697,000, or 10.5% of net revenues, in the firstquarter of 2007.  This increase wasprimarily due to increased spending and effort on development of the Company’sproprietary SEQerTM antibodies, which are produced by the Company’s GenomicAntibody Techonology TM platform and are being sold through the Company’santibody catalog.

 

Selling, generaland administrative expenses were $3.2 million for the first quarter of 2008,compared to $2.7 million for the same quarter in 2007. The increase isprimarily associated with the Company’s continued expansion of its sales andmarketing efforts.

 

The Companyrecorded net interest income of $62,000 in the first quarter of 2008 comparedto $110,000 in the prior year first quarter. The decrease was primarily due toincreased debt and related interest expense during the first quarter of 2008when compared to the first quarter of 2007, and decreased interest ratesreceived on invested cash during the first quarter of 2008.

 

As a result of thereduced margins and higher costs discussed above, pre-tax loss totaled $23,000for the three months ended March 31, 2008 compared to pre-tax income of$821,000 for the same period in 2007.

 

The Company’seffective tax rate was approximately 46% for the three month period ended March 31,2008 and approximately 40% for the three month period ended March 31,2007.  This increase is primarily due tothe suspension of the research and experimentation credit for 2008.

 

Net loss in thefirst quarter of 2008 was $12,000, or $0.00 per diluted share, compared to netincome of $490,000, or $0.02 per diluted share, for the same period in 2007.Diluted shares utilized in these computations were 20.4 million and 20.3million for the first quarters of 2008 and 2007, respectively.

 

**AntibodyProducts**

 

Antibody revenuesincreased 14.9% to $3.8 million for the first quarter of 2008, compared to $3.3million for the same quarter in 2007. The Company recorded increases in sales of its bulk antibody offeringsand also saw solid increases in demand for its custom antibody services, drivenby its new Genomic Antibody Technology TM program.  For the first quarter of 2008, antibody revenueswere 53.4% of total Company revenues compared to 50.1% in the first quarter of2007.

 

**FoodSafety Products**

 

Foodsafety revenues were $2.2 million for the first quarters of 2008 and 2007,increasing 1.2% in the current year period.

 

Foodpathogen sales (which are a subset of Food Safety revenues) increased 36.3% inthe first quarter of 2008 as compared to the first quarter of 2007. The Companycontinues to see revenue gains with its new RapidChek® SELECTTM forSalmonella.

 

Ag-GMO product sales(which are a subset of Food Safety revenues) were down $324,000, or 26.0%, forthe first quarter of 2008 as compared to the first quarter of 2007.  This decrease is primarily attributable todecreased demand for the Company’s testing products in Brazil where the Companyhas had strong sales efforts since 2000.

 

**Waterand Environmental Products**

 

Water and environmentalproducts revenue were $1.1 million for the first quarters of 2008 and 2007,decreasing 4.4% in the current year period.

 

14

----

 

**Liquidityand Capital Resources**

 

The net cash usedin operating activities of $66,000 for the first quarter of 2008 was primarilythe result of increases in other current assets and decreases in accruedexpenses, accounts receivable and inventory. The increase in other current assets was primarily the result of thepurchase of insurance for 2008, while the decrease in accrued expenses is primarilyattributable to reductions in commissions and incentives accrued.

 

Net cash used ininvesting activities of $325,000 for the first quarter of 2008 was primarilyrelated to the capital expenditures for the period. This compares to net cashused in investing activities of $366,000 for the first quarter of 2007. Thecapital expenditures for the first quarters of 2008 and 2007 were primarilyrelated to purchases of laboratory and manufacturing equipment.

 

Net cash used infinancing activities of $135,000 for the first quarter of 2008 was primarilythe result of scheduled debt repayments. Net cash provided by financing activities for the first quarter of 2007of $255,000 was primarily driven by proceeds from the exercise of stockoptions, which was partially offset by net repayments of outstanding debt.

 

The Company’sworking capital, current assets less current liabilities, increased $126,000 to$20.1 million at March 31, 2008 from $20.0 million at December 31,2007, primarily due to the increase in other current assets and reduction inaccrued expense as described above. Outstanding debt decreased $152,000 from$2.3 million at December 31, 2007 to $2.1 million at March 31, 2008,due to scheduled repayments.

 

The Company has afinancing agreement with a commercial bank that provides for up to a $5.0million revolving line of credit, none of which was outstanding and all ofwhich was available at March 31, 2008. The revolving line of credit bearsa variable interest rate of 1.00% to 2.25% over London Interbank Offered Rate(LIBOR) depending upon the ratio of the Company’s funded debt to EBITDA.  The Company’s annual effective rate ofinterest on this line of credit, taking into account the variable interest rateand LIBOR, was approximately 4.13% at March 31, 2008.

 

On December 13,2001, the Company entered into an agreement with a commercial bank to financethe construction of new facilities at its Windham, Maine location. Thisagreement provided for up to $1.5 million in financing, $298,000 of which wasoutstanding at March 31, 2008, and is repayable over seven years, withprincipal payments that began on October 1, 2002. The loan bears avariable interest rate of 1.00% to 2.75% over LIBOR depending upon the ratio ofthe Company’s funded debt to EBITDA. Payments are due monthly, with equalamortization of principal payments plus interest. The Company’s annualeffective rate of interest on this loan at March 31, 2008 wasapproximately 4.13%.

 

On August 21,2007, the Company entered into an agreement with a commercial bank to financethe construction of new facilities at its Windham, Maine location. Thisagreement provided for up to $2.0 million in financing, $1.8 million of whichwas outstanding at March 31, 2008, and is repayable over five years, withprincipal payments that began on October 1, 2007. The loan bears a fixedinterest rate of 5.96% with equal amortization of principal payments plusinterest.

 

Under the terms ofthe above financing, the Company is required to meet certain quarterlyfinancial covenants that include a ratio of EBITDA to current maturities ofdebt plus interest and cash paid for taxes greater than 1.50 and a ratio offunded debt to EBITDA not to exceed 3.25. The Company met all of its financialcovenants with respect to this indebtedness at March 31, 2008.

 

For the quarter endedMarch 31, 2008, the Company satisfied all of its cash requirements fromcash provided by operating activities, cash available and on-hand and from thefinancing agreements described above. At March 31, 2008, the Company had$1.5 million in long-term debt and stockholders’ equity of $37.4 million.

 

Based upon itscash on hand, credit facilities, current product sales and the anticipatedsales of new products, the Company believes it has, or has access to,sufficient resources to meet its operating requirements through the next twelvemonths. The Company’s ability to meet its long-term capital needs will dependon a number of factors, including compliance with existing and new loancovenants, the success of its current and future products, the focus and directionof its research and development programs, competitive and technologicaladvances, future relationships with corporate partners, government regulation,the Company’s marketing and distribution strategy, its successful sale ofadditional common stock and/or the Company successfully locating and obtainingother financing, and the success of the Company’s plan to make futureacquisitions. Accordingly, no assurance can be given that the 

 

15

----

 

Company will be able to meet the future liquidityrequirements that may arise from these inherent and similar uncertainties.

 

*Non-GAAPFinancial Measures*

 

The Companypresents an EBITDA measure as the Company believes this provides investors andthe Company’s management with additional information to measure the Company’sliquidity. EBITDA measures are not a measure of performance under GAAP, andtherefore should not be considered in isolation or as a substitute for netincome or cash flows from operations. Additionally, the Company’s EBITDAcalculations may differ from the EBITDA calculations for other companies.  The Company excludes stock compensationexpense from its measure of EBITDA.

 

The calculation ofthe Company’s EBITDA measure (as discussed above), and the reconciliation ofthe Company’s EBITDA measure to net cash provided by operating activities forthe three months ended March 31, 2008 and 2007, respectively, is asfollows:

 
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                            | ** ** | **(in thousands)**                          | ** ** |
| Net cash used in operating activities |       | $                                                | (66        | ) | $ | (431 | ) |
| Changes in assets and liabilities:    |       |                                             |       |   |   |
| Receivables                           |       | (545                                             | )          | 158 |   |
| Inventories                           |       | (205                                             | )          | 550 |   |
| Other current assets                  |       | 633                                              |       | 636 |   |
| Other assets                          |       | —                                           |       | 25 |   |
| Accounts payable                      |       | 83                                               |       | (22 | ) |
| Accrued expenses                      |       | 772                                              |       | 329 |   |
| Deferred revenue                      |       | (70                                              | )          | (21 | ) |
| Other non-current liabilities         |       | (1                                               | )          | (82 | ) |
| Net change in deferred income tax     |       | (35                                              | )          | (273 | ) |
| Income tax provision                  |       | (11                                              | )          | 331 |   |
| Stock compensation expense            |       | (252                                             | )          | (82 | ) |
| Interest income, net                  |       | (62                                              | )          | (110 | ) |
| EBITDA                                |       | $                                                | 241        |   | $ | 1,008 |   |

 

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

The Company hasexposure to changing interest rates, and is currently not engaged in hedgingactivities. Interest on approximately $298,000 of outstanding indebtedness isat a variable rate of 1.00% to 2.75% over the published LIBOR, based upon theCompany’s ratio of funded debt to EBITDA, and was 1.00% over LIBOR on averagefor the year. At the Company’s current level of indebtedness, each 1% change inthe variable interest rate will have an effect of $3,000 on the Company’sannual interest expense charges.

 

The Companyconducts operations in United Kingdom. The consolidated financial statements ofthe Company are denominated in U.S. dollars and changes in exchange ratesbetween foreign countries and the U.S. dollar will affect the translation offinancial results of foreign subsidiaries into U.S. dollars for purposes ofrecording the Company’s consolidated financial results. Historically, theeffects of translation have not been material to the consolidated financialresults.

 

16

----

 

**Item4. Controls and Procedures**

 

(a)                     Evaluation ofDisclosure Controls and Procedures

 

Our management,with the participation of our Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of our disclosure controls and procedures,as defined in Rule 13a-15(e) under the Securities Exchange Act of1934, as amended, as of the end of the period covered by this report. Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that, as of March 31, 2008, our disclosure controls andprocedures were effective to provide reasonable assurance that the informationrequired to be disclosed by us in reports filed under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms, and thatinformation required to be disclosed by us in the reports we file or submit underthe Securities Exchange Act of 1934, as amended, is accumulated andcommunicated to our management, including our principal executive and financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure.

 

(b)                    Change inInternal Control over Financial Reporting

 

No change in theCompany’s internal control over financial reporting occurred during the mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the internal control over financial reporting.

 

17

----

 

**PART II– OTHER INFORMATION**

 

**Item 6. Exhibits**

 
| 10.1 |   | Agreement, dated as of  March 12, 2008, by and among the Company and Steven R. Becker, BC Advisors,  LLC, SRB Management, L.P. and Richard van den Broek. (Filed as  Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with  the Securities and Exchange Commission on March 18, 2008, and  incorporated by reference herein.) |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1 |   | Certifications of the  Chief Executive Officer of Strategic Diagnostics Inc. required by  Rule 13a-14(a) under the Securities Exchange Act of 1934                                                                                                                                                                                                         |
| 31.2 |   | Certifications of the  Chief Financial Officer of Strategic Diagnostics Inc. required by  Rule 13a-14(a) under the Securities Exchange Act of 1934                                                                                                                                                                                                         |
| 32.1 |   | Certification of the  Chief Executive Officer of Strategic Diagnostics Inc. pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |
| 32.2 |   | Certification of the  Chief Financial Officer of Strategic Diagnostics Inc. pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |

 

 

**SIGNATURES**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
|                    |   | STRATEGIC DIAGNOSTICS  INC.                                |
|-------------------------|--------|------------------------------------------------------------|
|                    |   |                                                       |
| Date: May 12, 2008 |   | /s/ Matthew H. Knight                                      |
|                    |   | Matthew H. Knight                                          |
|                    |   | President, Chief  Executive Officer                        |
|                    |   | (Principal Executive  Officer)                             |
|                    |   |                                                       |
|                    |   |                                                       |
| Date: May 12, 2008 |   | /s/ Stanley A.  Fronczkowski                               |
|                    |   | Stanley A. Fronczkowski                                    |
|                    |   | Vice President –  Finance and Chief Financial Officer |
|                    |   | (Principal Financial  and Accounting Officer)              |

 

18

----