UNITED
STATES
 SECURITIES
AND 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 June 30, 2009
  o
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
Transition Period From _________ to _________
  Commission
File Number000-22400
  STRATEGIC
DIAGNOSTICS INC.
 (Exact
name of Registrant as specified in its charter)
  ______________
  Delaware
                  56-1581761(State
      or other jurisdiction of
                  (I.R.S.
      employerincorporation
      or organization)
                  identification
      no.)111
      Pencader DriveNewark,
      Delaware
                  19702(Address
      of principal executive offices)
                  (Zip
      Code)
  Registrant’s
telephone number, including area code: (302) 456-6789
 ______________
  Indicate
by check mark whether the Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
  Yes:
      x
                No:
      o
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 
 Yes:
      o
                  No:
      o
 
 
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
  Large
      accelerated filer o
                Accelerated
      filer oNon-accelerated
      filer o
                Smaller
      reporting company x(Do
      not check if a smaller reporting company)
  Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
  Yes:
      o
                No:
      x
  As of
August 10, 2009, there were 20,784,254 outstanding shares of the Registrant’s
common stock, par value $.01 per share.
  
  STRATEGIC
DIAGNOSTICS INC.
  INDEX
  Item
                                        
                                        PagePART
      I FINANCIAL INFORMATIONITEM
      1. Financial Statements (Unaudited)Consolidated
      Balance Sheets – June 30, 2009 and December 31, 2008
                                        2Consolidated
      Statements of Operations – Three and six months ended June 30, 2009 and
      2008
                                        3Consolidated
      Statements of Cash Flows – Six months ended June 30, 2009 and
    2008
                                        4Notes
      to Consolidated Interim Financial Statements
                                        5ITEM
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                                        12ITEM
      3. Quantitative and Qualitative Disclosures About Market Risk
                                        17ITEM
      4. Controls and Procedures
                                        17PART
      II OTHER INFORMATION
                                        18ITEM
      4. Submission of Matters to a Vote of Security Holders
                                        18ITEM
      6. Exhibits
                                        18SIGNATURES
                                        19
  1
  PART
I. – FINANCIAL INFORMATION
  ITEM
1. FINANCIAL STATEMENTS
  STRATEGIC
      DIAGNOSTICS INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share and per share data)(unaudited)June
      30,
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            December
      31,2009
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            2008ASSETSCurrent
      Assets :Cash
      and cash equivalents
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                            6,204
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                            9,980Restricted
      cash
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            2,703
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            -Receivables,
      net
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            3,739
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            4,099Inventories
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            3,905
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            3,890Deferred
      tax asset
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            3
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            3Other
      current assets
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            832
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            534Total
      current assets
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            17,386
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            18,506Property
      and equipment, net
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            5,112
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            5,275Other
      assets
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            33
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            107Deferred
      tax asset
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            45
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            71Intangible
      assets, net
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            1,492
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            1,562Total
      assets
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                            24,068
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                            25,521LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities :Current
      portion of long-term debt
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                            453
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                            1,658Accounts
      payable
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            415
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            691Accrued
      expenses
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            1,562
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            1,860Deferred
      revenue
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            281
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            64Total
      current liabilities
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            2,711
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            4,273Long-term
      debt
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            900
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            -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,20,780,243
      and 20,680,522 issuedat
      June 30, 2009 and December 31, 2008, respectively
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            208
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            206Additional
      paid-in capital
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            40,734
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            40,345Treasury
      stock, 406,627 common shares at costat
      June 30, 2009 and December 31, 2008
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            (555
                                                                                                                                                                                                                                            )
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            (555
                                                                                                                                                                                                                                            )Accumulated
      deficit
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            (19,920
                                                                                                                                                                                                                                            )
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            (18,625
                                                                                                                                                                                                                                            )Cumulative
      translation adjustments
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            (10
                                                                                                                                                                                                                                            )
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            (123
                                                                                                                                                                                                                                            )Total
      stockholders' equity
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            20,457
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            21,248Total
      liabilities and stockholders' equity
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                            24,068
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            
                                                                                                                                                                                                                                            $
                                                                                                                                                                                                                                            25,521
  The
accompanying notes are an integral part of these statements.
 2
  STRATEGIC
      DIAGNOSTICS INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except share and per share data)(unaudited)Three
      Months
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              Six
      MonthsEnded
      June 30,
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              Ended
      June 30,2009
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              2009
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              2008Revenues
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              6,853
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              6,584
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              13,755
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              13,739OPERATING
      EXPENSES:Manufacturing
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              3,223
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              3,184
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              6,320
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              6,306Research
      and development
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              820
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              921
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              1,483
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              1,861Selling,
      general and administrative
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              3,524
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              4,123
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              7,244
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              7,301Total
      operating expenses
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              7,567
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              8,228
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              15,047
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              15,468Operating
      loss
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (714
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,644
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,292
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,729
                                                                                                                                                                                                                                              )Interest
      income, net
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              -
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              37
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              5
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              99Loss
      before taxes
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (714
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,607
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,287
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,630
                                                                                                                                                                                                                                              )Income
      tax expense (benefit)
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (526
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              8
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (537
                                                                                                                                                                                                                                              )Net
      loss
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (734
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,081
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,295
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              (1,093
                                                                                                                                                                                                                                              )Basic
      loss per share
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              (0.04
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              (0.05
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              (0.06
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              (0.05
                                                                                                                                                                                                                                              )Shares
      used in computing basicloss
      per share
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20,105,814
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20,389,458
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20,070,882
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20,382,501Diluted
      loss per share
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              (0.04
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              (0.05
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              (0.06
                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                              (0.05
                                                                                                                                                                                                                                              )Shares
      used in computing dilutedloss
      per share
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20,105,814
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20,389,458
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20,070,882
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                              20,382,501The
      accompanying notes are an integral part of these
    statements.
 3
  STRATEGIC
      DIAGNOSTICS INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)(unaudited)Six
      MonthsEnded
      June 30,2009
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2008Cash
      Flows from Operating Activities :Net
      loss
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (1,295
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        (1,093
                                                                                                                                                                        )Adjustments
      to reconcile net loss to netcash
      used in operating activities :Depreciation
      and amortization
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        653
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        660Share-based
      compensation expense
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        375
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        400Deferred
      income tax provision
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        26
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (572
                                                                                                                                                                        )(Increase)
      decrease in :Receivables
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        360
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        158Inventories
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (15
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        240Other
      current assets
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (298
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (445
                                                                                                                                                                        )Other
      assets
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        81
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        3Increase
      (decrease) in :Accounts
      payable
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (276
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (144
                                                                                                                                                                        )Accrued
      expenses
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (298
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (45
                                                                                                                                                                        )Deferred
      revenue
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        217
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        5Net
      cash used in operating activities
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (470
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (833
                                                                                                                                                                        )Cash
      Flows from Investing Activities :Purchase
      of property and equipment
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (419
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (538
                                                                                                                                                                        )Proceeds
      from sale of assets
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        2Net
      cash used in investing activities
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (419
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (536
                                                                                                                                                                        )Cash
      Flows from Financing Activities :Proceeds
      from employee stock purchase plan
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        8
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        39Restricted
      cash requirement
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (2,703
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        -Repayments
      on financing obligations
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (305
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (305
                                                                                                                                                                        )Net
      cash used in financing activities
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (3,000
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (266
                                                                                                                                                                        )Effect
      of exchange rate changes on cash
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        113
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        3Net
      decrease in Cash and Cash Equivalents
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (3,776
                                                                                                                                                                        )
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        (1,632
                                                                                                                                                                        )Cash
      and Cash Equivalents, Beginning of Period
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        9,980
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        12,988Cash
      and Cash Equivalents, End of Period
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        6,204
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        $
                                                                                                                                                                        11,356Supplemental
      Cash Flow Disclosure :Cash
      paid for taxes
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        11
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        10Cash
      paid for interest
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        44
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        
                                                                                                                                                                        63The
      accompanying notes are an integral part of these
  statements
 4
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 (in
thousands, except share and per share data)
 (unaudited)
  1.
                DESCRIPTION
      OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
  POLICIES
  Business
  Strategic
Diagnostics Inc. and its subsidiaries (“SDI” or the “Company”) is a
biotechnology company with a core mission of developing, commercializing and
marketing innovative and proprietary products, services and solutions that
preserve and enhance the quality of human health and wellness.
  The
Company’s Life Science portfolio includes products and custom services that
supply critical reagents used across the Life Science research and development
markets. The Company’s Genomic Antibody TechnologyTM  (“GATTM”) is
gaining wide adoption in proteomic research, disease understanding and
drug/biomarker discovery among academic, biotech, in-vitro diagnostic and large
pharmaceutical customers.
  The
Company’s Kit products portfolio includes immunoassays which represent advanced
technology for rapid, cost-effective detection of food pathogens as well as
water and soil contaminants. SDI’s RapidChek®and
SELECT TM kits are experiencing growing adoption for the detection of pathogens
such as E. coli, Salmonella and Listeria in the production,
processing and manufacturing of food and beverages.
  By
applying its core competencies of creating proprietary antibodies and assay
development, the Company has produced sophisticated testing and reagent systems
that are responsive to each customer’s analytical information
needs.
  SDI is a
customer-centric organization. The Company’s goals are to consistently deliver
increased value to its customers that facilitate their business results, reduce
costs and help in the management of risk. SDI sales professionals focus on
delivering a quantifiable “return on investment” to their customers by reducing
time and total costs associated with applications for which the Company’s
products are used. In addition, the Company believes its tests provide high
levels of accuracy and reliability, which deliver more actionable test results
to the customer as compared to alternative products. The Company is focused on
sustaining profitable growth by leveraging its expertise in antibodies and
immuno-technologies to successfully develop proprietary products and services
that enhance the competitive advantage of its customers.
  The
Company believes that its competitive position has been enhanced through the
combination of talent, technology and resources resulting from the business
development activities it has pursued since its inception. The Company has
achieved meaningful economies of scale for the products it offers through the
utilization of its facilities in Newark, Delaware for the manufacture of test
kits and antibodies, and its facility in Windham, Maine for the manufacture of
antibodies.
  The
continued economic downturn, including disruptions in the capital and credit
markets, may continue indefinitely and intensify, and could adversely affect our
results of operations, cash flows and financial condition or those of our
customers and suppliers. These circumstances could adversely affect our access
to liquidity needed to conduct or expand our business or conduct acquisitions or
make other discretionary investments. These circumstances could adversely affect
our ability to draw on existing credit facilities, which depend on the ability
of the bank that is a party to that facility to meet its funding commitments to
us. A bank may not be able to meet its funding commitments if it experiences
shortages of capital and liquidity. These circumstances may also adversely
impact the capital needs of our customers and suppliers, which, in turn, could
adversely affect their ability to purchase our products or supply us with
necessary equipment and raw materials. This could adversely affect our results
of operations, cash flows and financial condition. A weakening business climate
could cause longer sales cycles and slower growth, and could expose us to
increased business or credit risk in dealing with customers or suppliers
adversely affected by economic conditions. Our ability to collect accounts
receivable may be delayed or precluded if our customers are unable to pay their
obligations.
  5
 
 Basis of Presentation and
Interim Financial Statements
  The
accompanying unaudited consolidated interim financial statements of the Company
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all the information and footnotes required by
U.S. generally accepted accounting principles (“GAAP”) for complete financial
statements and should be read in conjunction with the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2008. In the opinion of
management, the accompanying consolidated interim financial statements include
all adjustments (all of which are of a normal recurring nature) necessary for a
fair presentation of the results of operations.  The interim operating
results are not necessarily indicative of the results to be expected for the
entire year.
  Revenue
Recognition
  Revenues
composed of sales of immunoassay-based test kits and certain antibodies and
immunochemical reagents are recognized upon the shipment of the product and
transfer of title, or when related services are provided. Revenues associated
with such products or services are recognized when persuasive evidence of an
order exists, shipment of product has occurred or services have been provided,
the price is fixed and determinable and collectability is reasonably assured.
Management is required to make judgments based on actual experience about
whether or not collectability is reasonably assured.
  The
Company enters into contracts related to the production of custom antibodies,
which provide for the performance of defined tasks for a fixed price, with
delivery of the product upon completion of production. The standard time to
complete a project is typically longer than 30 days but less than 12 months, and
effort is expended over the life of the project. Revenues related to sales of
custom antibody projects are recognized when a project’s specifications have
been met and the related materials have been shipped.
  Fees
associated with products and services added on to a custom antibody project
subsequent to delivery of the initial project are billed monthly and recognized
as revenue as the services and other deliverables are provided.  Sales
taxes collected from customers are presented net in the consolidated statement
of operations.
  Use of
Estimates
  The
preparation of the consolidated interim financial statements requires management
of the Company to make a number of estimates and assumptions relating to the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated interim financial statements, and
the reported amounts of revenues and expenses during the period. These estimates
include those made in connection with assessing the valuation of accounts
receivable, inventories, deferred tax assets and long lived assets. Actual
results could differ from these estimates.
 
 New Accounting
Pronouncements
 
 In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141(Revised),
Business Combinations (“SFAS No. 141(R)”), which replaces SFAS No. 141,
Business Combinations, and requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquired at the acquisition date, measured at their fair values as of that date,
with limited exceptions. This statement also requires the acquirer in a business
combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the non-controlling interest in the acquired, at the
full amounts of their fair values. SFAS No. 141(R) makes various other
amendments to authoritative literature intended to provide additional guidance
or to confirm the guidance in that literature to that provided in this
statement. This statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  SFAS
No. 141(R)’s impact on accounting for business combinations is dependent
upon future acquisitions the Company may make.
 
 In April 2008, the FASB issued FASB
Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible
Assets (“FSP 142-3”).  FSP 142-3 amends the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under SFAS No. 142, Goodwill and
Other Intangible Assets.  This new guidance applies prospectively to
intangible assets that are acquired individually or with a group of other assets
in business combinations and asset acquisitions.  FSP 142-3 is
effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008.  FSP 142-3’s impact on the Company
is dependent upon future acquisitions the Company may make.
  6
  In May
2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"). SFAS 165 is
intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for
selecting that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. SFAS 165 is
effective for interim or annual financial periods ending after June 15,
2009.  Adoption of SFAS No. 165 did not have an impact on the
Company’s financial position, results of operations or liquidity.
  In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
(“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification
(the “Codification”) as the single source of authoritative nongovernmental U.S.
GAAP. The Codification is effective for interim and annual periods ending after
September 15, 2009. The adoption of this standard will not have a material
impact on the Company’s financial statements.
  Comprehensive
Loss
  Comprehensive
loss consists of the following for each period:
  Three
      Months Ended
                                              
                                              
                                              Six
      Months EndedJune
      30,
                                              
                                              
                                              June
      30,2009
                                              
                                              
                                              2008
                                              
                                              
                                              2009
                                              
                                              
                                              2008Net
      loss
                                              
                                              $
                                              (734
                                              )
                                              
                                              $
                                              (1,081
                                              )
                                              
                                              $
                                              (1,295
                                              )
                                              
                                              $
                                              (1,093
                                              )Currency
      translation adjustment
                                              
                                              
                                              121
                                              
                                              
                                              
                                              2
                                              
                                              
                                              
                                              113
                                              
                                              
                                              
                                              3Total
      comprehensive loss
                                              
                                              $
                                              (613
                                              )
                                              
                                              $
                                              (1,079
                                              )
                                              
                                              $
                                              (1,182
                                              )
                                              
                                              $
                                              (1,090
                                              )
 
 2.
                BASIC
      AND DILUTED LOSS PER SHARE
  Basic
loss per share (EPS) is computed by dividing net loss available for common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted EPS is similar to basic EPS, except that the dilutive effect
of converting or exercising all potentially dilutive securities is also included
in the denominator. The Company’s calculation of diluted EPS includes the
dilutive effect of stock options and restricted stock units. Basic loss per
share excludes potentially dilutive securities.  For the three and six
month periods ended June 30, 2009 and 2008, conversion of stock options and
unvested restricted shares totaling 2,210,350 and 1,596,307 into common share
equivalents were excluded from this calculation because they were
anti-dilutive.
  7
  Three
      Months Ended
                                                                                          
                                                                                          
                                                                                          Six
      Months EndedJune
      30,
                                                                                          
                                                                                          
                                                                                          June
      30,2009
                                                                                          
                                                                                          
                                                                                          2008
                                                                                          
                                                                                          
                                                                                          2009
                                                                                          
                                                                                          
                                                                                          2008Weighted
      average common shares outstanding
                                                                                          
                                                                                          
                                                                                          20,105,814
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,389,458
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,070,882
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,382,501Shares
      used in computing basicloss
      per share
                                                                                          
                                                                                          
                                                                                          20,105,814
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,389,458
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,070,882
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,382,501Dilutive
      effect of stock options andunvested
      restricted stock units
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -Shares
      used in computing dilutedloss
      per share
                                                                                          
                                                                                          
                                                                                          20,105,814
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,389,458
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,070,882
                                                                                          
                                                                                          
                                                                                          
                                                                                          20,382,501
  3.
                SHARE-BASED
      COMPENSATION
  Under
various plans, executives, key employees and outside directors receive awards of
options to purchase common stock. The Company has a stock option plan (the “2000
Plan”) which authorizes the granting of incentive and nonqualified stock options
and restricted stock units. Incentive stock options are granted at not less than
100% of fair market value at the date of grant (110% for stockholders owning
more than 10% of the Company’s common stock). Nonqualified stock options are
granted at not less than 85% of fair market value at the date of grant. A
maximum of 6,000,000 shares of common stock are issuable under the 2000 Plan.
Certain additional options have been granted outside the 2000 Plan. These
options generally follow the provisions of the 2000 Plan.  The Company
issues new shares to satisfy option exercises and the vesting of restricted
stock units.
  The Company also has an Employee
Stock Purchase Plan (the “ESPP”). The ESPP allows eligible full-time employees
to purchase shares of common stock at 90 percent of the lower of the fair market
value of a share of common stock on the first or last day of the quarter.
Eligible employees are provided the opportunity to acquire Company common stock
during each quarter. No more than 661,157 shares of common stock may be issued
under the ESPP. Such stock may be unissued shares or treasury shares of the
Company or may be outstanding shares purchased in the open market or otherwise
on behalf of the ESPP. Under SFAS 123R, Share-Based Payment, the Company’s ESPP
is compensatory. Therefore, the Company is required to recognize compensation
expense related to the discount from market value of shares sold under the
ESPP.  The Company issues new shares to satisfy shares purchased under
the ESPP.
  Share-based
compensation expense recorded in the three and six month periods ended June 30,
2009 and 2008 is summarized as follows:
  Three
      Months Ended
                                                                          
                                                                          
                                                                          Six
      Months EndedJune
      30,
                                                                          
                                                                          
                                                                          June
      30,2009
                                                                          
                                                                          
                                                                          2008
                                                                          
                                                                          
                                                                          2009
                                                                          
                                                                          
                                                                          2008Stock
      options
                                                                          
                                                                          $
                                                                          79
                                                                          
                                                                          
                                                                          $
                                                                          88
                                                                          
                                                                          
                                                                          $
                                                                          180
                                                                          
                                                                          
                                                                          $
                                                                          225Employee
      stock purchase plan
                                                                          
                                                                          
                                                                          -
                                                                          
                                                                          
                                                                          
                                                                          2
                                                                          
                                                                          
                                                                          
                                                                          1
                                                                          
                                                                          
                                                                          
                                                                          4Restricted
      stock units
                                                                          
                                                                          
                                                                          78
                                                                          
                                                                          
                                                                          
                                                                          58
                                                                          
                                                                          
                                                                          
                                                                          194
                                                                          
                                                                          
                                                                          
                                                                          171Total
      share-based compensation expense
                                                                          
                                                                          $
                                                                          157
                                                                          
                                                                          
                                                                          $
                                                                          148
                                                                          
                                                                          
                                                                          $
                                                                          375
                                                                          
                                                                          
                                                                          $
                                                                          400
  The
deferred income tax benefit related to share-based compensation expense for the
six month period ended June 30, 2009 was $0 due to the full valuation allowance
against deferred tax assets, and $101 for the six month period ended June 30,
2008.  Share-based compensation expense is a component of selling,
general and administrative expense, and is recorded as a non-cash expense in the
operating activities section of the Company’s Consolidated Statements of Cash
Flows.
  8
  No
options were exercised in the six month periods ended June 30, 2009 and
2008.  Proceeds received from employee payments into the ESPP in the
six month periods ended June 30, 2009 and 2008, were $8 and $39,
respectively.  These amounts are recorded in the cash flows from
financing activities section of the Company’s Consolidated Statements of Cash
Flows.
  Information
with respect to the activity of outstanding stock options granted under the 2000
Plan and options granted separately from the 2000 Plan for the six months ended
June 30, 2009 is summarized as follows:
 
 Weighted
                                                                                                                                                                                              
                                                                                                                                                                                              AggregateNumber
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              Average
      Remaining
                                                                                                                                                                                              
                                                                                                                                                                                              Instrinsicof
      Shares
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              Price
      Range
                                                                                                                                                                                              
                                                                                                                                                                                              Contractual
      term
                                                                                                                                                                                              
                                                                                                                                                                                              ValueBalance,
      January 1, 2009
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              1,719,972
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              1.50
                                                                                                                                                                                              
                                                                                                                                                                                              -
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              6.94Granted
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              385,000
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              1.10
                                                                                                                                                                                              
                                                                                                                                                                                              -
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              1.50Cancelled
      / Forfeited
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              (119,629
                                                                                                                                                                                              )
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              2.88
                                                                                                                                                                                              
                                                                                                                                                                                              -
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              4.56Balance,
      June 30, 2009
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              1,985,343
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              1.10
                                                                                                                                                                                              
                                                                                                                                                                                              -
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              6.94
                                                                                                                                                                                              
                                                                                                                                                                                              6.5
      years
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              1Vested
      and excercisable atJune
      30, 2009
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              1,224,395
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              1.50
                                                                                                                                                                                              
                                                                                                                                                                                              -
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              6.94
                                                                                                                                                                                              
                                                                                                                                                                                              4.8
      years
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              -Expected
      to vest as ofJune
      30, 2009
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              1,916,368
                                                                                                                                                                                              
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              1.10
                                                                                                                                                                                              
                                                                                                                                                                                              -
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              6.94
                                                                                                                                                                                              
                                                                                                                                                                                              6.4
      years
                                                                                                                                                                                              
                                                                                                                                                                                              $
                                                                                                                                                                                              1
  During
the six month period ended June 30, 2009, there were 385,000 options granted
with a weighted average grant date fair value, based on a Black-Scholes option
pricing model, of $0.69 per share.  The assumptions used in the
Black-Scholes model are as follows: dividend yield 0%, expected volatility
51.26%, risk-free interest rate 2.48% and expected life of 5.88
years.  The Company uses the Simplified Method for determining the
expected life of options granted which is computed using the sum of the average
vesting period and the contractual life of the option and dividing by 2, for all
periods presented.
  The
following table provides additional information about the Company’s stock
options outstanding and exercisable at June 30, 2009:
  Options
      Outstanding
                                                                                                            
                                                                                                            
                                                                                                            Options
      ExercisableWeighted
      Average
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            Wtd.
      AverageRange
      of
                                                                                                            
                                                                                                            
                                                                                                            Number
      of
                                                                                                            
                                                                                                            
                                                                                                            Remaining
                                                                                                            
                                                                                                            Exercise
                                                                                                            
                                                                                                            
                                                                                                            Number
      of
                                                                                                            
                                                                                                            
                                                                                                            ExerciseExercise
      Prices
                                                                                                            
                                                                                                            
                                                                                                            Shares
                                                                                                            
                                                                                                            
                                                                                                            Contractual
      Life
                                                                                                            
                                                                                                            Price
                                                                                                            
                                                                                                            
                                                                                                            Shares
                                                                                                            
                                                                                                            
                                                                                                            Price$
                                                                                                            1.10
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            $
                                                                                                            2.61
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            748,700
                                                                                                            
                                                                                                            
                                                                                                            9.0Years
                                                                                                            
                                                                                                            $
                                                                                                            1.58
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            82,250
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            2.26$
                                                                                                            3.05
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            $
                                                                                                            3.57
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            266,400
                                                                                                            
                                                                                                            
                                                                                                            4.8Years
                                                                                                            
                                                                                                            $
                                                                                                            3.33
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            266,400
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            3.33$
                                                                                                            3.69
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            $
                                                                                                            6.94
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            970,243
                                                                                                            
                                                                                                            
                                                                                                            5.1Years
                                                                                                            
                                                                                                            $
                                                                                                            4.12
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            875,745
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            4.10$
                                                                                                            1.10
                                                                                                            
                                                                                                            -
                                                                                                            
                                                                                                            $
                                                                                                            6.94
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,985,343
                                                                                                            
                                                                                                            
                                                                                                            6.5Years
                                                                                                            
                                                                                                            $
                                                                                                            3.06
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            1,224,395
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            3.81
 
 9
  A summary
of the status of the Company’s unvested restricted stock as of December 31, 2008
and changes during the six month period ended June 30, 2009 is presented
below.
  Weighted
      AverageGrant
      Date
                                                                                        
                                                                                        
                                                                                        AggregateShares
                                                                                        
                                                                                        
                                                                                        Fair
      Value
                                                                                        
                                                                                        
                                                                                        Intrinsic
      ValueNon-vested
      RSU's at January 1, 2009
                                                                                        
                                                                                        
                                                                                        296,406
                                                                                        
                                                                                        
                                                                                        $
                                                                                        2.28Granted
                                                                                        
                                                                                        
                                                                                        64,500
                                                                                        
                                                                                        
                                                                                        $
                                                                                        1.26Vested
                                                                                        
                                                                                        
                                                                                        (124,532
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        2.12Cancelled
      / forfeited
                                                                                        
                                                                                        
                                                                                        (11,367
                                                                                        )
                                                                                        
                                                                                        $
                                                                                        3.69Non-vested
      RSU's at June 30, 2009
                                                                                        
                                                                                        
                                                                                        225,007
                                                                                        
                                                                                        
                                                                                        $
                                                                                        2.00
                                                                                        
                                                                                        
                                                                                        $
                                                                                        261Expected
      to vest at June 30, 2009
                                                                                        
                                                                                        
                                                                                        214,159
                                                                                        
                                                                                        
                                                                                        $
                                                                                        1.96
                                                                                        
                                                                                        
                                                                                        $
                                                                                        248
  Restricted
stock granted is generally scheduled to vest over periods of two to four years.
The cost of the grant is charged to operations over the vesting
period.  At June 30, 2009, the weighted average remaining term of
non-vested restricted stock was 1.9 years.
 
 4.
                INVENTORIES
  The
Company’s inventories are valued at the lower of cost or market. For inventories
that consist primarily of test kit components, bulk serum and antibody products,
cost is determined using the first in, first out method. For inventories that
consist of costs associated with the production of custom antibodies, cost is
determined using the specific identification method. At June 30, 2009 and
December 31, 2008, inventories consisted of the following:
 
 June
      30,
                                                        
                                                        
                                                        December
      31,2009
                                                        
                                                        
                                                        2008Raw
      materials
                                                        
                                                        $
                                                        1,169
                                                        
                                                        
                                                        $
                                                        1,216Work
      in progress
                                                        
                                                        
                                                        1,190
                                                        
                                                        
                                                        
                                                        946Finished
      goods
                                                        
                                                        
                                                        1,546
                                                        
                                                        
                                                        
                                                        1,728Inventories
                                                        
                                                        $
                                                        3,905
                                                        
                                                        
                                                        $
                                                        3,890
 
 10
  5.
                INTANGIBLE
      ASSETS
  At June
30, 2009 and December 31, 2008, intangible assets consisted of the
following:
  June
      30,
                                                              
                                                              
                                                              December
      31,2009
                                                              
                                                              
                                                              2008
                                                              
                                                              
                                                              LivesIntangible
      assets
                                                              
                                                              
                                                              2,614
                                                              
                                                              
                                                              
                                                              2,614
                                                              
                                                              
                                                              
                                                              2-20Less:
      Accumulated amortization
                                                              
                                                              
                                                              (1,122
                                                              )
                                                              
                                                              
                                                              (1,052
                                                              )Net
      intangible assets
                                                              
                                                              $
                                                              1,492
                                                              
                                                              
                                                              $
                                                              1,562
 
 6.
                DEBT
  On May 5,
2000, the Company entered into a financing agreement with a commercial bank
which was amended on May 15, 2009 (as amended, the “Credit
Agreement”).  The Credit Agreement provided for up to a $1 million
revolving line of credit, none of which was outstanding at June 30, 2009. The
revolving line of credit bore a variable interest rate of between 150 basis
points and 250 basis points over the one month LIBOR rate depending upon the
ratio of the Company’s funded debt to EBITDA. The Company’s annual effective
rate of interest on this line of credit, taking into account the variable
interest rate and LIBOR, was 2.82% at June 30, 2009.
  On
December 13, 2001, the Company received a term loan under the Credit Agreement
to finance the construction of new facilities at its Windham, Maine location.
This agreement provided for up to $1.5 million in financing, $53,000 of which
was outstanding at June 30, 2009, and is repayable over seven years, with
principal payments that began on October 1, 2002. The loan bears a variable
interest rate of 100 basis points less than the current Prime Interest Rate.
Payments are due monthly, with equal amortization of principal payments plus
interest. The Company’s annual effective rate of interest on this loan at June
30, 2009 was 2.25%.
  On August
21, 2007, the Company received a term loan under the Credit Agreement to finance
the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2 million in financing, $1.3 million of which was
outstanding at June 30, 2009, and is repayable over five years, with principal
payments that began on October 1, 2007. The loan bears a fixed interest rate of
5.96% with equal amortization of principal payments plus interest.
  As of
June 30, 2009, the outstanding balance on all of the Company’s commercial bank
debt was $1.4 million. This indebtedness and the Company’s $1 million unused
line of credit is secured by $2.7 million in restricted cash as required by the
May 15, 2009 amendment to the Company’s Credit Agreement.
  Under the
Credit Agreement, the Company was required to meet certain quarterly financial
covenants that included maintaining a minimum tangible net worth of not less
than $18.5 million and EBITDA of not less than $100,000 for the quarter ended
June 30, 2009.
  The
Company did not meet its financial covenants with respect to its indebtedness at
June 30, 2009. The Company received a waiver of the financial covenants relating
to the Credit Agreement from its commercial bank as of June 30,
2009.
  On August
12, 2009, the Credit Agreement was amended to eliminate the revolving line of
credit, remove the financial covenants requiring minimum EBITDA and
tangible net worth amounts, and reduce the restricted cash requirement from $2.7
million to $1.25 million.
  11
  7.
                INCOME
      TAXES
 
 SFAS No. 109, Accounting for Income
Taxes (“SFAS No. 109”) requires a company to evaluate its deferred tax assets on
a regular basis to determine if a valuation allowance against the net deferred
tax assets is required.  In accordance with SFAS No. 109, the Company
had a full valuation allowance offsetting its United States federal and state
net deferred tax assets which primarily represent net operating loss
carryforwards (“NOLs”) at December 31, 2008.  During the six month
period ended June 30, 2009, the Company’s management concluded that the full
valuation allowance for U.S. federal and state net deferred tax assets is
appropriate as the facts and circumstances have not changed since the year ended
December 31, 2008.
  The
Company is subject to U.S. federal and UK income tax, as well as income taxes of
multiple state jurisdictions.   The Company recognizes interest
and penalties related to uncertain tax positions in income tax
expense.  Upon adoption of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of FASB Statement 109, and at June
30, 2009, the Company had no interest or penalties accrued related to uncertain
tax positions due to the available NOLs.
  As of
January 1, 2009, the Company provided a liability for approximately $487 of
unrecognized tax benefits, which if recognized in a period where there was not a
full valuation allowance, would affect the effective tax rate.  For
the six months ended June 30, 2009, unrecognized tax benefits increased $36 to
$523, which if recognized in a period where there was not a full valuation
allowance, would affect the effective tax rate.
  For
federal purposes, post-1993 tax years remain open to examination as a result of
earlier net operating losses being utilized in recent years. For state purposes,
the statute of limitations remains open in a similar manner for states that have
generated net operating losses. The Company does not expect that the total
amount of unrecognized tax benefits related to positions taken in prior periods
will change significantly during the next 12 months.
 
 8.
                SUBSEQUENT
      EVENTS
  The
Company has evaluated all events subsequent to the balance sheet date of June
30, 2009 through the date of issuance, August 14, 2009.
  Organizational
Changes
  On July 9, 2009, the Company announced
to its employees that the Company’s Life Science facility in Dallas, Texas would
be closing in the third quarter of 2009.  The Company expects to
record charges of approximately $200,000 in the third quarter of 2009 related to
severance, relocation and lease cancellation costs.
  Change
to Debt Agreement
  On August 12, 2009 the Company amended
its Credit Agreement with a commercial bank.  The amendment includes a
cancellation of the $1 million line of credit, the removal of the financial
covenants requiring minimum EBITDA and tangible net worth amounts and a
reduction in the restricted cash to be held as collateral from $2.7 million to
$1.25 million.
  Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
  Forward-Looking
Statements
  This Form
10-Q contains certain forward-looking statements reflecting the current
expectations of Strategic Diagnostics Inc. and its subsidiaries (the “Company”
or “SDI”). In addition, when used in this quarterly report, the words
“anticipate,” “enable,” “estimate,” “intend,” “expect,” “believe,” “potential,”
“may,” “will,” “should,” “project” and similar expressions as they relate to the
Company are intended to identify said forward-looking statements. Investors are
cautioned that all forward-looking statements involve risks and uncertainties,
which may cause actual results to differ from those anticipated at this time.
Such risks and uncertainties include, without limitation, changes in demand for
products, delays in product development, delays in market acceptance of new
products, retention of customers, attraction and retention of management and key
employees, adequate supply of raw materials, inability to obtain or delays in
obtaining third party approvals or required government approvals, the ability to
meet increased market demand, competition, protection of intellectual property,
non-infringement of intellectual property, seasonality, the ability to obtain
financing and other factors more fully described in the Company’s public filings
with the U.S. Securities and Exchange Commission, including, without limitation,
the Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
  12
 
 Background
  SDI is a
biotechnology company with a core mission of developing, commercializing and
marketing innovative and proprietary products, services and solutions that
preserve and enhance the quality of human health and wellness.
  The
Company believes that its competitive position has been enhanced through the
combination of talent, technology and resources resulting from the business
development activities it has pursued since its inception. The Company has
achieved meaningful economies of scale for the products it offers through the
utilization of its consolidated facilities in Newark, Delaware for the
manufacture of test kits and antibodies, and its facility located in Windham,
Maine for the manufacture of antibodies.
  The
Company believes that by applying its core competency of creating custom
antibodies to assay development, it produces sophisticated diagnostic testing
and reagent systems that are responsive to customer diagnostic and information
needs. Customers benefit from a quantifiable “return on investment” by reducing
time, labor and/or material costs associated with applications for which the
Company’s products are used. In addition, the Company believes its tests provide
high levels of accuracy, reliability and actionability of essential test results
as compared to alternative products. The Company is focused on sustaining this
competitive advantage by leveraging its expertise in immunology, proteomics,
bio-luminescence and other bio-reactive technologies to continue its successful
customer-focused research and development efforts. The Company believes that an
established product base, quality manufacturing expertise, experienced sales and
marketing organization, established network of distributors, corporate partner
relationships and proven research and development expertise will be critical
elements of its potential future success.
  In 2008,
the Company continued the transition from a fragmented product offering and
marketing strategy to becoming a focused organization, with proven proprietary
technologies tied directly to its customers’ needs. The transition is most
evident in the Genomic Antibody TechnologyTM (GATTM) initiative and food pathogen
detection products, where the Company believes significant progress is being
made.
  The
Company continues to develop and introduce new methods for the detection of food
pathogens that deliver a strong competitive advantage to its customers. In 2005,
the Company filed a patent for new technology to be used in proprietary
enrichments of its food pathogen testing methods. The patent covers technology
for increasing the specificity and sensitivity of the Company’s immunoassay test
methods. The patent also makes claims for the application of the technology in
large scale bio-production/bio-fermentation processes, such as those used in the
production of amino acids, ethanol, enzymes and other processes using
microbiological production methods.
  The
Company continues to develop multiple channels to market products worldwide
through an approach that includes direct sales, inside sales, distributors and
agents. The Company increased distribution for its food pathogen products in
Europe and Asia where there is growing demand for the Company’s product
line.
  The
Company believes it is making progress in most of its business
efforts.  As the deployment of new initiatives is accelerated,
building on the Company’s leadership position in food pathogens and expanding
its strong positioning in the emerging area of genomic antibodies, the Company
anticipates that the revenue lost to market changes in its legacy businesses
will be replaced and the Company will develop a stronger, more predictable
revenue base.
  The
Company expects the GATTM and food pathogen products to be its primary growth
drivers in the future, and that the Company’s competencies and competitive
positions in these two areas are strong.
  13
 
 Results
of Operations
  Three
Months Ended June 30, 2009 versus Three Months Ended June 30, 2008
  Revenues
for the second quarter of 2009 increased 4% to $6.9 million, compared to $6.6
million for the same period in 2008. The increase in revenues in the second
quarter of 2009 was primarily the result of a 16% increase in sales of life
science products,  partially offset by a 5% decline in sales of kit
products.
  Life Science
Products
  Life
science revenues increased 16% to $3.3 million for the second quarter of 2009,
compared to $2.9 million for the same quarter in 2008.  The Company
recorded increases across all of its product offerings.  Sales of
products utilizing its GAT TM platform increased 45% to $434,000, bulk antibody
sales increased 33% to $738,000, sales of custom polyclonal products increased
7% to $1.4 million and sales of custom monoclonal products increased 2% to
$699,000.  This increase in life science revenues was primarily the
result of growing demand for the Company’s GAT TM
products.
  Kit
Products
 
 Kit product revenues decreased 5% to
$3.5 million in second quarter of 2009 as compared to $3.7 million in the second
quarter of 2008, as described below.
  Sales of
food pathogen products increased 1% to $1.4 million in the second quarter of
2009 as compared to the second quarter of 2008.  Ag-GMO product sales
decreased 10% to $597,000, in the second quarter of 2009 as compared to the
second quarter of 2008 primarily attributable to decreased demand for the
Company’s testing products in Brazil and reduced demand for products that detect
the StarlinkTM  trait
in grains.  Water and environmental products revenue decreased 8% to
$1.5 million in the second quarter of 2009 as compared to the second quarter of
2008 primarily attributable to lower sales of water testing equipment into
China.
  Gross
profits (defined as total revenues less manufacturing costs) for the second
quarter of 2009 were $3.6 million compared to $3.4 million for the same period
in 2008. Gross margins were 53% and 52% for the second quarters of 2009 and
2008, respectively. The increase in margins was primarily attributable to
increased production volumes in the antibody business which created a lower per
unit cost of sale.
  Operating
expenses for the second quarter of 2009 decreased 8% to $7.6 million, compared
to $8.2 million for the second quarter of 2008.   This decrease
was primarily attributable to a 15% decrease in selling, general and
administrative costs, and an 11% decrease in research and development costs,
partially offset by a 1% increase in manufacturing costs, all as described
below.
  Research
and development spending was $820,000, or 12% of revenues, in the second quarter
of 2009, compared to $921,000, or 14% of revenues, in the second quarter of
2008.  This decrease was primarily due to decreased spending and
effort on development of the Company’s proprietary SEQerTM antibodies, which are
produced by the Company’s GAT TM platform and are being sold through the
Company’s antibody catalog.
  Selling,
general and administrative expenses were $3.5 million for the second quarter of
2009, compared to $4.1 million for the same quarter in 2008. The decrease is
primarily associated with the absence of severance charges incurred in the 2008
period for the Company’s former Chief Executive Officer.
  The
Company had no net interest income in the second quarter of 2009 compared to
$37,000 in the second quarter of 2008. The decrease was primarily due to lower
interest rates received on decreased levels of invested cash and cash
equivalents during the second quarter of 2009.
  The
Company’s effective income tax rate was 3% for the three month period ended June
30, 2009 and approximately 33% for the three month period ended June 30,
2008.  This decrease is primarily due to the full valuation allowance
placed against U.S. federal and state deferred tax assets as of June 30,
2009.
  Net loss
in the second quarter of 2009 was $734,000, or $0.04 per diluted share, compared
to a net loss of $1.1million, or $0.05 per diluted share, for the same period in
2008. Diluted shares utilized in these computations were 20.1 million and 20.4
million for the second quarters of 2009 and 2008, respectively.
  14
  Six
Months Ended June 30, 2009 versus Six Months Ended June 30, 2008
  Revenues
for the six months ended June 30, 2009 were $13.8 million, which are comparable
to the same period in 2008.
  Life Science
Products
  Life
Science revenues increased 5% to $7.0 million for the six months ended June 30,
2009, compared to $6.7 million for the same period in 2008.  Sales of
products utilizing the Company’s GAT TM platform increased 46% to $784,000, bulk
antibody sales increased 24% to $1.9 million and sales of custom polyclonal
products remained flat at $2.7 million.  Sales of custom monoclonal
products decreased 23% to $1.4 million.  This increase in life science
revenues was primarily the result of growing demand for the Company’s GAT TM
products.
  Kit
Products
 
 Kit product revenues decreased 4% to
$6.7 million in the six months ended June 30, 2009 as compared to $7.0 million
for the same period in 2008, as described below.
  Sales of
food pathogen products increased 4% to $2.8 million in the 2009 period as
compared to the 2008 period.  Ag-GMO product sales decreased 22% to
$1.2 million for the 2009 period as compared to the 2008 period primarily
attributable to decreased demand for the Company’s testing products in Brazil
and reduced demand for products that detect the StarlinkTM  trait
in grains.  Water and environmental products revenue decreased 4% to
$2.6 million for the first six months of 2009 as compared to the first six
months of 2008 primarily attributable to lower sales of water testing equipment
into China.
  Gross
profits (defined as total revenues less manufacturing costs) and gross margins
remained the same for the first six months of 2009 and 2008, at $7.4 million and
54%, respectively.
  Operating
expenses for the six months ended June 30, 2009 decreased 3% to $15.0 million,
compared to $15.5 million for the six months ended June 30,
2008.   This decrease was primarily attributable to a 20%
decrease in research and development costs and a 1% decrease in selling, general
and administrative costs all as described below.
  Research
and development spending was $1.5 million, or 11% of net revenues, in the first
six months of 2009, compared to $1.9  million, or 14% of net revenues,
in the first six months of 2008.  This decrease was primarily due to
decreased spending and effort on development of the Company’s proprietary SEQerTM
antibodies, which are produced by the Company’s GAT TM platform and are being
sold through the Company’s antibody catalog.
  Selling,
general and administrative expenses were $7.2 million for the six months ended
June 30, 2009, compared to $7.3 million for the six months ended June 30, 2008.
The decrease is primarily associated with the reduction of severance charges
incurred in the 2008 period for the Company’s former Chief Executive Officer,
partially offset by higher costs for incentives and professional
fees.
  The
Company recorded $5,000 in net interest income in the six months ended June 30,
2009 compared to $99,000 in the six months ended June 30, 2008. The decrease was
primarily due to lower interest rates received on decreased levels of invested
cash and cash equivalents during the 2009 period.
  The
Company’s effective income tax rate was 0% for the six month period ended June
30, 2009 and approximately 33% for the six month period ended June 30,
2008.  This decrease is primarily due to the full valuation allowance
placed against U.S. federal and state deferred tax assets as of June 30,
2009.
  Net loss
in the six months ended June 30, 2009 was $1.3 million, or $0.06 per diluted
share, compared to a net loss of $1.1million, or $0.05 per diluted share, for
the six months ended June 30, 2008. Diluted shares utilized in these
computations were 20.1 million and 20.4 million for the 2009 and 2008 periods,
respectively.
  15
  Liquidity
and Capital Resources
  The net
cash used in operating activities of $470,000 for the first six months of 2009
compares to net cash used in operating activities of $833,000 for the first six
months of 2008.  The net cash used in operating activities for the
2009 period was primarily the result of the net loss recorded in the period,
increases in other current assets and decreases in accrued expenses and accounts
payable.  The net cash used in operating activities for the 2008
period was primarily the result of the net loss recorded in the period, deferred
income tax provision and an increase in other current assets.
  Net cash
used in investing activities of $419,000 for the first six months of 2009
related to the capital expenditures for the period. This compares to net cash
used in investing activities of $536,000 for the first six months of 2008. The
capital expenditures for the 2009 period were primarily related to computer and
electronic equipment.  The capital expenditures for the 2008 period
were primarily related to purchases of laboratory equipment.
  Net cash
used in financing activities of $3.0 million in the first six months of 2009 was
primarily attributable to the Company’s requirement to have $2.7 million in
restricted cash in connection with the May 15, 2009 amendment to the Company’s
Credit Agreement, which is described below, as well as scheduled debt
payments.  Net cash used in financing activities of $266,000 for the
first six months of 2008 was primarily the result of scheduled debt
repayments.
  The
Company’s working capital (current assets less current liabilities) was
$14.7 million at June 30, 2009 compared to $14.2 million at December 31,
2008.
  On May 5,
2000, the Company entered into a financing agreement with a commercial bank
which was amended on May 15, 2009 (as amended, the “Credit
Agreement”).  The Credit Agreement provided for up to a $1 million
revolving line of credit, none of which was outstanding at June 30, 2009. The
revolving line of credit bore a variable interest rate of between 150 basis
points and 250 basis points over the one month LIBOR rate depending upon the
ratio of the Company’s funded debt to EBITDA. The Company’s annual effective
rate of interest on this line of credit, taking into account the variable
interest rate and LIBOR, was 2.82% at June 30, 2009.
  On
December 13, 2001, the Company received a term loan under the Credit Agreement
to finance the construction of new facilities at its Windham, Maine location.
This agreement provided for up to $1.5 million in financing, $53,000 of which
was outstanding at June 30, 2009, and is repayable over seven years, with
principal payments that began on October 1, 2002. The loan bears a variable
interest rate of 100 basis points less than the current Prime Interest Rate.
Payments are due monthly, with equal amortization of principal payments plus
interest. The Company’s annual effective rate of interest on this loan at June
30, 2009 was 2.25%.
  On August
21, 2007, the Company received a term loan under the Credit Agreement to finance
the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2 million in financing, $1.3 million of which was
outstanding at June 30, 2009, and is repayable over five years, with principal
payments that began on October 1, 2007. The loan bears a fixed interest rate of
5.96% with equal amortization of principal payments plus interest.
  As of
June 30, 2009, the outstanding balance on all of the Company’s commercial bank
debt was $1.4 million. This indebtedness and the Company’s $1 million unused
line of credit is secured by $2.7 million in restricted cash as required by the
May 15, 2009 amendment to the Company’s Credit Agreement.
  16
  Under the
Credit Agreement, the Company was required to meet certain quarterly financial
covenants that included maintaining a minimum tangible net worth of not less
than $18.5 million and EBITDA of not less than $100,000 for the quarter ended
June 30, 2009.
  The
Company did not meet its financial covenants with respect to its indebtedness at
June 30, 2009. The Company received a waiver of the financial covenants relating
to the above financing from its commercial bank as of June 30,
2009.
  On August
12, 2009, the Credit Agreement was amended to eliminate the revolving line of
credit, remove the financial covenants requiring minimum EBITDA and
tangible net worth amounts, and reduce the restricted cash requirement from $2.7
million to $1.25 million.
 For the
six months ended June 30, 2009, the Company satisfied all of its cash
requirements from cash available and on-hand.  At June 30, 2009, the
Company had $1.4 million in debt and $20.5 million in stockholders’
equity.
  Based
upon its cash and cash equivalents on hand, credit facilities, current product
sales and the anticipated sales of new products, the Company believes it has, or
has access to, sufficient resources to meet its operating requirements through
the next 12 months. The Company’s ability to meet its long-term capital needs
will depend on a number of factors, including compliance with existing and new
loan covenants, the success of its current and future products, the focus and
direction of its research and development programs, competitive and
technological advances, future relationships with corporate partners, government
regulation, the Company’s marketing and distribution strategy, its successful
sale of additional common stock and/or the Company successfully locating and
obtaining other financing, and the success of the Company’s plan to make future
acquisitions. Accordingly, no assurance can be given that the Company will be
able to meet the future liquidity requirements that may arise from these
inherent and similar uncertainties.
  Item
3. Quantitative and Qualitative Disclosures About Market Risk
  The
Company has exposure to changing interest rates, and is currently not engaged in
hedging activities. Interest on approximately $53,000 of outstanding
indebtedness is at a variable rate of 1% less than the published prime interest
rate.  At the Company’s current level of indebtedness, each 1% change
in the variable interest rate will have an effect of $500 on the Company’s
annual interest expense charges.
  The
Company conducts operations in the United Kingdom. The consolidated financial
statements of the Company are denominated in U.S. dollars and changes in
exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company’s consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.
  Item
4. Controls and Procedures
  (a)
              Evaluation
      of Disclosure Controls and
Procedures
  Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended, as of the end of the period covered by this report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that, as of June 30, 2009, our disclosure controls and procedures were
effective to provide reasonable assurance that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that information required to be
disclosed by us in the reports we file or submit under the Securities Exchange
Act of 1934, as amended, is accumulated and communicated to our management,
including our principal executive and financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
  (b)
              Change
      in Internal Control over Financial
Reporting
  No change
in the Company’s internal control over financial reporting occurred during the
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the internal control over financial
reporting.
 
 17
  PART
II – OTHER INFORMATION
 
 Item
4. Submission of Matters to a Vote of Security Holders
 
 On May 12, 2009, the Company held its
Annual Meeting of Stockholders (the “Meeting”).  At the Meeting, the
stockholders elected two directors of the Company to serve for a two-year term
until the 2011 Annual Meeting of Stockholders and until their respective
successors are duly elected and qualified.  The vote on each director
is set forth below (there were no abstentions or broker non-votes):
 
 Name
                  For
                  WithheldSteven
      R. Becker
                  15,929,079
                  1,973,151Francis
      M. DiNuzzo
                  17,270,518
                  631,712
 
 The directors whose term of office
as a director continued after the meeting are C. Geoffrey Davis, Clifford L.
Spiro, Richard van den Brock and Stephen L. Waechter.
 
 At the meeting, an amendment to
increase the number of shares authorized for issuance under the Company’s 2000
Stock Incentive Plan was approved:
 
 Proposal
                      Shares
                        Voted For
                      Shares Voted
                        Against
                      Abstain
                      Broker Non-VotesAmendment
      to the 2000 Stock Incentive Plan to Increase the Number of Shares
      authorized for issuance
                      11,070,581
                      1,525,106
                      256,279
                      5,050,264
  Item
6. Exhibits
  31.1
                Certifications
      of the Chief Executive Officer of Strategic Diagnostics Inc. required by
      Rule 13a-14(a) under the Securities Exchange Act of
193431.2
                Certifications
      of the Chief Financial Officer of Strategic Diagnostics Inc. required by
      Rule 13a-14(a) under the Securities Exchange Act of
193432.1
                Certification
      of the Chief Executive Officer of Strategic Diagnostics Inc. pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      Sarbanes-Oxley Act of 200232.2
                Certification
      of the Chief Financial Officer of Strategic Diagnostics Inc. pursuant to
      18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      Sarbanes-Oxley Act of 2002
 
 18
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
  STRATEGIC
      DIAGNOSTICS INC.Date:
      August 14, 2009
                  
                  /s/
      Francis M. DiNuzzoFrancis
      M. DiNuzzo
                    President,
      Chief Executive Officer
                    (Principal
      Executive Officer)
   Date:
      August 14, 2009
                    
                    /s/
      Kevin J. BrattonKevin
      J. Bratton
                      Vice
      President – Finance and ChiefFinancial
      Officer
                      (Principal
      Financial and Accounting
Officer)








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