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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31,
    2005                                             
|          
|          
|          
|          
|OR        
|          
|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 Number: 000-50786

STRATAGENE CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                |  |                    
|----------------------------------------------- |  | -------------------
|                                               
|                                               
|                                               
|                                               
|Delaware                                        |  | 33-0683641         
|(State or other jurisdiction of                 |  | (I.R.S. Employer   
|incorporation or organization)                  |  | Identification No.)
|                                               
|                                               
|                                               
|                                               
|11011 North Torrey
    Pines Road, La Jolla, CA |  | 92037(Zip Code)    
|(Address of principal executive
    offices)    |  |                    

(858) 373-6300

(Registrants telephone number, including area code)


No Change

(Former name, former address and former fiscal
year, if changed since last report)


Securities registered pursuant to Section 12(b) of the
Act:

None


Securities registered pursuant to Section 12(g) of the
Act:

Common Stock, $.0001 par value

(Title of class)


Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.     Yes o          No þ

Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.     Yes o          No þ

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 þ          No o

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

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

o o þ


Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act).     Yes o          No þ

As of June 30, 2005, the last day of the registrants
second fiscal quarter of fiscal 2005, the aggregate market value
of the common stock held by non-affiliates of the registrant was
approximately $70.7 million, based on the last reported
sale price on the preceding business day. Shares of common stock
held by each executive officer and director and by each person
or group who owns 10% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrants common
stock as of March 13, 2006 was 22,328,227.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain information called for by Part III of this
Form 10-K will either be filed with the Commission under
Regulation 14A under the Securities Exchange Act of 1934 or
by amendment to this Form 10-K, in either case not later
than 120 days after December 31, 2005.



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STRATAGENE CORPORATION

Annual Report on Form 10-K

Table of Contents

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|Part I       
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|Item 1.       |  | Business                                                                                                             |    |      | 1  | 
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|Item 1A.      |  | Risk Factors                                                                                                         |    |      | 8  | 
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|Item 2.       |  | Properties                                                                                                           |    |      | 19 | 
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|Item 3.       |  | Legal Proceedings                                                                                                    |    |      | 20 | 
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|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                              |    |      | 23 | 
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|Part II      
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|Item 5.       |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |    |      | 23 | 
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|Item 6.       |  | Selected Financial Data                                                                                              |    |      | 24 | 
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|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |    |      | 25 | 
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|Item 7A.      |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                       |    |      | 38 | 
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|Item 8.       |  | Financial Statements and
    Supplementary Data                                                                      |    |      | 40 | 
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|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |    |      | 75 | 
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|Item 9A.      |  | Controls and Procedures                                                                                              |    |      | 75 | 
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|Item 9B.      |  | Other Information                                                                                                    |    |      | 75 | 
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|Part III     
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|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                               |    |      | 75 | 
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|Item 11.      |  | Executive Compensation                                                                                               |    |      | 75 | 
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|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management                                                   |    |      | 75 | 
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|Item 13.      |  | Certain Relationships and
    Related Transactions                                                                   |    |      | 76 | 
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|Item 14.      |  | Principal Accountant Fees
    and Services                                                                           |    |      | 76 | 
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|Part IV      
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|Item 15.      |  | Exhibits and Financial
    Statement Schedules                                                                       |    |      | 76 | 
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|Signatures    |  |                                                                                                                      | 79 |     
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|Schedule II   |  |                                                                                                                      | 80 |     
|EXHIBIT 10.18
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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PART I.






|        |         
|------- | --------
|Item 1. | Business

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K includes
forward-looking statements intended to qualify for
the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. Some of the statements
in this Annual Report on Form 10-K, including, but not
limited to, statements contained in the Managements
Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of
1934, as amended. These statements are therefore entitled to the
protection of the safe harbor provisions of these laws. We
generally identify forward-looking statements in this Annual
Report by using words such as believe,
intend, target, expect,
estimate, may, should,
plan, project, contemplate,
anticipate, predict or similar
expressions. You can also identify forward-looking statements by
discussions of strategies, plans or intentions, among other
things. These statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be
materially different from any future results, levels of
activity, performance or achievements expressed or implied by
these forward-looking statements. These factors include the
absence of a public market for our common stock prior to the
Hycor merger, the challenges of integrating our business with
that of Hycors, our ability to introduce new products and
the acceptance of these products by the marketplace,
competition, the inability to sell products as a result of the
possible termination of license agreements, fluctuations in
operating results, dependence on key employees, our
indebtedness, future capital requirements, the possibility of
unproductive research and development projects, ability to
manage growth, price volatility of our common stock, the impact
of future sales of common stock on our stock price, potential
declines in research and development budgets or funding and our
ongoing ability to protect our own intellectual property rights
and avoid violating the intellectual property rights of third
parties.

Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee
future results, events, levels of activity, performance or
achievement. Any forward-looking statements are made pursuant to
the Private Securities Litigation Reform Act of 1995 and, as
such, speak only as of the date made. We undertake no obligation
to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise, unless required by law.

Overview

Stratagene Corporation and subsidiaries, which we refer to
collectively as we, our or us, develop and manufacture
biological products, instruments and software designed to
improve the speed and accuracy of life sciences research and
clinical diagnosis. We market our products to researchers and
clinicians in clinical laboratories and academic, hospital and
government institutions, as well as to scientists in
pharmaceutical and biotechnology companies, in the U.S. and
internationally. Scientists and clinicians use our products to
identify genes and proteins, study how genes and proteins
regulate cells, determine the molecular mechanisms of health and
disease, search for new drug therapies, and develop diagnostic
tests.

We engage in business activity in two operating segments:
Research Supplies and Clinical Diagnostics. We have marketed and
sold our Research Supplies products since 1984, while the
Clinical Diagnostics products are a new addition to our product
portfolio as a result of a merger with Hycor Biomedical Inc., or
Hycor, in June 2004. Hycors experience in manufacturing
and marketing Food and Drug Administration, or FDA, regulated
clinical diagnostic products also spans 20 years. (See
Note 12 to the Financial Statements for additional
information on segments.)

Our Research Supplies products incorporate a diverse range of
molecular biology technologies used for gene transfer, gene and
protein expression, gene cloning, protein and gene functional
analysis, nucleic acid and protein purification and analysis,
microarrays, DNA replication and nucleic acid quantification.
Our Clinical Diagnostics products focus on allergy and
autoimmune testing and urinalysis. We manufacture our Research

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Our Research Supplies segment offers a broad portfolio of
products in each of the following three market categories:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gene Analysis: Our gene analysis products, which
    accounted for 35.5%, 51.3%, and 59.2% of total revenue in 2005,
    2004 and 2003, respectively, help researchers study gene
    activity, genetic code sequences, and gene dosage; as well as
    allow the purification and amplification of nucleic acid
    sequences,                                                                    
|
| |  | Protein Analysis and Cell Biology: Our protein analysis
    and cell biology products help researchers study signaling
    pathways within and between cells and tissues; create, purify
    and measure proteins; and change the chemical composition of
    proteins. These products accounted for approximately 9.7%, 15.2%
    and 15.1% of total revenue in 2005, 2004 and 2003, respectively.
|
| |  | Gene Discovery: Our gene discovery products, which
    accounted for approximately 6.5%, 11.4% and 17.1% of total
    revenue in 2005, 2004 and 2003, respectively, help researchers
    discover genes or find variations within DNA and RNA
    compositions.                                                                                                                                    

Our Clinical Diagnostics segment, which reflects sales from the
date of the Hycor merger in June 2004 and, accordingly, does not
reflect a full year of results for fiscal 2004, offers products
in the following areas:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Urinalysis: The KOVATM Microscopic Urinalysis
    System is our largest product line in the Clinical Diagnostics
    segment, accounting for approximately 8.4% and 7.4% of total
    revenue in 2005 and 2004, respectively. The KOVA System provides
    laboratories with the capability to perform uniform and reliable
    microscopic analyses of urine specimens and quality control for
    bio-chemical urinalysis. It is comprised of plastic collection
    containers, tubes and pipettes, patented microscopic slides, and
    human urine-based control materials.                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Allergy: Our allergy diagnostic product line, which
    accounted for approximately 7.9% and 6.8% of total revenue in
    2005 and 2004, respectively, is a complete line of
    radioimmunoassay, or RIA, and enzymatic immunoassay, or EIA,
    procedures to test for specific allergies to more than 1,000
    different allergens such as grasses, weeds, trees, epidermals
    (i.e., animal hair), dust, dust mites, molds, and foods. We also
    offer general screening tests. Unlike the traditional prick
    puncture and intradermal testing methods of diagnosing
    allergies, our products permit a physician to diagnose allergies
    by testing a sample of the patients blood for the presence
    of the specific IgE or IgG antibody, which reacts with the
    corresponding allergen. This method has many advantages over the
    traditional methods of allergy diagnosis, not the least of which
    is patient comfort.
|
| |  | Autoimmune: Our autoimmune diagnostic product line, which
    accounted for approximately 1.3% and 1.2% of total revenue in
    2005 and 2004, includes tests used to diagnose and monitor
    autoimmune disorders such as rheumatoid arthritis and systemic
    lupus erythematosus, among others. Autoimmune diseases may be
    systemic or organ-specific and we expect the need for this type
    of diagnostic testing to increase as the population ages and
    primary care physicians learn more about autoimmune diseases. We
    base our tests on enzyme immunoassay technology in a microplate
    format. Unlike traditional methods like immunofluorescence,
    which requires a dedicated and highly trained technologist to
    read slides manually through a microscope one at a time, our
    products can automate this process either on our HY-TEC
    instruments or on general microplate processors.                     



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our allergy and autoimmune product lines also include the HY-TEC
    480 and HY-TEC 288 automated diagnostic systems that provide
    clinical laboratories with significant productivity improvement
    capabilities. The HY-TEC systems include the instruments,
    software, and test reagents necessary to perform allergy and
    autoimmune testing. We place a large percentage of the HY-TEC
    systems on a reagent rental basis. A reagent
    rental transaction, common to the diagnostic market,
    involves placing an instrument in the laboratories of customers
    that pay for the system over an agreed contract period by
    purchasing test reagents. Our HY-TEC reagent rental program is
    similar in that we typically

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | place instruments in use with direct customers that pay for the
    instrument over an agreed contract period by purchasing test
    reagents, but also includes selling some instruments to
    distributors and direct customers. The typical contract period
    for the HY-TEC reagent rental is between 3 and 5 years. The
    instruments that we sell to distributors recognize a minimal
    gross profit to assist them with their instrument placements,
    with the expectation that we will earn a profit on the
    subsequent sales of reagents necessary to operate the instrument.

We believe that our competitive strengths position us to compete
effectively within the life sciences research and clinical
diagnostics markets. These strengths include innovative product
research and development, a diverse intellectual property
portfolio, a dedication to quality and customer service,
effective sales and marketing, and an experienced management
team.

Research and Development

We believe that we have a strong scientific team. As of
December 31, 2005, our research and development department
had 81 employees, 17 of whom have Ph.Ds or M.Ds. Our employees
actively stay abreast of scientific and industry developments in
an effort to identify and acquire innovative technologies from
researchers and research institutions throughout the world. As
of December 31, 2005, we owned approximately 180 patents
and had approximately 220 patent applications pending. We spent
$12.4 million, $10.8 million and $10.5 million on
proprietary research and development activities during fiscal
2005, 2004 and 2003, respectively.

Our core strengths are in the areas of molecular biology,
including gene cloning, gene expression and gene detection. We
have focused research groups in DNA replication factors, nucleic
acid and protein purification, E. coli and mammalian genetics,
polymerase chain reaction (PCR) and quantitative PCR
(QPCR), ribonucleic acid interference (RNAi), proteomics, and
microarrays.

Sales and Marketing

We currently market our products in over 60 countries worldwide.
We sell our products directly to customers in the U.S., Canada,
Germany, France, Switzerland, Austria, Belgium, Luxembourg, the
Netherlands, Japan, and the United Kingdom. In addition, we use
specialized distributors to market our products in more than 50
other countries. As of December 31, 2005, we employed 129
highly trained and skilled people in our sales and marketing
department to market our products and provide customer technical
support and service. Approximately 50% of our sales and
marketing staff have degrees in biological sciences and over 22%
have advanced degrees.

Our customers include most major pharmaceutical and
biotechnology companies, including Merck, Pfizer, Amgen and
Genentech. We also serve academic research laboratories,
including the United States National Institutes of Health,
Harvard University, Stanford University and the University of
California system. Additionally, we serve the two largest
reference laboratories in the United States, Quest Diagnostics
and Laboratory Corporation of America (LabCorp). Quest
Diagnostics standardizes their member and managed laboratories
on our KOVA-Trol urinalysis controls, and we are the prime
allergy testing vendor to LabCorp. As a result of our long
history of providing products to the molecular biology research
and diagnostics markets, we enjoy a high degree of brand
awareness.

Due to the highly technical nature of our products, we employ
and train scientists to work as technical sales representatives.
Each technical sales representative has an extensive background
in molecular biology, which includes spending time in the
laboratory doing research before we hire them for the sales
department. To guide the professional training of our technical
sales representatives, we developed a comprehensive product
training and consultative selling skills curriculum called
Stratagene University. Technical sales representatives
matriculate through a series of courses to increase their
product knowledge and develop the skills necessary to assist
customers in making informed buying decisions. Strong
consultative skills, in-depth product knowledge and a thorough
understanding of molecular biology techniques and the research
process allow our sales representatives to become advisors,
acting in a consultative role with their customers. Our

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Our marketing departments in San Diego, California and
Garden Grove, California combine various types of advertising
media and methods to inform customers of new product
developments and enhancements to existing products. We advertise
in many prominent scientific journals, periodically publish a
product catalog, distribute quarterly Strategiesnewsletters and conduct direct and online mail campaigns to
researchers in the U.S. and Europe. We also reach a broad range
of scientists by presenting at scientific seminars and
exhibiting at scientific meetings.

Our web site allows researchers to learn about new products,
view an on-line catalog, place orders, download technical
manuals and vector sequences, read our newsletter and subscribe
to monthly announcements about new products and other pertinent
scientific information. We currently accept orders on-line and
are working to make our entire order fulfillment and billing
processes available to our customers electronically. As a
result, we are able to support our customers as they seek to
shift their purchasing from current conventional procurement
processes to e-commerce over the Internet.

Manufacturing

We maintain manufacturing facilities in Garden Grove,
California, the Austin, Texas area and Edinburgh, Scotland. In
June 2004, we decided to move our remaining manufacturing
operations at the San Diego facility to our Texas facility,
which we completed by the end of the second quarter of 2005. Our
Garden Grove and Edinburgh facilities support our Clinical
Diagnostics products, while our Texas facility supports our
Research Supplies products. We have distribution and warehouse
facilities in Scotland, Germany, the Netherlands and Japan. We
also provide instrument service capabilities in our sites in
Texas and Germany. An integrated planning, purchasing and
warehousing system, which include incoming materials inspection
and quality assurance testing, support our manufacturing at both
the California and Texas facilities. Our biological process
improvement department within the manufacturing sector supports
our new product introductions, and existing product and process
improvements. All products must meet or exceed rigid quality
control testing specifications.

Our Garden Grove and Edinburgh facilities are registered as a
manufacturer of medical devices with the FDA. To comply with FDA
requirements, we must manufacture our Clinical Diagnostics
products in conformance with the FDAs medical device
Quality System Regulation, also known as Good Manufacturing
Practices, or GMP. Our existing Clinical Diagnostics products
are also subject to certain FDA pre-market notification
requirements.

Our Garden Grove, Edinburgh, and the Austin area facilities are
also certified under International Organization for
Standardization (ISO) 13485. ISO 13485 is the standard
specific to medical devices and requires high levels of quality
in all areas of development, production and servicing. The
requirements include stringent detail and record retention of
technical data, complaints and follow-up, environmental
monitoring, risk identification and analysis, and
accountability. ISO 13485 is globally recognized as a stringent
standard of quality management systems for medical devices.

Patents and Proprietary Technologies

We consider the protection of our proprietary technologies and
products to be important to the success of our business. We rely
on a combination of patents, licenses, trade secrets and
trademarks to establish and protect our proprietary rights in
our technologies and products. Our product portfolio includes
many products in which we have a proprietary interest. As of
December 31, 2005, we owned approximately 180 patents and
had approximately 220 patent applications pending. Additionally,
we have entered into over 70 licenses with academic, government
or commercial entities, which provide us with access to
additional technologies. To stimulate growth, we continued to
invest in excess of 13% and 12% of product sales in research and
development during fiscal 2005 and 2004, respectively. This
investment in research and development is necessary to continue
an accelerated rate of creating new intellectual property.

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Generally, patents issued in the U.S. have a term of
20 years from the date of filing the application in the
case of patents issued from applications submitted on or after
June 8, 1995 and 17 years from the date of issue for
patents issued from applications submitted prior to June 8,
1995. Patents in most other countries have a term of
20 years from the date of filing the patent application.
Our material patents expire at various times between 2010 and
2017. As the publication of discoveries in the scientific and/or
patent literature tends to lag behind actual discoveries by at
least several months, there may be patent applications or
scientific discoveries of which we are not currently aware.
Accordingly, we cannot assure you that patents will issue from
any of our patent applications or from applications licensed to
us.

Our success depends to a significant degree upon our ability to
develop proprietary products and technologies. It is important
to our success that we adequately protect our intellectual
property associated with these products and technologies. We
intend to continue filing patent applications as we develop new
products and technologies. Patents provide some degree of
protection for our intellectual property. However, the assertion
of patent protection involves complex legal and factual
determinations and is therefore uncertain and expensive. See
Risk Factors  Inability to secure and maintain
intellectual property protection for our products and
technologies could adversely affect our ability to compete
and  Intellectual property litigation could
seriously harm our business.

Corporate Collaborations

In December 2005, we entered into a strategic partnership with
Strand Life Sciences, or Strand, to develop a suite of next
generation bioinformatics software tools. Under the terms of the
agreement, Strand and we are collaborating on designing and
developing innovative software tools to address the increasingly
complex demands of biological data analysis for life scientists.
We will exclusively market and sell the jointly developed
products, which will use Strands award-winning
avadisTM technology. The agreements require us to
make aggregate milestone payments of $0.9 million to Strand
upon our acceptance of certain deliverables. In addition, the
agreements require us to make $1.5 million in minimum
annual payments to Strand in the first twelve months after our
first commercial sale or 60 days after our final acceptance
of the product. We may offset the $1.5 million minimum
annual payments by $0.5 million of the $0.9 million
milestone payments in the first twelve months. The agreements
also require us to make $1.7 million in minimum annual
payments to Strand in the second twelve months.

We also entered into a License, Manufacturing and Supply
Agreement with privately-held Focus Diagnostics, Inc., or Focus
in October 2005, to address the growing molecular diagnostics
market for infectious diseases. Focus is a specialty diagnostics
company that develops innovative infectious disease products and
is a leading reference laboratory for infectious and
immunological diseases. Under the agreement, we have granted
Focus a non-exclusive license to our proprietary FullVelocity
technology, and will provide expertise and knowledge that Focus
will use to develop selected molecular diagnostics testing kits
and products. In exchange, Focus will pay us a royalty based on
Focus sales of finished products. We will also manufacture
the diagnostic products which Focus intends to commercialize
globally. Additionally, we will manufacture and sell reagents to
Focus for laboratory-developed tests to be used in Focus
national reference laboratory.

We also entered into an agreement with the Diagnostics Division
of Bayer HealthCare LLC, or Bayer, in December 2005, whereby
Bayer will purchase a customized version of our Mx3005P
instrument system for use in a new platform Bayer is developing
for performing molecular diagnostics tests worldwide. Bayer is
currently developing a system to market to clinical laboratories
for performing kinetic PCR molecular diagnostics tests and will
use our instruments as the QPCR instrument component of the
system. Under the terms of the agreement, we will develop
customized software and system features for Bayers use.
The agreement also calls for us to implement Quality System
Regulations (QSR) and procedures under which we will
manufacture the customized Mx3005P instruments for Bayer. Our
facility in the Austin, Texas area, where we manufacture the
Mx3005P, is currently certified under ISO 13485 as a
high-quality medical devices developer and manufacturer with
technical and administrative controls to assure safety and
reliability under all regulatory and customer requirements. We
will receive milestone payments based upon us completing
software-based customization and regulatory activities needed to
meet Bayers clinical requirements.

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Technology Licensing

Products sold pursuant to license agreements accounted for
approximately 51% of our product sales in 2005. Under these
agreements, we pay royalties to the licensor based upon a
percentage of the sales of the products containing or using the
licensed technology and/or intellectual property rights. We
believe that our ability to license new technologies from third
parties is and will continue to be important to our ability to
offer new products.

There can be no assurance that we will be able to continue to
successfully identify new technologies developed by others. Even
if we are able to successfully identify new technologies of
interest, we may not be able to negotiate a license on favorable
terms, or at all. See Risk Factors  Failure to
license new technologies could impair our new product
development. Some of our licenses may not run for the life
of the applicable patent. We may not be able to renew our
existing licenses on favorable terms, or at all. If we lose our
rights to patented or proprietary technology, we may need to
redesign our products or we may lose a competitive advantage.
Potential competitors could license technologies that we fail to
license and potentially erode our market share for certain
products. See Risk Factors  We may not be able
to renew our existing licenses, which could prevent us from
selling some of our products.

Competition

The markets for our products are highly competitive. We expect
the intensity of competition to increase. Our principal
competitors in the Research Supplies segment include:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | Invitrogen Corporation,                                   
|
| |  | GE Healthcare (formerly Amersham Biosciences),            
|
| |  | Promega Corporation,                                      
|
| |  | New England Biolabs,                                      
|
| |  | Qiagen,                                                   
|
| |  | Roche Applied Sciences (formerly Roche Molecular Systems),
|
| |  | Applera (formerly Applied Biosystems),                    
|
| |  | Techne, and                                               
|
| |  | Biorad.                                                   

Our Clinical Diagnostics product lines have several different
competitors. The KOVA Microscopic Urinalysis System has
significant competition from at least two national diagnostic
product manufacturing and distribution companies that market
products performing similar functions. We believe that we are
the leading supplier of standardized microscopic urinalysis
systems.

Pharmacia, Inc. and Diagnostic Product Corporation have products
that compete with our allergy diagnostic products.

Many of our competitors have greater financial, operational and
sales and marketing resources and more experience in research
and development than we do. These competitors and other
companies may have developed or could in the future develop new
technologies that compete with our products or which could
render our products obsolete. See Risk Factors 
The markets for our products are extremely competitive and
subject to rapid technological change and if we fail to compete
effectively, our business may suffer.

We believe that customers in our markets display a significant
amount of loyalty to their initial supplier of a particular
product. Therefore, there is a significant competitive advantage
in being the first to introduce a new product to market.
Accordingly, we believe that to compete effectively, we will
need to consistently be first to market with innovative new
research products and services. See Risk
Factors  Our future success depends on the timely
introduction of new products and the acceptance of these new
products in the marketplace.

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Government Regulation

Our Research Supplies products are not subject to direct
governmental regulation other than the laws and regulations
generally applicable to businesses in the jurisdictions in which
we operate, including those governing the handling and disposal
of hazardous wastes and other environmental matters. Our
research and development activities involve the controlled use
of small amounts of hazardous materials, chemicals and
radioactive compounds. Although we believe that our safety
procedures for handling and disposing of such materials comply
with applicable regulations, we cannot completely eliminate the
risk of accidental contamination or injury from these materials.
In the event of such an accident, we could be held liable for
resulting damages. Any such liability could have a material
adverse effect on us. However, we do not expect that complying
with governmental regulations that we are subject to will have a
material effect on our capital expenditures, earnings or
competitive position.

Government regulations directed towards containing the cost of
medical services and limiting the amount of reimbursement to
service providers indirectly affects our Clinical Diagnostics
products. These types of regulations, which are applicable to
both domestic and international markets, will tend to limit
growth rates in our target markets for these products. We
designed our products, including the HY-TEC automated diagnostic
system, to provide a cost effective solution to service
providers, thereby aiding in the cost containment efforts.
However, we cannot predict the long-term effect on revenue
growth resulting from these regulations.

Our Garden Grove and Edinburgh facilities are registered as a
manufacturer of medical devices with the FDA. To comply with FDA
requirements, we must manufacture our Clinical Diagnostics
products in conformance with the FDAs medical device
Quality System Regulation, also known as Good Manufacturing
Practices, or GMP. Our existing Clinical Diagnostics products
are also subject to certain FDA pre-market notification
requirements.

Receiving, using, and disposing radioactive materials are
subject to licensing requirements of the Nuclear Regulatory
Commission, or NRC. We hold a radioactive materials license from
the NRC for our radioactive labeling activities, and the NRC
periodically inspects our facilities.

We would be adversely affected if we were unable to maintain our
governmental licenses or continue to comply with applicable
federal and state regulations, but we do not expect this to
occur. We cannot predict whether future changes in government
regulations might substantially increase compliance costs,
adversely affect the time required to develop and introduce
products, or limit or preclude the sale of our new products.

Employees

As of December 31, 2005, we employed 459 persons, of whom
53 held Ph.D. or M.D. degrees. As of that date, 81 employees
were engaged in research and development, 129 in sales and
marketing, 173 in manufacturing and 76 in supporting business
development, information services, intellectual property, legal,
finance, human resources and other functions. We do not enter
into collective bargaining agreements with our employees, and we
believe that we maintain good relations with our employees.

Available Information

You may electronically obtain all materials we file with the
Securities and Exchange Commission, or SEC, by visiting the SEC
internet site, http://www.sec.gov. Additionally, you may
obtain these materials through the SECs Public Reference
Room at 100 F Street, N.E., Washington, D.C. 20549 or by
calling the SEC at 1-800-SEC-0330.

Our Internet address is www.stratagene.com. We make available
free of charge through our Internet web site our annual report
on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission. Our
internet address is not intended to function as a hyperlink,

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Item 1A.     Risk
Factors

It is important to carefully consider the following risks,
together with other matters described in this Form 10-K or
in other documents referred to in this Form 10-K in
evaluating our business and prospects. If any of the following
risks occur, our business, financial condition or operating
results could be harmed. In such case, the trading price of our
common stock could decline. The risks described below are not
the only risks we face. Additional risks not presently known to
us or that we currently deem immaterial may also impair business
operations.



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | Our future success depends on the timely introduction of
    new products and the acceptance of these new products in the
    marketplace.

Rapid technological change and frequent new product
introductions are typical for the markets we serve. Our future
success will depend in large part on continuing to develop and
introduce new products in a timely manner that address evolving
market requirements.

We believe successful new product introductions provide a
significant competitive advantage because customers make an
investment of time in selecting and learning to use new products
and are reluctant to switch thereafter. To the extent that we
fail to introduce new and innovative products, we may lose
market share to our competitors, which may be difficult to
regain. Any inability, for technological or other reasons, to
successfully develop and introduce new products could materially
damage our business.

In the past we have experienced, and are likely to experience in
the future, delays in developing and introducing products. We
cannot assure you that we will keep pace with the rapid rate of
change in life sciences or clinical diagnostic research, or that
our new products will adequately meet the requirements of the
marketplace or achieve market acceptance. Some of the factors
affecting market acceptance of new products include:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | availability, quality and price relative to competitive products;          
|
| |  | the timing of introducing the product relative to competitive
    products;
|
| |  | customers opinions of the products utility;                              
|
| |  | citation of the product in published research; and                         
|
| |  | general trends in life sciences and clinical diagnostics
    research.     



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The markets for our products are extremely competitive and
    subject to rapid technological change and if we fail to compete
    effectively, our business may suffer.

The markets for our products are highly competitive. We compete
with many other suppliers of life sciences research products and
clinical diagnostic products. Many of our competitors have
greater financial, operational and sales and marketing resources
and more experience in research and development than we do.
These and other companies may have developed or could in the
future develop new technologies that compete with our products
or even render our products obsolete. Competition in our markets
is primarily driven by:



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | product performance, features and reliability;                                     
|
| |  | price;                                                                             
|
| |  | timing of product introductions;                                                   
|
| |  | ability to develop, maintain and protect proprietary products
    and technologies;
|
| |  | sales and distribution capabilities;                                               

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| |   |                                   
| | - | ----------------------------------
| |  | technical support and service; and
|
| |  | breadth of product line.          

If a competitor develops or acquires superior technology or
cost-effective alternatives to our products, our business,
financial condition and results of operations could be
materially adversely affected.

Our competitors have in the past and may in the future compete
by lowering prices. We may respond by lowering our prices, which
could reduce revenues and profits. Conversely, failure to
anticipate and respond to price competition may damage our
market share. In addition, we must continually adapt to new
marketing and distribution trends in order to compete
effectively.

We believe that customers in our markets display a significant
amount of loyalty to their initial supplier of a particular
product. Therefore, it may be difficult to make sales to
customers who have previously purchased products from our
competitors. To the extent we are unable to be the first to
develop and supply new products, our competitive position may
suffer.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | We may be prevented from selling some of our products if
    our existing license agreements are terminated.

Approximately 51% of our product sales in 2005 were attributable
to products sold pursuant to license agreements. If we lose the
rights to use a patented technology, we may be forced to stop
selling some of our products or redesign our products and may
lose significant sources of revenues. In addition, potential
competitors could license technologies that we fail to license.
Losing a significant license could have a material adverse
effect on our business.

Our significant licenses include:



| |   |                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a license from Applera Corporation (which license was assigned
    to Applera from Hoffman La Roche and Roche Molecular
    Systems, Inc. in 2005) granting us, among other rights, the
    right to manufacture, promote and sell certain products for use
    in the research field in a process referred to as the PCR
    process; and
|
| |  | a license from Applied Biosystems, which grants us rights to
    manufacture, promote and sell thermal cyclers (certain
    laboratory instruments capable of generating and maintaining
    specific temperatures for a defined period of time) under
    certain patents for use in the research field.                                   

Applera may terminate its license agreement (1) for cause,
(2) if certain parties acquire more than 50% of the voting
stock of our subsidiary that is a party to the agreement, and
(3) in the event of our bankruptcy or insolvency. Since
mid-2003 and through late 2005, we withheld royalty payments to
Applera under this license agreement pending further evaluation
of a potential overpayment of royalties paid to Applera in prior
periods. During that period, we continued to record estimated
quarterly royalties payable under this license agreement and
report these amounts to Applera. We believe that we determine
the royalties we calculate and accrue in accordance with the
terms of this patent license agreement. However, our royalty
calculations are subject to review by Applera. Our financial
position or results of operations could be materially affected
if the parties determine that the royalties differ significantly
from the amounts we have recorded. Additionally, there can be no
assurances that we will recover any overpayment in royalties
paid in prior periods. The U.S. patents that covered the
PCR process underlying this royalty obligation expired in March
2005. The corresponding foreign patents will expire in 2006 and
2007. Upon expiration of these patents outside of the United
States, we will no longer be required to pay royalties under
these patents on future product sales.

The agreement with Applied Biosystems may be terminated
(1) for cause, (2) upon the change in control of our
subsidiary that is a party to the license agreement, and
(3) in the event of our bankruptcy or insolvency.

We do not anticipate that either of these significant license
agreements will terminate in the near future.

Our licenses typically subject us to various commercialization,
sublicensing and other material obligations. If we fail to
comply with these requirements, we could lose important rights
under a license, such as the

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| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Because our quarterly revenue and operating results may
    vary significantly in future periods, our stock price may
    decline.

Our operating results have fluctuated in the past and may
continue to fluctuate in the future. In particular, we have
historically seen slower sales in the fourth quarter as a result
of reduced purchases by academic and research institutions as
well as the closing of such facilities during the holiday
period. Our revenues are unpredictable and may also fluctuate
due to changes in demand for our products, delays in developing
and introducing new products and new product introductions by
our competitors. A high proportion of our costs are fixed, due
in part to significant research and development costs. Thus,
small declines in revenue could disproportionately affect
operating results in a quarter and the price of our common stock
may decline. Moreover, a variety of factors may affect our
ability to make accurate forecasts regarding our operating
results. Because of these factors, our operating results in one
or more future quarters may fail to meet the expectations of
securities analysts or investors, which could also cause our
stock price to decline.



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Our founder, chairman of our board of directors, chief
    executive officer and president exerts considerable control over
    our business.

As of December 31, 2005, Joseph A. Sorge, M.D., our
founder, chairman of the board of directors, chief executive
officer and president, beneficially owned approximately 60% of
our outstanding common stock. As a result, Dr. Sorge
controls all matters requiring approval of our stockholders,
including electing directors and approving mergers or other
business combinations. Such a concentration of ownership may
have the effect of delaying or preventing transactions resulting
in our change of control, including transactions where
stockholders might otherwise receive a premium for their shares
over then current market prices.



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend substantially on key employees, and losing the
    services of any of our key employees or failing to hire
    qualified employees could seriously damage our business.

To a large degree, we depend on our founder, chairman of our
board of directors, chief executive officer and president,
Joseph A. Sorge, M.D. Dr. Sorge has significant expertise
in the life sciences research market and has been instrumental
in establishing and executing our business plan. Losing Dr.
Sorges services could have a material adverse effect on
our business. Dr. Sorge has an existing employment agreement
with us, which expires in June 2007, subject to automatic one
year renewals unless either party provides timely notice of
non-renewal. We maintain directors and officers insurance for
the benefit of our officers and directors.

Because our products and services are highly technical in
nature, only highly qualified and trained scientists have the
necessary skills to develop and market our products and provide
our services. As such, our future success also will depend in
large part on the continued service of our key scientific and
management personnel, including research and development,
customer service, marketing and sales staffs. We face intense
competition for these professionals from our competitors, our
customers and other companies throughout our industry. We do not
generally enter into employment agreements requiring these
employees to continue their employment for any period of time.
Any failure on our part to hire, train and retain a sufficient
number of qualified professionals could seriously damage our
business.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Our indebtedness could limit our ability to operate our
    business, obtain additional financing and pursue other business
    opportunities.

As of December 31, 2005, we had approximately
$4.0 million of outstanding indebtedness related to
industrial revenue bonds. We also have a $9.0 million
reducing revolving line of credit. At December 31, 2005,

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| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will need a portion of our cash flow to pay the principal and
    interest on our indebtedness, including indebtedness we may
    incur in the future;            
|
| |  | payments of our indebtedness will reduce the funds that would
    otherwise be available for our operations and future business
    opportunities;                   
|
| |  | we may have greater relative debt burdens than our competitors,
    which may place us at a competitive disadvantage;                                                
|
| |  | our debt level may make us more vulnerable than our competitors
    to a downturn in our business or the economy in general; and                                     
|
| |  | there would be a material adverse effect on our business and
    financial condition if we are unable to service our indebtedness
    or obtain additional financing.



| |                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not have financing for future capital requirements,
    which may prevent us from addressing gaps in our product
    offerings or improving our technology.

Although historically our cash flow from operations has been
sufficient to satisfy working capital, capital expenditure and
research and development requirements, in the future we may need
to incur additional debt or issue equity in order to fund these
requirements as well as to make acquisitions and other
investments. Our senior credit facility restricts our ability to
incur new debt. If we cannot obtain additional debt or equity
financing on acceptable terms or if we are limited with respect
to incurring additional debt or issuing equity, we may be unable
to address gaps in our product offerings or improve our
technology, particularly through strategic acquisitions or
investments.

We may need to raise substantial amounts of money to fund a
variety of future activities integral to the development of our
business, including but not limited to the following:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | for research and development to successfully develop additional
    products;                            
|
| |  | to file and prosecute patent applications and defend and assert
    patents to protect our technology;   
|
| |  | to retain qualified employees, particularly in light of intense
    competition for qualified scientists;
|
| |  | to manufacture additional products ourselves or through third
    parties; and                           
|
| |  | to acquire new technologies, products or companies.                                                      

If we raise funds through the issuance of debt or equity, any
debt securities or preferred stock issued will have rights,
preferences and privileges senior to those of holders of our
common stock in the event of a liquidation. The terms of the
debt securities may impose restrictions on our operations. If we
raise funds through the issuance of equity, this issuance would
dilute the ownership interest of our existing stockholders. We
expect to fund future acquisitions in part by issuing additional
equity. If the price of our equity is low or volatile, we may
not be able to acquire other companies.



| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our inability to secure and maintain intellectual property
    protection for our products and technologies could adversely
    affect our ability to compete.

Our success depends to a significant degree upon our ability to
develop, maintain and protect proprietary products and
technologies. We file patent applications in the United States
and selectively in foreign countries as part of our strategy to
protect our proprietary products and technologies. However,
patents provide only limited protection of our intellectual
property. The assertion of patent protection involves complex
legal and factual determinations and is therefore uncertain and
expensive. We cannot provide assurances that patents will be
granted with respect to any of our pending patent applications,
that the scope of any of our patents will be sufficiently broad
to offer meaningful protection, or that we will develop
additional proprietary technologies that are patentable. Our
issued patents, or third party patents that we license, could be
successfully challenged,

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The laws governing the scope of patent coverage in the United
States and abroad continue to evolve, particularly in the life
sciences area. The laws of some foreign countries may not
protect our intellectual property rights to the same extent as
United States laws. We hold patents only in selected countries.
Therefore, third parties can make, use and sell products covered
by our patents in countries in which we do not have patent
protection.

We give our customers the right to use some of our products for
research purposes only under certain licenses. These licenses
could be contested. Therefore, no assurances can be given that
we would either be aware of an unauthorized use or be able to
enforce these license limitations in a cost-effective manner.

We attempt to protect our trade secrets by entering into
confidentiality agreements with employees, consultants and third
parties. However, these agreements might be breached and, if
they are, there may not be an adequate remedy available to us.
Also, our trade secrets might become known to a third party
through means other than by breach of its confidentiality
agreements, or they could be independently developed by our
competitors. If our trade secrets become known, our business and
competitive position could be adversely affected.



| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are currently, and could in the future be, subject to
    lawsuits, arbitrations, and other legal actions, particularly
    involving claims for infringement of patents and other
    intellectual property rights.

We believe that we have meritorious defenses against the claims
currently asserted against us and intend to defend them
vigorously. However, the outcome of legal actions is inherently
uncertain, and we cannot be sure that we will prevail in any of
these actions. An adverse determination in some of our current
legal actions, particularly the cases described below, could
have a material adverse effect on our business. Our products are
based on complex, rapidly developing technologies. These
products could be developed without knowledge of previously
filed patent applications that mature into patents that cover
some aspect of these technologies. In addition, our belief that
our products do not infringe the technology covered by valid and
enforceable patents could be successfully challenged by third
parties. We have from time to time been notified that we may be
infringing patents and other intellectual property rights of
others. Also, in the course of our business, we may from time to
time have access to confidential or proprietary information of
third parties, and these parties could bring a claim against us
asserting that we had misappropriated their technologies and had
improperly incorporated such technologies into our products. Due
to these factors, there remains a constant risk of intellectual
property litigation affecting our business. We have been made a
party to litigation involving intellectual property matters.
Such actions currently include the litigations described in the
following paragraphs, some of which, if determined adversely,
could have a material adverse effect on us. To avoid or settle
legal claims, it may be necessary or desirable in the future to
obtain licenses relating to one or more products or relating to
current or future technologies, and we cannot be assured that we
will be able to obtain these licenses or other rights on
commercially reasonable terms.

We have been involved in significant patent disputes with third
parties, a number of which remain unresolved. For example, we
are involved in litigation with Invitrogen Corporation regarding
patents relating to certain enzymes and competent cell products.
In one such litigation, in which Invitrogen alleges damages of
up to approximately $22.0 million, the Federal Circuit
Court of Appeals reversed the district courts prior
summary judgment decision of patent invalidity due to public
use, affirmed the district courts partial summary judgment
of infringement, affirmed the district courts denial of
summary judgment of invalidity due to indefiniteness, and
remanded the case for further proceedings.

We are also involved in litigation with Applera Corporation
regarding a patent that Applera alleges is infringed by our
real-time PCR instrumentation and certain related reagents.

In addition, we are involved in litigation with Third Wave
Technologies regarding patents relating to certain assays for
the detection of nucleic acids. In a jury trial in August 2005,
the jury returned a verdict that

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We are also involved in litigation with Invitrogen Corporation
and Takara Bio regarding one of our patents relating to
polymerase blend products. As part of the patent infringement
claims in these matters, we seek monetary damages, injunctive
relief and attorneys fees. As stated above, the outcome of
any such litigation or appeal is inherently uncertain.

These cases are described in further detail in
Item 3  Legal Proceedings of this report. The
cost of litigation and the amount of management time associated
with these cases is significant. There can be no assurance that
these matters will be resolved favorably; that we will continue
to be able to sell the products in question or other products as
a result; or that any monetary or other damages assessed against
us will not have a material adverse effect on the company. Even
a successful outcome may take years to achieve and the costs
associated with such litigation, in terms of dollars spent and
diversion of management time and resources, could seriously harm
the our business.

Moreover, if a third party claims an intellectual property right
to technology that we use, we may be forced to discontinue an
important product or product line, alter our products and
processes, pay license fees, pay damages for past infringement
or cease certain activities. Under these circumstances, we may
attempt to obtain a license to such intellectual property, but
we may not be able to do so on commercially reasonable terms, or
at all.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | We may spend resources on research and development
    projects without being able to achieve an adequate return, if
    any, on our investment.

It is important for us to continue to invest heavily in research
and development. However, because we compete in a relatively new
and constantly evolving market, we may pursue research and
development projects that do not result in viable commercial
products. In addition, we have in the past, and may in the
future, terminate research efforts in a particular area after we
have made substantial initial funding commitments in that area.
Any failure to translate research and development expenditures
into successful new product introductions could have an adverse
effect on our business.



| |                                                                           
| | --------------------------------------------------------------------------
| | Our business could suffer if we fail to manage our growth
    effectively.

A significant portion of our historical revenue growth is
attributable to internal product development. We are one of the
smaller companies in our industry, and therefore particularly
dependent on internal invention and product development to
replace older products in our product line. Our ability to
achieve our expansion objectives and to manage our growth
effectively depends upon a variety of factors, including our
ability to internally develop products, to attract and retain
skilled employees, to successfully position and market our
products and to identify and acquire technologies and
intellectual property rights from third parties. In addition, we
face significant challenges and risks in building and managing
our sales team, including managing geographically dispersed
sales efforts and adequately training our sales people in the
use and benefits of our products. To accommodate our growth and
compete effectively, we will be required to improve our
information systems, create additional procedures and controls
and expand, train, motivate and manage our work force. Our
future success will depend in part on the ability of current and
future management personnel to operate effectively, both
independently and as a group. We cannot be certain that our
personnel, systems, procedures and controls will be adequate to
support our future operations.

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| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock price could be adversely affected if we are
    unable to implement and maintain effective internal control over
    financial reporting.

Item 308 of Regulation S-K promulgated under
Section 404 of the Sarbanes-Oxley Act of 2002 requires that
public companies annually evaluate the effectiveness of their
internal control over financial reporting as of the end of each
fiscal year, and include a management report assessing the
effectiveness of such internal control over financial reporting
in all annual reports. Item 308 of Regulation S-K also
requires that the independent accountants of public companies
attest to, and report on, managements assessment of its
internal control over financial reporting. The initial
compliance date with respect to these requirements depends on
whether a company is an accelerated filer as
determined by Rule 12b-2 of the Exchange Act. An
accelerated filer must begin to comply with the
rules regarding managements report on internal control
over financial reporting for its first fiscal year ending on or
after November 15, 2004, and a non-accelerated
filer must begin to comply with these requirements for its
first fiscal year ending on or after July 15, 2007.
Accelerated filer status is measured as of the end
of each fiscal year and is determined in part on whether the
aggregate market value of the common equity of a company held by
non-affiliates of such company is $75.0 million or more
measured as of the last business day of the companys most
recently completed second fiscal quarter.

We are not an accelerated filer as of
December 31, 2005 because the aggregate market value of our
common stock held by non-affiliates as of June 30, 2005 was
not equal to or greater than $75.0 million. However, we
will not be able to determine if we will be subject to the rules
regarding managements report on internal control over
financial reporting for the fiscal year ending December 31,
2006 until June 30, 2006. If the aggregate market value of
our common stock held by our non-affiliates as of June 30,
2006 is equal to or greater than $75.0 million, then we
will become an accelerated filer effective as of
December 31, 2006 and will be required to comply with the
rules regarding managements report on internal control
over financial reporting for fiscal 2006. Conversely, if the
aggregate market value of our common stock held by
non-affiliates as of June 30, 2006 is less than
$75.0 million, then we will continue to be a
non-accelerated filer for fiscal 2006 and will not
be required to comply with the rules regarding managements
report on internal control over financial reporting until the
fiscal year ending December 31, 2007. Notwithstanding the
extension of this compliance date, we are currently making
efforts to prepare ourselves to be able to comply with such
requirements. These efforts include documenting, evaluating the
design, and testing the effectiveness of our internal control
over financial reporting. During this process, we expect to make
improvements in the design and operation of our internal control
over financial reporting, including further formalization of
policies and procedures, improved segregation of duties and
additional monitoring of controls.

Our management, including our Chief Executive Officer
(CEO) and our Chief Financial Officer
(CFO), does not expect that our internal control
over financial reporting will prevent all errors and all fraud.
A control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that the
control systems objectives will be met. Further, the
design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and
instances of fraud, if any, within our company have been, or
will be detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and
that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management
override of the controls. The design of any system of controls
is based in part on certain assumptions about the likelihood of
future events, and we cannot assure you that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.

We cannot assure you that we or our independent registered
public accounting firm will not identify a material weakness in
our internal control over financial reporting. A material
weakness in our internal control over financial reporting would
require management and our independent registered public
accounting firm to evaluate our internal control over financial
reporting as ineffective. If our internal control over financial

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| |                                                              
| | -------------------------------------------------------------
| | The price of our common stock is expected to be
    volatile.

The market price of our common stock may be subject to
significant fluctuations. These fluctuations may occur, among
other reasons, in response to:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | quarterly fluctuations in our operating and earnings per share
    results;                      
|
| |  | technological innovations or new product introductions by us or
    our competitors;             
|
| |  | delays in developing and introducing new products;                                               
|
| |  | disputes concerning patents, licenses or other proprietary
    rights;                           
|
| |  | changes in earnings estimates by equity and market research
    analysts;                        
|
| |  | sales of common stock by existing stockholders;                                                  
|
| |  | loss of key personnel; and                                                                       
|
| |  | securities class actions or other litigation affecting us or
    other companies in our industry.

Any failure to meet analysts expectations could have an
adverse effect on the market price for our common stock. In
addition, the stock market is subject to extreme price and
volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many
companies for reasons unrelated to the operating performance of
these companies. In the past, following periods of volatility in
the market price of a companys securities, securities
class action litigation has often been instituted against that
company. If similar litigation were instituted against us, it
could result in substantial costs and a diversion of our
managements attention and resources, which could have an
adverse effect on our business, financial condition and results
of operations. In addition, we cannot predict the extent to
which investors interest in us will lead to a liquid
trading market in our common stock.



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Future sales of currently outstanding shares of our common
    stock could adversely affect our stock price.

As of December 31, 2005, we had approximately
22.3 million shares of common stock outstanding. We have
entered into a registration rights agreement with Dr. Sorge
and certain of his affiliates pursuant to which, at the request
of Dr. Sorge and subject to specified conditions, we will
file a registration statement under the Securities Act covering
2,000,000 shares of our common stock held by Dr. Sorge
and specified trusts and partnerships controlled by Dr. Sorge.
Dr. Sorge and such trusts and partnerships are also
entitled to register the remaining approximately
11.1 million shares of our common stock held by them in
specified situations. The shares held by Dr. Sorge and such
trusts and partnerships may also be sold from time to time in
the public market subject to the requirements of Rule 144
under the Securities Act. The sale by our current stockholders
of a substantial number of shares, or the expectation that such
sales may occur, could significantly reduce the market price of
our common stock.

We have also registered the shares of common stock that we may
issue from time to time under our employee benefits plans. As a
result, these shares can be freely sold in the public market
upon issuance, subject to restrictions under the securities
laws. If any of our stockholders cause a large number of
securities to be sold in the public market, the sales could
reduce the trading price of our common stock. These sales also
could impede our ability to raise future capital.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Reductions in research and development budgets or
    government funding may impact our sales.

Fluctuations in the research and development budgets of our
customers could have a significant effect on the demand for our
products. Research and development budgets fluctuate due to
changes in available resources, spending priorities and
institutional budgetary policies. Our business could be
seriously damaged by

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A substantial portion of our sales have been to researchers at
universities, government laboratories and private foundations
whose funding is dependent upon grants from government agencies,
such as the United States National Institutes of Health.
Although we are not aware of any impending reductions in
governmental grants, government funding of research and
development is subject to the political process and as a result
the amount of available funding may decrease. Our sales may be
adversely affected if our customers delay purchases as a result
of uncertainties surrounding the approval of government budget
proposals. A reduction in government funding for the National
Institutes of Health or other government research agencies could
seriously damage our business.

In recent years, the pharmaceutical and biotechnology industries
have undergone substantial consolidation. Further mergers or
corporate consolidations in these industries could cause us to
lose existing customers and potential future customers.
Pharmaceutical and biotechnology companies have generally raised
little money in the past few years, and some are low on funds.
Some of these companies have begun to reduce their research and
development budgets in recent years. It is possible that these
biotechnology and pharmaceutical companies will continue to
reduce spending on research and development in the future and
some companies may go out of business entirely. In addition,
health care reform and other changes in the regulatory
environment affecting these industries could have an adverse
impact on research and development expenditures by
pharmaceutical and biotechnology companies, which would
negatively impact our business.

Our academic customers generally receive funds from approved
grants at particular times of the year, as determined by the
government. Grants have in the past been frozen for extended
periods or have otherwise become unavailable to various
institutions without advance notice. The timing of the receipt
of grant funds affects the timing of purchase decisions by our
customers and, as a result, can cause fluctuations in our sales
and operating results.



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Failure to license new technologies could impair our new
    product development.

In order to meet the needs of our customers, we must develop a
broad spectrum of products. To develop a product line, it is
sometimes advantageous or necessary to license technologies from
third parties. Approximately 51% of our product sales for 2005
were attributable to products manufactured or sold under
licenses from third parties. As a result, we believe our ability
to license new technologies from third parties is and will
continue to be important to our ability to offer new products.

From time to time, we are notified or become aware of patents
held by third parties that are related to technologies we are
selling or may sell in the future. After consideration of these
patents, we may attempt to obtain a license for these
technologies. We can give no assurances that we will be able to
negotiate such licenses on commercially reasonable terms, or at
all.

Our ability to gain access to technologies necessary to develop
new products depends, in part, on our ability to convince third
parties that we can successfully commercialize their
technologies. We can give no assurances that we will be able to
continue to identify new technologies developed by others or
that we will be able to negotiate appropriate licenses on
commercially reasonable terms, or at all.



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may acquire other businesses or form joint ventures
    that could decrease our profitability, dilute your ownership,
    increase our debt or cause us to incur significant
    expense.

As part of our business strategy, we intend to pursue
acquisitions of other complementary businesses and technology
licensing arrangements. We also intend to pursue strategic
alliances that leverage our core technology and industry
experience to expand our product offerings and geographic
presence. We have limited experience with respect to acquiring
other companies and limited experience with respect to forming
collaborations, strategic alliances and joint ventures. If we
were to make any acquisitions, we may not be able to integrate
these acquisitions successfully into our existing business and
we could assume unknown or contingent liabilities. Any future
acquisitions we make could also result in large and immediate
write-offs or

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| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in distribution and purchasing methods by our
    customers may force us to use more expensive marketing and
    distribution channels.

A number of our customers have developed purchasing initiatives
to reduce the number of vendors they purchase from in order to
lower their supply costs. In some cases, these customers have
established agreements with large distributors, which include
discounts and the distributors direct involvement with the
purchasing process. These activities may force us to supply
these large distributors with our products at a discount to
continue to reach our customers. For similar reasons, many of
our larger customers, including the government, have requested
and may in the future request special pricing arrangements,
including blanket purchase agreements. To date, we do not
believe that these special pricing arrangements have had a
material effect on either revenues or margins. However, in the
future these agreements may limit our pricing flexibility, which
could adversely impact our business, financial condition and
results of operations. In addition, if we lose one or more of
our distributors and cannot arrange suitable alternatives, our
business could be adversely affected.

Several of our customers have requested that we sell our
products through third party, e-commerce web sites. While this
trend does not seem to be growing, offering our products through
these web sites generally requires us to agree to offer
volume-related discounts and pay commissions on the sales made
through these web sites to these third party e-commerce
providers. Consequently, margins on sales made through these
third party web sites would generally be lower than those on
sales made through traditional channels. Our business may be
harmed as a result of these web sites or other sales methods
that may be developed in the future.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | We rely on third party manufacturers for raw materials and
    product components.

We rely on third party manufacturers to supply many of our raw
materials and product components. Some of these components are
only available from a single supplier or a limited group of
suppliers, either because the market for these components is too
small to support multiple suppliers or because the components
are protected by patents, in which case there may only be a
single supplier for the covered components. Our reliance on
outside vendors generally, and a sole supplier or a limited
group of suppliers in particular, involves several risks,
including:



| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an inability to obtain an adequate supply of required components
    due to manufacturing capacity constraints, the discontinuance of
    a product by a third-party manufacturer, an acquisition of the
    manufacturer by one of our competitors or other supply
    constraints;
|
| |  | delays and long lead times in receiving materials from
    vendors; and                                                                                                                                                                                                             
|
| |  | reduced control over quality and pricing of components.                                                                                                                                                                                                                             

If a sole source third party supplier were to go out of
business, we might be unable to find a replacement for such
source or it might take us several months to be able to make the
substance or component internally. If a sole source third party
supplier were to be acquired by a competitor, that competitor
may elect not to sell to us in the future.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Adverse developments affecting our international
    operations or foreign currency fluctuations could harm our
    results from operations.

Including sales made by our subsidiaries and distributors, our
products are currently marketed in over 60 countries
throughout the world. Measured in U.S. dollars, our revenue
outside the United States for the twelve months ended
December 31, 2005 was approximately 22%. In addition,
approximately 9% of our total sales for the twelve months ended
December 31, 2005 were for products exported from the
United States. We

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| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | difficulties and costs associated with staffing and managing
    foreign operations;   
|
| |  | unexpected changes in regulatory requirements;                                         
|
| |  | the difficulties of compliance with a wide variety of foreign
    laws and regulations;
|
| |  | more limited protection for intellectual property rights in some
    countries;        
|
| |  | changes in our international distribution network and direct
    sales force;          
|
| |  | potential trade restrictions and exchange controls;                                    
|
| |  | import and export licensing requirements;                                              
|
| |  | longer accounts receivable collection cycles in certain foreign
    countries; and     
|
| |  | potential increased costs associated with overlapping tax
    structures.              

A significant portion of our business is conducted in currencies
other than the U.S. dollar, which is its reporting
currency. We recognize foreign currency gains or losses arising
from our operations in the period incurred. As a result,
currency fluctuations among the U.S. dollar and the
currencies in which we do business could adversely affect our
results of operations. We cannot predict the effects of exchange
rate fluctuations upon our future operating results because of
the number of currencies involved, the variability of currency
exposures and the potential volatility of currency exchange
rates. In the past, we have engaged in foreign currency exchange
hedging transactions to manage our foreign currency exposure,
but we cannot assure you that our future strategies will
adequately protect our operating results from the effects of
exchange rate fluctuations.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Our activities involve hazardous materials and may subject
    our business to costly environmental liability.

We use hazardous materials, including phenol, chloroform and
ethanol, and radioactive isotopes in connection with our
research and development activities, as well as in our
manufacturing processes and in evaluating the performance of
various products. We are subject to federal, state and local
laws and regulations governing the use, manufacture, storage,
handling and disposal of these materials and specified waste
products. We cannot completely eliminate the risk of accidental
contamination of property or injury to individuals from these
materials. In the event of such an accident, we could be liable
for any damages that result, which could have a material adverse
effect on our business, financial condition and results of
operations. We carry insurance for contamination resulting from
using hazardous materials with $25,000 limitations per incident
with respect to pollution clean-up and removal and radioactive
contamination. Additionally, any accident could partially or
completely shut down our research and manufacturing facilities
and operations. We may also have to incur substantial costs to
comply with current or future environmental laws and regulations.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Interruptions in our manufacturing operations could
    adversely impact our ability to effectively operate our
    business.

We maintain manufacturing facilities in Garden Grove,
California, in the Austin, Texas area, and in Edinburgh,
Scotland. Damage to these facilities due to fire, earthquake or
other natural disaster, power loss, unauthorized entry or other
events could cause an interruption in producing our products. We
do not have or plan to obtain earthquake insurance. In late 1999
and early 2000 we opened a manufacturing facility outside of
Austin, Texas and moved over 100 jobs to that location. During
the transition process, we lost some key personnel who were
important to certain manufacturing processes. As a result, we
were unable to manufacture certain products for a period of
three to six months. Many of the customers who wanted to
purchase the affected products during this period switched to
other suppliers and we found it difficult to reacquire these
customers once we were able to manufacture the products again.
Accordingly, we believe that a prolonged

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| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could incur substantial unexpected expenses, experience
    product returns and suffer damage to our brand and reputation if
    our biological products and instruments are not properly
    produced or manufactured.

Our biological products and instruments are complex and may be
improperly produced or manufactured. In the past, we have
voluntarily recalled several of our products. In each case, we
identified and corrected the problem. If we need to recall our
products, we could experience decreased sales and loss of
customers and market share. In addition, a recall would divert
managerial and financial resources and could harm our reputation
with customers.



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business could suffer if our access to necessary
    tissue samples is restricted or ethical concerns surrounding the
    use of genetic information become widespread.

We require access to human and other tissue samples and other
biological materials to continue to develop our products. We
compete with many other companies for these materials and may
not be able to obtain or maintain access to these materials on
acceptable terms, or at all. In addition, genetic testing has
raised ethical issues regarding confidentiality and the
appropriate use of the resulting information. Governmental
regulation in the United States and foreign countries could
limit access to, or use of, human and other tissue samples or
restrict the use of, or regulate, genetic testing. If we lose
access to sufficient numbers or sources of tissue samples, or if
tighter restrictions are imposed on our customers use of
the information generated from tissue samples, our business
could suffer.



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Anti-takeover provisions of our certificate of
    incorporation and bylaws and provisions of Delaware law could
    delay or prevent a change of control that you may favor.

Provisions of our amended and restated certificate of
incorporation and amended and restated bylaws may discourage,
delay or prevent a merger or other change of control that
stockholders may consider favorable or may impede the ability of
the holders of our common stock to change our management. The
provisions of our amended and restated certificate of
incorporation and amended and restated bylaws, among other
things, authorize our board of directors to issue preferred
stock in one or more series, without stockholder approval.

Because we have not chosen to be exempt from Section 203 of
the Delaware General Corporation Law, this provision could also
delay or prevent a change of control that you favor.
Section 203 provides that, subject to limited exceptions,
persons that acquire, or are affiliated with a person that
acquires, more than 15 percent of the outstanding voting
stock of a Delaware corporation shall not engage in any business
combination with that corporation, including by merger,
consolidation or acquisition of additional shares, for a
three-year period following the date on which that person or its
affiliate crosses the 15 percent ownership threshold.

Additionally, because Dr. Sorge owns approximately 60% of
the Companys outstanding common stock, he controls all
matters requiring approval of our stockholders. As a result,
among other things, Dr. Sorge must approve any merger or
other business combination related to our company.






|        |           
|------- | ----------
|Item 2. | Properties

At December 31, 2005, we had the following facilities:



| |                 
| | ----------------
| | Owned Facilities



| |   |                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We own approximately 42 contiguous acres in the Austin, Texas
    area, where during 1998 and 1999 we constructed an
    85,000 square foot facility to support product
    manufacturing activities, warehousing and distribution of our
    Research Supplies products.
|
| |  | We also own an approximately 6,000 square foot facility in
    Jackson, Wyoming, operated exclusively for research and
    development activities.                                                                                                                       

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| |                  
| | -----------------
| | Leased Facilities



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | San Diego, California  This facility is
    approximately 47,000 square feet and serves as our
    companys headquarters, as well as our base for marketing
    and product support operations and research and development
    activities. The lease for this facility expires in September
    2008 and we have the right to renew this lease for an additional
    five-year period.                                                                                                                                                        
|
| |  | Garden Grove, California  This approximately
    76,000 square foot facility is where we manufacture our
    Clinical Diagnostics products. The lease for this facility has a
    ten-year term and expires in December 2007, and we have a right
    to renew this lease for an additional five-year period.                                                                                                                                                                                                                                   
|
| |  | Amsterdam, the Netherlands  This facility is
    approximately 7,300 square feet and supports European sales
    and distribution of our Research Supplies products. The lease
    for this facility expires in August 2007.                                                                                                                                                                                                                                                                                                                    
|
| |  | Ontario, Canada  This facility is
    approximately 2,200 square feet and supports research and
    development. The lease for this facility expired in September
    2005, and we currently lease this facility on a month-to-month
    basis.                                                                                                                                                                                                                                                                                                 
|
| |  | Tokyo, Japan  This location has a small
    facility to support new sales and distribution channels in Asia,
    as well as a warehouse. The leases for this facility cover
    approximately 2,500 square feet of space and expire in
    August 2006 and August 2007, respectively. In 2006, the Japanese
    operations will move to a new facility that allows for the
    operations and warehouse activities to exist in one location.
    The new facility is approximately 3,000 square feet and the
    lease is for a two-year period.
|
| |  | Kassel, Germany  This facility is
    approximately 12,900 square feet and is used for packaging,
    warehousing, and distributing our Clinical Diagnostics products.
    The lease for this facility expires in March 2007.                                                                                                                                                                                                                                                                                                                   
|
| |  | Edinburgh, Scotland  This facility is
    approximately 7,000 square feet and supports research and
    development, manufacturing, warehousing, and distributing of our
    Clinical Diagnostics products. The lease for this facility
    expires in September 2006. We have the right to extend this
    lease for an additional five-year period.                                                                                                                                                                                           

In our opinion, our facilities and equipment are adequately
maintained, in good operating condition and adequate for our
present needs. We upgrade and modernize our facilities and
equipment and expand our facilities as necessary to meet
customer and regulatory requirements.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are a party to litigation in the ordinary course of business.
Due to the uncertainties inherent in litigation, no assurances
can be given as to the outcome of these proceedings. If any of
these matters were resolved in a manner unfavorable to our
company, our business, financial condition, results of
operations, and cash flows could be materially harmed.
Additionally, favorable outcomes or gain contingencies that may
result from these matters, if any, are not recognized until they
are realized. Information on the most significant of these
matters follows.



| |                       
| | ----------------------
| | Invitrogen Corporation

In June 2000, we were sued by Invitrogen Corporation (formerly
Life Technologies, Inc.) in the United States District
Court for the District of Maryland. The complaint alleges that
we willfully infringed United States patent no. 6,063,608 (and
United States patent nos. 5,244,797 and 5,405,776) for making,
using and selling products derived from, using or containing
RNase H minus reverse transcriptase enzymes. Invitrogens
motion for a preliminary injunction was denied and the case was
stayed pending a trial in a related action involving Invitrogen
and a third party regarding the same patents. Invitrogen
appealed the denial of an injunction and the stay to the Federal
Circuit Court of Appeals. In February 2002, the Federal Circuit
Court of Appeals affirmed the district courts decision.
The case against our company remains administratively stayed.

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In March 2001, we were sued by Invitrogen Corporation in the
United States District Court for the Western District of Texas
(Austin). The complaint alleges (1) that we willfully
infringed United States patent no. 4,981,797 for making, using
and selling competent E. colicell products and
(2) for lost profits and/or reasonable royalty damages of
up to approximately $22.0 million. In November 2001, the
district court granted our motion for summary judgment, finding
that the 797 patent was not infringed by us. Invitrogen
appealed the judgment to the Federal Circuit Court of Appeals
which, in May 2003, reversed the district courts decision
in part and remanded the case for further proceedings. In
January 2004, on remand from the Federal Circuit Court, the
district court determined on Invitrogens motion for
partial summary judgment that we infringed the 797 patent
based on our then existing manufacturing process, and further
held on partial summary judgment, that while the 797
patent was not invalid for indefiniteness, the 797 patent
was invalid because of public use under 35 U.S.C.
§ 102(b). Invitrogen appealed the district
courts ruling of invalidity, and oral arguments were heard
before the Federal Circuit Court of Appeals in May 2005. In
October 2005, the Federal Circuit Court reversed the district
courts summary judgment of invalidity due to public use,
affirmed the district courts partial summary judgment of
infringement, affirmed the district courts denial of
summary judgment of invalidity due to indefiniteness, and
remanded the case for further proceedings. Upon remand, the
district court has set the case for trial in July 2006. We
intend to vigorously pursue our claims and affirmative defenses,
including various alternative grounds of invalidity of the
797 patent and that our current manufacturing process does
not infringe the 797 patent.

In November 2001, we filed a complaint in the United States
District Court for the District of Maryland charging Invitrogen
Corporation with willful infringement and inducing others to
infringe United States patent no. 5,556,772 for making, using,
selling and offering for sale certain polymerase blend products.
We seek a permanent injunction against continued infringement as
well as monetary damages (compensatory and enhanced) and
recovery of its attorneys fees and costs. Given the nature
of patent litigation, at the present time we are unable to
quantify the amount of remuneration we will ultimately seek in
this proceeding or the likelihood of recovering any portion of
such remuneration once quantified. No trial date is currently
set for this case.



| |           
| | ----------
| | Takara Bio

In November 2002, we filed a complaint in the United States
District Court for the District of Maryland charging Takara Bio
with willful infringement and inducing others to infringe United
States patent no. 5,556,772 for making, using, selling and
offering for sale certain polymerase blend products. We seek a
permanent injunction, monetary damages (compensatory and
enhanced) and recovery of our attorneys fees and costs.
Given the nature of patent litigation, at the present time we
are unable to quantify the amount of remuneration we will
ultimately seek in this proceeding or the likelihood of
recovering any portion of such remuneration once quantified.
Takara filed a counterclaim in a separate action in the United
States District Court for the Southern District of California.
By its counterclaim, Takara seeks joint ownership of our
772 patent. In June 2003, we successfully moved to
transfer the California action to Maryland. In August 2003, the
Maryland district court denied Takaras motion to dismiss
or transfer the complaint, and the cases have been consolidated
for pretrial and trial. The parties entered into a joint
stipulation, effective as of September 20, 2005, to stay
the proceedings to continue to pursue settlement of this action.
No trial date is currently set for this case.



| |                        
| | -----------------------
| | Third Wave Technologies

In September 2004, we were sued by Third Wave Technologies, Inc.
(Third Wave) in the United States District
Court for the Western District of Wisconsin. The complaint
alleged that we infringed United States patent nos.
6,348,314 and 6,090,543, and have induced or contributed to
infringement of the patents-in-suit, by making, using,
importing, offering for sale and/or selling assays employing
cleavage of nucleic acids, including at least our Full Velocity
products. Third Wave sought a preliminary and permanent
injunction, monetary damages (compensatory and enhanced), and
recovery of its attorneys fees and costs. In October 2004,
we filed our answer to the complaint responding that we did not
infringe a valid or enforceable claim of either patent. We also
asserted affirmative defenses, including invalidity and
unenforceability, and

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During 2005, we paid $2.9 million in legal fees to an
outside law firm that represented us in a litigation matter that
was tried before a jury. Subsequent to year end, we ended our
attorney/client relationship with this firm. As of
December 31, 2005, accrued but unpaid legal fees amounted
to $0.8 million. Subsequent to year end, we indicated that
we may pursue claims for damages against the outside law firm
and the outside law firm indicated that it may adjust billing
credits previously applied to payments made through the third
quarter of 2005 in the amount of $1.1 million. We believe
that we have fairly stated legal expenses in 2005 after
considering these unresolved issues.

In May 2005, we filed a complaint in the United States District
Court for the District of Delaware charging Third Wave
Technologies with willful infringement of and inducing others to
infringe United States patent nos. 6,528,254 and 6,548,250 for
making, using, selling and offering for sale certain of its
Invader®
Plus products. We seek a permanent injunction against continued
infringement as well as monetary damages (compensatory and
enhanced) and recovery of our attorneys fees and costs. On
September 21, 2005, Third Wave answered our complaint
asserting affirmative defenses of invalidity and
non-infringement and counterclaims for invalidity and
non-infringement. On October 11, 2005, we answered Third
Waves counterclaims asserting the patents-in-suit as valid
and enforceable. Given the nature of patent litigation, at the
present time we are unable to quantify the amount of damages we
will ultimately seek in this proceeding or the likelihood of
recovering any portion of such damages once quantified. The
trial is scheduled to begin in November 2007.



| |                    
| | -------------------
| | Applera Corporation

In November 2004, we received notice of a patent infringement
suit filed by Applera Corporation against us and other parties
in the United States District Court for the District of
Connecticut for alleged infringement of U.S. patent no.
6,814,934. Our products alleged to infringe are the QPCR
instruments and certain related reagents. In December 2004, we
filed our answer to the complaint responding that we do not
infringe, directly or indirectly, any valid and enforceable
claim of the 934 patent and asserting related
counterclaims of invalidity and non-infringement. An estimate of
the possible loss or range of loss cannot be made at this time
and we are unable to determine whether the outcome of the
litigation could have a material impact on our results of
operations or financial condition in any future period. This
case is currently scheduled to be placed on the Courts
trial ready list in October 2006.

In June 2005, we received notice that Applera had filed an
action against us in the Dusseldorf District Court in Germany
relating to EP patent 0 872 562, the European counterpart of the
934 patent. By decision of the European Patent Office
dated January 7, 2005, the 562 patent was revoked.
Based upon that revocation, we moved to stay the district court
proceeding in July 2005. Applera has consented to our request to
stay this proceeding.

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| |                 
| | ----------------
| | Ariadne Genomics

In March 2005, we filed a demand for arbitration with the
American Arbitration Association (AAA) against
Ariadne Genomics, Inc. (Ariadne) for declaratory
relief and damages relating to the Exclusive Marketing and
Distribution Agreement (the Agreement) executed in
December 2002 between the parties. Ariadne filed counterclaims
in the AAA, which we denied. The parties have now reached an
amicable settlement of this matter. In October 2005, we and
Ariadne executed a Binding Settlement Agreement Term Sheet (the
Term Sheet) to resolve all of our disputes, and the
parties are in the process of completing a comprehensive
Settlement Agreement. In brief, the settlement memorialized in
the Term Sheet provides that our exclusive right to market, sell
and distribute the software products covered by the Agreement
between the parties has been confirmed, and that the term of
that Agreement has been extended through December 31, 2005.
In addition, Ariadne agreed to pay us a sum of $300,000 by
December 31, 2005, which has now been paid. All proceedings
between the parties will be dismissed with prejudice, and all
disputes in the United States Patent & Trademark
Office will be dismissed by agreement. After executing the Term
Sheet, we and Ariadne entered into negotiations for a
comprehensive settlement agreement, but have been unable to
resolve certain remaining issues. Pursuant to the Term Sheet,
any remaining disputes regarding the settlement or the
parties claims against each other are to be submitted to
binding arbitration before a single neutral arbitrator in
San Diego County. That arbitration occurred on
February 27, 2006, and we are awaiting a final decision.



| |                    
| | -------------------
| | Other Legal Matters

Pursuant to the terms of a 2002 litigation settlement, we were
entitled to receive 35,290 shares of a European company. We
received 11,763 shares in August 2004, 11,764 shares
in September 2004 and the final 11,763 shares in March
2005. These shares were sold and converted into cash upon
receipt, resulting in a gain in other income of approximately
$530,000 during the quarter ended March 31, 2005 and
$664,000 during the quarter ended September 30, 2004.

In October, 2005 we realized pre-tax income of approximately
$34.1 million from a settlement with Cambridge Antibody
Technology related to certain patent rights. This
$34.1 million was offset by a $10.7 million royalty
obligation related to this settlement due to a third party.






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

During the fourth quarter of the fiscal year ended
December 31, 2005, there were no matters submitted to a
vote of security holders.




PART II.






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



| |                             
| | ----------------------------
| | Market Price of Common Stock

Our common stock trades on The Nasdaq Stock Markets
National Market under the symbol STGN. The following table sets
forth the range of high and low trading prices for the common
stock for the periods indicated as reported on the Nasdaq
National Market. Our common stock did not begin trading on the
Nasdaq National Market until June 3, 2004, therefore, there
is no information provided for the first quarter of

23



---



##### Table of Contents





|                              |                                          |      |   |       |  |  |   |      | 
|----------------------------- | ---------------------------------------- | ---- | - | ----- |  |  | - | ---- | 
|                              |                                          | High |   | Low  
|                              |                                          |      |   |      
|Year ended December 31, 2005: |                                          |      |   |       |  |  |   |     
|                             
|                             
|                             
|                             
|                              | Fourth quarter                           |      | $ | 10.93 |  |  | $ | 8.67 | 
|                             
|                             
|                             
|                             
|                              | Third quarter                            |      | $ | 10.33 |  |  | $ | 6.42 | 
|                             
|                             
|                             
|                             
|                              | Second quarter                           |      | $ | 10.44 |  |  | $ | 7.25 | 
|                             
|                             
|                             
|                             
|                              | First quarter                            |      | $ | 8.83  |  |  | $ | 6.51 | 
|                             
|                             
|                             
|                             
|Year ended December 31, 2004: |                                          |      |   |       |  |  |   |     
|                             
|                             
|                             
|                             
|                              | Fourth quarter                           |      | $ | 8.10  |  |  | $ | 6.00 | 
|                             
|                             
|                             
|                             
|                              | Third quarter                            |      | $ | 8.53  |  |  | $ | 5.90 | 
|                             
|                             
|                             
|                             
|                              | Second quarter (commencing June 3, 2004) |      | $ | 12.00 |  |  | $ | 7.51 | 

On March 13, 2006, the last reported sale of our common
stock on the Nasdaq National Market was $10.26. There were
855 stockholders of record as of March 13, 2006 with
22,328,227 shares outstanding. The aforementioned number of
stockholders of record as of March 13, 2006 does not
reflect persons or entities that hold their stock in nominee or
street name through various brokerage firms. No
dividends have been paid to our stockholders during the past
five years except for a special cash dividend of $0.25 per
share to holders of record of our common stock paid on
January 6, 2006. The special cash dividend was paid in
connection with the recognition of approximately
$23.4 million in pre-tax income in the fourth quarter of
2005 due to a settlement related to our licensing certain
technology to Cambridge Antibody Technology. We have no
intentions of paying any subsequent cash dividends in the
foreseeable future. Our credit facilities also restrict the
payment of dividends, and we received a consent from the credit
facility holder to pay the January 6, 2006 dividend.

Prior to June 2, 2004, our financials were presented on a
combined basis with BioCrest Holdings, LLC, or BCH, since BCH
was in common control with Stratagene and substantially all of
the BCH membership units were held by certain Stratagene
shareholders. The members of BCH did receive distributions.
However, since we acquired the BCH assets on June 2, 2004,
no further distributions have been made. On February 9,
2006, we dissolved BCH.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected historical consolidated financial data as
of and for the fiscal years ended December 31, 2001, 2002,
2003, 2004 and 2005, presented below under the captions
Operating Results and Financial
Position, have been derived from our audited consolidated
financial statements as of those dates and for those periods.
The selected historical consolidated financial data and notes
should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements.

|                                                  |  |                                       |         |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                  |  |                                      
|                                                  |  | Year Ended December 31,              
|                                                  |  |                                      
|                                                  |  | 2005                                  |         | 2004 |  | 2003 |        | 2002 |  | 2001
|                                                  |  |                                       |         |      |  |      |        |      |  |     
|                                                  |  |                                      
|                                                  |  | (In thousands, except per share data)
|                                                 
|                                                 
|                                                 
|                                                 
|Operating Results                                 |  |                                       |         |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|                                                 
|                                                 
|                                                 
|                                                 
|Total revenue(a)                                  |  | $                                     | 130,285 |      |  | $    | 84,813 |      |  | $    | 69,703 |  |  | $ | 64,512 |  |  | $ | 59,955 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Net income                                        |  |                                       | 7,788   |      |  |      | 7,438  |      |  |      | 3,252  |  |  |   | 505    |  |  |   | 731    | 
|                                                 
|                                                 
|                                                 
|                                                 
|Basic earnings per share(b)                       |  |                                       | 0.35    |      |  |      | 0.39   |      |  |      | 0.21   |  |  |   | 0.03   |  |  |   | 0.04   | 
|                                                 
|                                                 
|                                                 
|                                                 
|Diluted earnings per share                        |  |                                       | 0.35    |      |  |      | 0.39   |      |  |      | 0.21   |  |  |   | 0.03   |  |  |   | 0.04   | 
|                                                 
|                                                 
|                                                 
|                                                 
|Weighted average shares outstanding 
    basic   |  |                                       | 22,113  |      |  |      | 19,308 |      |  |      | 15,633 |  |  |   | 15,634 |  |  |   | 15,640 | 
|                                                 
|                                                 
|                                                 
|                                                 
|Weighted average shares outstanding 
    diluted |  |                                       | 22,259  |      |  |      | 19,313 |      |  |      | 15,633 |  |  |   | 15,634 |  |  |   | 15,640 | 

24



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##### Table of Contents



|                                        |  |                         |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|--------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                        |  |                        
|                                        |  | Year Ended December 31,
|                                        |  |                        
|                                        |  | 2005                    |         | 2004 |  | 2003 |        | 2002 |  | 2001
|                                        |  |                         |         |      |  |      |        |      |  |     
|Financial Position                      |  |                         |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|                                       
|                                       
|                                       
|                                       
|Working capital                         |  | $                       | 18,942  |      |  | $    | 17,899 |      |  | $    | 9,485  |   |  | $ | 6,172  |   |  | $ | 6,922  |  
|                                       
|                                       
|                                       
|                                       
|Net property and equipment              |  |                         | 11,267  |      |  |      | 12,112 |      |  |      | 10,321 |   |  |   | 11,186 |   |  |   | 11,583 |  
|                                       
|                                       
|                                       
|                                       
|Total assets(c)                         |  |                         | 124,682 |      |  |      | 80,332 |      |  |      | 38,588 |   |  |   | 34,198 |   |  |   | 34,229 |  
|                                       
|                                       
|                                       
|                                       
|Total debt                              |  |                         | 9,515   |      |  |      | 9,707  |      |  |      | 30,381 |   |  |   | 30,469 |   |  |   | 31,411 |  
|                                       
|                                       
|                                       
|                                       
|Total stockholders equity (deficit)(d) |  |                         | 58,490  |      |  |      | 55,160 |      |  |      | (5,947 | ) |  |   | (8,248 | ) |  |   | (7,306 | )



---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | 2005 total revenue includes a royalty revenue settlement of
    $34.1 million from a third party.                                                                                                                                                                                                                                                                                 
|   
|(b) |  | Earnings per share information for the years ended
    December 31, 2001 through 2003 has been calculated assuming
    our acquisition of substantially all of the assets of BioCrest
    had occurred at the beginning of the first period presented, by
    dividing the respective net income by the weighted average
    shares of our common stock for the respective period.
|   
|(c) |  | 2005 and 2004 total assets include goodwill of approximately
    $27.2 million resulting from the merger with Hycor in June
    2004.                                                                                                                                                                                                                                             
|   
|(d) |  | Includes distributions to BCH members of $476,280, $544,707,
    $809,909, and $400,000 for the years ended December 31,
    2004 through 2001, respectively. 2005 includes the recognition
    of the special cash dividend of $5,571,321 that we paid on
    January 6, 2006, which was declared on November 7,
    2005.                                                       






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The following information should be read in conjunction with
the financial statements and the related notes included in
Item 8 of Part II of this Annual Report on
Form 10-K and with the financial statements. Our financial
information includes the accounts and balances of Stratagene
Corporation and subsidiaries on a consolidated basis, and
includes the results of operations of Hycor Biomedical Inc. and
subsidiaries since our acquisition of Hycor on June 2,
2004.

This Managements Discussion and Analysis of
Financial Condition and Results of Operations and other
sections of this Annual Report on Form 10-K contain
forward-looking statements and include assumptions concerning
our operations, future results and prospects. These
forward-looking statements are based on current expectations and
are subject to a number of risks, uncertainties and other
factors. Our actual results could differ materially from those
expressed in or implied by these forward-looking statements as a
result of various factors, including those set forth under
Risk Factors in Item 1A of Part 1 of this
Annual Report on Form 10K.

Overview

We develop and manufacture biological products, instruments and
software designed to improve the speed and accuracy of life
sciences research and clinical diagnosis. We market our products
to researchers and clinicians in clinical laboratories and
academic, hospital and government institutions, as well as to
scientists in pharmaceutical and biotechnology companies, in the
U.S. and internationally. Scientists and clinicians use our
products to identify genes and proteins, study how genes and
proteins regulate cells, determine the molecular mechanisms of
health and disease, search for new drug therapies, and develop
diagnostic tests.

We engage in business activity in two operating segments:
Research Supplies and Clinical Diagnostics. We have marketed and
sold our Research Supplies products for over 20 years,
while the Clinical Diagnostics products are a new addition to
our product portfolio as a result of the merger with Hycor
Biomedical Inc. in June 2004. Hycors experience in
manufacturing and marketing Food and Drug Administration, or
FDA, regulated clinical diagnostic products also spans
20 years.

25



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##### Table of Contents



Merger with Hycor

On June 2, 2004, we acquired all of the outstanding shares
of Hycor Biomedical Inc. through our merger of a wholly owned
subsidiary of our company with Hycor, with Hycor continuing as a
wholly owned subsidiary of ours. Pursuant to the merger,
Hycors stockholders received 0.6158 of a share of our
common stock in exchange for each share of Hycor common stock,
plus cash for any fractional shares. The merger has been
recognized as a tax-free reorganization. We filed a registration
statement on Form S-4 (No. 333-109420) and related
amendments in connection with the transaction, which
registration statement was declared effective by the Securities
and Exchange Commission on April 29, 2004. We incurred
merger-related costs of approximately $1.7 million, which
were capitalized as a component of the purchase price.

BCH Asset Acquisition

Concurrently with the closing of the Hycor merger, we acquired
substantially all of the assets of BioCrest Holdings, L.L.C., or
BCH, including BCHs interests in its subsidiaries. In
exchange, we forgave all of the outstanding intercompany
indebtedness owed by BCH and its subsidiaries to us of
approximately $5.4 million and assumed all of the other
outstanding liabilities of BCH and its subsidiaries of
approximately $0.8 million. Because we and BCH were under
common control, with substantially all of the BCH membership
units held by certain of our shareholders, the acquisition of
BCH was recorded on a historical cost basis. As such, there was
no adjustment of BCHs assets and liabilities to fair value
and no goodwill resulting from the purchase. As of and for the
year ended December 31, 2004, our financial statements are
presented on a consolidated basis. There was no change to income
for previous periods presented on a combined basis. For income
tax purposes, this transaction was taxable. The financial
statements in 2004 reflected net deferred tax assets of $875,000
for differences between the tax and book bases of assets and
liabilities that we acquired. With the completion of the initial
consolidated tax returns in 2005, we adjusted the deferred tax
asset associated with the acquired assets and liabilities and
reflected a reduction of approximately $514,000 to the net
deferred tax asset and additional paid-in capital in accordance
with Statement of Financial Accounting Standards, or
SFAS No. 109, Accounting for Income Taxes.

Prior to the acquisition date, we presented our financial
statements on a combined basis with BCH. BCH was a limited
liability company treated as a partnership for income tax
purposes; therefore, any related income tax obligations were the
responsibility of the members of BCH. As a result, the
operations of BCH did not reflect a provision for income taxes
in the combined financial statements. Beginning on June 2,
2004, our consolidated results, which includes the results of
BCH, includes a provision for income taxes.

As part of the acquisition of BCH, we acquired BCHs
interests in its subsidiaries, which include Phenogenex, LLC, or
Phenogenex, Iobion Informatics, LLC and subsidiaries, which we
refer to collectively as Iobion, and an investment in a joint
venture consisting of a 49% interest in a limited partnership,
which we refer to as the LP, that operates a research lab. The
investment in a joint venture was accounted for under the equity
method. In December 2004, the LP redeemed our rights and
interests in the LP.

At the time of the BCH acquisition, we owned 100% of Phenogenex
and approximately 78% of Iobion. The remaining 22% interest in
Iobion was held by two individuals, one of which is now an
employee of Iobion and the other is a consultant to us. In
October 2004, we purchased the remaining 22% outstanding
membership interests in Iobion owned by these individuals. As a
result of the purchase of these minority interests, we now own
100% of Iobion. Total cash consideration of $330,000 was paid
and was recorded to intangible assets based on the fair value of
the assets and liabilities acquired.

During 2005, we merged Iobion and Phenogenex into us, leaving
only the Iobion Informatics (Canada), Ltd. subsidiary
remaining, and on February 9, 2006, we dissolved BCH. There
was no financial statement impact to this merger or dissolution.

Basis of Presentation

Our financial information has been presented on a consolidated
basis, and includes the results of operations of Hycor
Biomedical Inc. and subsidiaries since we acquired Hycor on
June 2, 2004. The financial

26



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##### Table of Contents





Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America and management is required to make certain
estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the periods presented. The significant accounting
policies that we believe are the most critical to aid in fully
understanding and evaluating its reported financial results
include the following:



| |                 
| | ----------------
| | Use of Estimates

Preparing the financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
disclosures made in the accompanying notes. Actual results could
differ from those estimates.



| |                    
| | -------------------
| | Revenue Recognition

We recognize revenue from research supplies, diagnostic and
basic instrumentation product sales under the provisions of
Staff Accounting Bulletin, or SAB, No. 104, Revenue
Recognition, which is generally when we ship the products,
transfer title and eliminate our risk of loss. In accordance
with Statement of Position, or SOP, No. 97-2, Software
Revenue Recognition, as amended by SOP No. 98-9, for
instrumentation products where software is considered more than
incidental to the product, we recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the
sales price is fixed or determinable and collectibility is
probable. Generally, these criteria are met at the time we ship
the product and transfer the title. When contractual acceptance
clauses exist, we recognize revenue upon satisfaction of such
clauses. We earn and recognize contract research service
revenues in accordance with contract provisions. We record
amounts received in advance of performance or acceptance as
deferred revenue.

The following table summarizes the types of deferred revenue and
the timing of when we recognize that revenue:

|                                            |  |                                                                                                                                                                                                                                                      
|------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Type of Deferred Revenue                    |  | When Recognized                                                                                                                                                                                                                                      
|                                            |  |                                                                                                                                                                                                                                                      
|                                           
|                                           
|                                           
|                                           
|Extended warranty or maintenance agreements |  | Recognized over the term of the contract,
    generally 12 months. In most cases, these contracts were
    sold at the time of product purchase and the recognition of
    revenue begins after the warranty period, which is generally one
    year.
|                                           
|                                           
|                                           
|                                           
|License agreements                          |  | Recognized over the term of the agreement,
    generally 12 months.                                                                                                                                                                                  

The following table provides the percentage of the ending
balance in deferred revenue that each type of deferred revenue
represents as of December 31 for each year presented:

|                                                             |  |      |     |      |  |  |     |  
|------------------------------------------------------------ |  | ---- | --- | ---- |  |  | --- | -
|Type of Deferred Revenue                                     |  | 2005 |     | 2004
|                                                             |  |      |     |     
|Extended warranty, installation or maintenance
    agreement |  |      | 59  | %    |  |  | 49  | %
|                                                            
|                                                            
|                                                            
|                                                            
|License agreements                                           |  |      | 41  | %    |  |  | 51  | %
|                                                             |  |      |     |      |  |  |     |  
|Total deferred revenue                                       |  |      | 100 | %    |  |  | 100 | %
|                                                             |  |      |     |      |  |  |     |  



| |                    
| | -------------------
| | Accounts Receivable

We perform ongoing credit evaluations of our customers and
adjust credit limits based upon payment history and the
customers current creditworthiness. We regularly monitor
collections and payments from customers and maintain a provision
for estimated credit losses based upon historical experience and
any

27



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##### Table of Contents







| |            
| | -----------
| | Inventories

We value inventories at the lower of the actual cost to purchase
and/or manufacture the inventory or the current estimated market
value of the inventory. We regularly review inventory quantities
on hand and record a provision for excess and obsolete inventory
on specifically identified items based primarily on an estimated
forecast of product demand and production requirements. Our
losses from disposal of excess or obsolete inventory have
historically been within expectations and the provisions
established. However, our estimates of future product demand may
prove to be inaccurate, in which case we may have understated or
overstated the provision required for excess and obsolete
inventory. In addition, rapid technological change or new
product development could result in an increase in the quantity
of obsolete inventory on hand. In the future, if our inventory
is determined to be overvalued, we would be required to
recognize such costs in our cost of products sold at the time of
such determination. Likewise, if our inventory is determined to
be undervalued, we may have over-reported our cost of products
sold in previous periods and would be required to recognize such
additional operating income at the time of sale or disposition.

Additionally, our manufacturing costs and inventory carrying
costs are dependent on our accurate estimates of customer demand
for our products. A significant increase in the demand for our
products could result in a short-term increase in the cost of
inventory purchases, while a significant decrease in demand
could result in an increase in the amount of excess inventory
quantities on hand and increase the expense of storing and
maintaining the inventory until it is sold. As a result,
although we attempt to maximize the accuracy of our forecasts of
future product demand, any significant unanticipated changes in
demand or technological developments could have a significant
impact on the value of our inventory and our reported operating
results.



| |               
| | --------------
| | Deferred Taxes

Our deferred tax assets relate to prior operating losses that
are available to offset future taxable income and tax credits
that are available to offset future income taxes. We also
recognize deferred taxes for differences between the financial
statement carrying amounts and the tax bases of assets and
liabilities. We evaluate a variety of factors in determining the
amount of deferred income tax assets to be recognized pursuant
to SFAS, No. 109, Accounting for Income Taxes.



| |                  
| | -----------------
| | Long-lived Assets

We account for long-lived assets in accordance with the
provisions of SFAS No. 142, Goodwill and
Intangibles, and SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. These
Statements require that long-lived assets and certain
identifiable intangible assets be reviewed annually for
impairment or whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to
the future net undiscounted cash flows expected to be generated
by the asset. With the acquisition of Hycor in the second
quarter of 2004, we have substantial amortizable and
non-amortizable long-lived assets (including goodwill) that are
reviewed for impairment annually and when there is an indication
that the carrying value of an asset may not be recoverable. If
such assets are considered to be impaired, the impairment we
would recognize is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.



| |          
| | ---------
| | Royalties

We enter into license agreements in the ordinary course of our
business, which require royalty payments based on specified
product sales. These agreements cover the majority of our
products. We believe that we determine the royalties we
calculate and accrue in accordance with the patent license
agreement. However, our royalty calculations are subject to
review by the license holder. Therefore, our financial position
or results

28



---



##### Table of Contents







| |           
| | ----------
| | Warranties

We generally warrant certain equipment against defects in
workmanship or materials for a period of one year from the date
of purchase. Upon shipment of equipment sold that includes a
warranty, we establish, as part of cost of products sold, a
provision for the expected costs of such warranty. While our
warranty costs have historically not been significant, we cannot
guarantee that we will continue to experience the same warranty
return and repair rates that we have in the past. A significant
increase in product return and repair rates could have a
material adverse impact on operating results for the period or
periods in which such items materialize.



| |                                 
| | --------------------------------
| | Derivative Financial Instruments

We account for derivative financial instruments in accordance
with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended, and related
literature, which we refer to collectively as
SFAS No. 133. During 2004, we entered into derivative
instruments to reduce the risk of foreign currency fluctuations;
however, such derivative instruments did not qualify for hedge
accounting under the provisions of SFAS No. 133.
Accordingly, we recognized both unrealized and realized gains or
losses resulting from changes in fair value as incurred in gain
(loss) on foreign currency transactions in the consolidated
income statements.



| |                         
| | ------------------------
| | Research and Development

We focus our research and development efforts on developing
products that use innovative technologies in both the Research
Supplies and Clinical Diagnostics product lines. Research and
development costs are expensed as incurred. For the years ended
December 31, 2005, 2004 and 2003, our research and
development expenses totaled approximately $12.4 million,
$10.8 million and $10.5 million, respectively, and we
intend to spend between 12% and 14% of our revenues on research
and development activities for at least the next few years.

Our numerous research and development initiatives are generally
ongoing. Some of the efforts are for new product technologies,
while others are designed to support an existing product or
products relating to one of our more than 4,000 stock keeping
units, which cover approximately 85 existing product categories.
In addition, the funds we used in our research and development
activities are allocated among the various technologies and
products in which we are currently involved and are not
concentrated to one specific product or product line.

We do not provide forward-looking estimates of costs and time to
complete any of our individual ongoing research and development
projects because none of such projects are material to our
company on an individual basis. In addition, any such estimates
would be subject to a number of risks and uncertainties,
including our ability to predict the outcome of complex
research, competition from other entities of which we may become
aware in future periods, predictions of market potential from
products that may be derived from our research

29



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##### Table of Contents





Results of Operations



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Twelve months ended December 31, 2005 compared to
    twelve months ended December 31, 2004



| |              
| | -------------
| | Total Revenue

Revenue increased $45.5 million or 53.6% in 2005 compared
to 2004. We attribute this increase primarily to recording
$34.1 million we received as a lump-sum payment from a
third party to fully satisfy monies due for certain patent
interests as well as recording a full year of Hycors
diagnostics revenue of $23.3 million during 2005 as
compared to only recording seven months of diagnostics sales of
$13.4 million during 2004. Excluding the effect from the
non-recurring settlement and the increase due to a full twelve
months of revenue from Hycor, sales increased 2.6% over the
comparable 2004 period. Also contributing to the growth were
increased sales in QPCR and Mutagenesis product sales of
$4.1 million offset by declines in older technology
products of $3.1 million. The strengthening foreign
exchange value of the dollar also affected sales in 2005
resulting in a negative foreign exchange impact to foreign sales
of $0.2 million for a 0.2% decrease to total worldwide
revenue when compared to 2004. We expect that future revenue
will depend on a number of factors, including the market
acceptance of new products, competitive conditions, currency
fluctuations and the continued funding of customer research
budgets.

The lump sum payment we received was made pursuant to a
settlement agreement by which the parties settled certain patent
related matters. The technology owned by certain patent owners,
including us, relates to a collaboration between Abbott and
Cambridge Antibody Technology for the development of
Humira®
for the treatment of rheumatoid arthritis. The first commercial
sales of this product occurred in 2003. We agreed to a lump sum
payment to satisfy in full their interest with respect to the
Humira®
collaboration. We also have the right to realize approximately
$0.8 million during the years 2006 to 2010 if commercial
sales of
Humira®
are continuing.

In addition to the settlement of the obligations related to
Humira®,
the parties agreed to a decreased royalty rate on Abbotts
other fully human antibody that neutralizes human IL-12, which
was also developed in collaboration with Cambridge Antibody
Technology. This antibody is referenced as ABT-874 by Abbott and
is in Phase II drug trials. We cannot predict the
likelihood or amount of income that we may realize as a result
of commercialization of this product in the future.



| |             
| | ------------
| | Gross Profit

Gross profit increased $29.6 million, or 53.4%, due to
recording the net effect of the $34.1 million royalty
related to the Cambridge Antibody Technology settlement offset
by a $10.7 million CAT royalty obligation due to an
unrelated third party, as well as recording a full year of
Hycors results of operations for the twelve months ended
December 31, 2005 as compared to recording seven months of
Hycors results of operations for the twelve months ended
December 31, 2004. During the twelve months ended
December 31, 2005, we also recorded less royalty expense on
product sales due to the expiration of certain patents held by a
third party. As a percentage of sales, gross profit remained
relatively constant at 65.3% for the twelve months ended
December 31, 2005 as compared to 65.4% for the twelve
months ended December 31, 2004.



| |                         
| | ------------------------
| | Research and Development

Research and development expenses increased $1.7 million or
15.7% for the twelve months ended 2005 as compared to the twelve
months ended December 31, 2004. This increase is due to
including a full year of Hycors diagnostic research and
development expenses for the twelve months ended
December 31, 2005 as compared to including seven months of
Hycors expense for the twelve months ended
December 31, 2004. The increased spending was also a result
of increased research and development activities in molecular
diagnostics and software solutions. As a percentage of total
revenue, research and development expenses decreased from 12.7%
in 2004 to 9.6% in 2005 as a result of recognizing higher
revenue during the twelve months ended

30



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##### Table of Contents







| |                      
| | ---------------------
| | Selling and Marketing

Selling and marketing expenses increased $3.1 million or
17.0% for the twelve months ended December 31, 2005 as
compared to the twelve months ended December 31, 2004. The
increase in spending was partially due to including twelve
months of Hycors selling and marketing expenses in 2005 as
compared to including seven months of Hycors selling and
marketing expense in 2004 resulting in $1.3 million of the
increase. During the twelve months ended December 31, 2005,
we also incurred increased selling and marketing expense of
$1.8 million related to our Japanese operations, increased
personnel costs and increased marketing communications expenses.
As a percentage of total revenue, selling and marketing expenses
decreased from 21.4% in 2004 to 16.3% in 2005 due to recording
higher revenue for the twelve months ended December 31,
2005 as compared to the twelve months ended December 31,
2004.



| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses increased by
$3.2 million or 19.9% for the twelve months ended
December 31, 2005 as compared to the twelve months ended
December 31, 2004. Legal expenses increased by
approximately $5.1 million for the twelve months ended
December 31, 2005 compared to the twelve months ended
December 31, 2004 as a result of two patent litigation
matters in which we were a defendant. We also incurred increased
general and administrative expense due to including Hycors
results for the full twelve months ended December 31, 2005
as compared to including only seven months of Hycors
results for the twelve months ended December 31, 2004
resulting in $0.8 million of the increase. This increased
spending was partially offset by $2.4 million in expense
related to bonuses paid to our CEO in connection with the Hycor
merger for the twelve months ended December 31, 2004. As a
percentage of total revenue, general and administrative expenses
decreased from 19.3% in 2004 to 15.0% in 2005 due to the
increased revenue recognized during 2005 as compared to 2005.



| |                  
| | -----------------
| | Litigation charge

During the fourth quarter of 2005, we accrued $20.6 million
in expense for the judgment awarded in the Third Wave
Technologies vs. Stratagene patent infringement matter. This
amount includes total damages of $15.9 million,
attorneys fees and costs of $4.2 million, and
pre-judgment interest of $0.5 million. In considering
whether to record a loss contingency, we considered the guidance
provided by FASB Statement No. 5, Accounting for
Contingencies. Although we have now appealed the district
court judgment to the Federal Circuit Court of Appeals, we have
accrued $20.6 million, as we believe that we have met the
conditions for accrual as stated in FASB Statement No. 5.
Post-judgment interest at the rate of approximately 4.4%
compounded annually remains in effect and unpaid unless the
judgment is reversed. (See Item 3: Legal Proceedings).



| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets

Impairment of long-lived assets decreased by approximately
$20,000, or 24.8%, from $82,446 for the twelve months ended
December 31, 2004 to $62,033 for the twelve months ended
December 31, 2005. This expense relates to writing-off the
remaining unamortized balances of patents that we believe are
not recoverable.



| |                          
| | -------------------------
| | Other Income and Expenses

Total other expense, net of income, remained relatively constant
for the twelve months ended December 31, 2005 as compared
to the twelve months ended December 31, 2004. Fluctuations
within other income and expense included a decrease in income
for the twelve months ended December 31, 2005 due to a 2004
$1.8 million gain recorded in equity in earnings of a joint
venture, which was not repeated in 2005.

31



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| |             
| | ------------
| | Income Taxes

We recorded $3.9 million of tax expense in 2005. The
effective tax rate increased from 30.5% in 2004 to 33.4% in
2005. The effective tax rate for 2005 was higher than 2004
primarily due to BCH recording a gain in equity in earnings of a
joint venture of $1.8 million in fiscal 2004 related to the
sale of certain assets of the joint venture, in which BCH had a
minority interest. Prior to the BCH asset acquisition date,
Stratagene and BCH presented their financial statements on a
combined basis as a result of being under common control and
because certain Stratagene shareholders held substantially all
the BCH membership units. BCH consisted substantially of limited
liability companies that were treated as partnerships for income
tax purposes; therefore, any related income tax liabilities were
the responsibility of the members of BCH. As a result, the
operations of BCH did not reflect a provision for income taxes
prior to the acquisition date. The income taxes attributable to
the $1.8 million gain are the responsibility of the members
of BCH and accordingly, the consolidated financial statements do
not include a provision for income taxes on this gain. On
February 9, 2006, we dissolved BCH.

For the twelve months ended December 31, 2005, we reversed
approximately $320,000 of tax reserves due to the completion of
an IRS review of our 2001 and 2002 federal tax returns. As a
result, all reserves pertaining to these tax years were no
longer necessary.

We recognize state research and development and other credits
when we generate them. We recognize excess credits for mature
operating entities and we will use these excess credits to
offset future taxable income, as we believe it is more likely
than not that we will utilize the credits.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Twelve months ended December 31, 2004 compared to
    twelve months ended December 31, 2003

Total Revenue

Revenue increased $15.1 million or 21.7% in 2004 compared
to 2003. We attribute this increase primarily to recording seven
months of Hycors diagnostics revenue of $13.4 million
as a result of the merger on June 2, 2004. Also
contributing to the growth were increased sales in QPCR,
Mutagenesis and Bioinformatics product sales of
$8.9 million offset by declines in older technology
products of $7.0 million. The weakening dollar affected
sales in 2004 resulting in a positive foreign exchange impact to
foreign sales of $1.7 million, or 10%, and a 2.5% increase
to total worldwide revenue when compared to 2003.



| |             
| | ------------
| | Gross Margin

Gross margin decreased 1.4% from 66.8% in 2003 to 65.4% in 2004
primarily due to the blending of the lower margin diagnostic
products as a result of the merger with Hycor.



| |                         
| | ------------------------
| | Research and Development

Research and development expenses increased $0.3 million or
2.9% in 2004 compared to 2003. This increase was due to
incurring seven months of Clinical Diagnostics research and
development expenses of $0.9 million as a result of the
merger with Hycor, offset by decreased Research Supplies
research and development expense of $0.6 million due to
transitioning the Mx3000 effort from research and development to
manufacturing in the third quarter of 2003 as well as canceling
certain research and development efforts. As a percentage of
total revenue, research and development expenses decreased from
15.0% in 2003 to 12.7% in 2004 as a result of recognizing seven
months of Diagnostics revenue of $13.4 million in 2004 as a
result of the Hycor merger.

32



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| |                      
| | ---------------------
| | Selling and Marketing

Selling and marketing expenses increased $3.0 million or
20.1% in 2004 compared to 2003. As a percentage of total
revenue, selling and marketing expenses decreased slightly from
21.7% in 2003 to 21.4% in 2004. The increase in selling and
marketing expenses was partially a result of incurring
$2.0 million of Hycor selling and marketing expenses during
the seven month period since the merger. Also contributing to
the increase was our continued build up of our Japanese
operations as well as an unfavorable foreign exchange impact of
approximately $0.3 million. Additionally, as a result of
the merger with Hycor, we recorded amortizable intangible assets
related to trade names and customer contracts. We are amortizing
these intangible assets to selling and marketing expenses over
various periods ranging from one to five years beginning in June
of 2004. The related amortization expense included in selling
and marketing was approximately $0.2 million for the year
ended December 31, 2004. Also included is approximately
$53,000 of non-cash stock compensation charges related to the
amortization of unvested stock options assumed in the Hycor
merger. See Note 3 to our consolidated financial statements
for the year ended December 31, 2004.



| |                           
| | --------------------------
| | General and Administrative

General and administrative expenses increased by
$5.3 million or 48.5% in 2004 compared to 2003. As a
percentage of total revenue, general and administrative expenses
increased from 15.8% in 2003 to 19.3% in 2004. The increased
spending was primarily due to expenses of $2.4 million
related to bonuses Dr. Sorge received as a result of the
merger with Hycor, $0.4 million of expenses related to
increased legal fees associated with patent litigation,
approximately $1.0 million of expense for additional costs
related to public company oversight and seven months of general
and administrative expenses related to the Hycor operations of
$1.5 million, which includes approximately
$0.2 million for the amortization of patents and non-cash
stock compensation charges related to the unvested stock options
assumed in the merger with Hycor.



| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets

Impairment of long-lived assets decreased by $49,000 or 37.2%
from $131,250 for the twelve months ended December 31, 2003
to $82,446 for the twelve months ended December 31, 2004.
This expense relates to writing-off the remaining unamortized
balances of patents that we believe are not recoverable.



| |                         
| | ------------------------
| | Other Income and Expense

Total other income, net of expense, increased by
$5.3 million or 112.0% in 2004 compared to 2003. As a
result of the BCH asset acquisition, we have a 49% minority
interest in a limited partnership, which we refer to as the LP,
that operates a research lab. On June 1, 2004, prior to our
acquisition of the BCH assets, the LP sold the assets related to
its clinical diagnostics business to a third party for
approximately $4.5 million. The consolidated financial
statements for the year ended December 31, 2004 reflect a
$1.8 million gain in equity in earnings of joint venture
for our share of the realized gain on the sale of these assets.
In addition, we recorded $0.2 million fewer losses from our
minority interest in the LP as a result of the LPs normal
operations when compared to the same period in 2003.

On December 23, 2004, the LP redeemed our rights and
interests. In return, we received cash consideration of
approximately $1.0 million and recorded a non-operating
loss of approximately $0.2 million for the difference
between the carrying basis in the entity on December 23,
2004 and the consideration received. As a result of the
redemption transaction, we have rights to additional amounts
realized by the LP from future royalty streams and future
clinical trial revenues. We will record these amounts as other
non-operating income in future periods when we know the amounts
and we are assured of collection.

Also contributing to the net increase of other income was a
reduction in interest expense of $1.9 million in 2004
compared to 2003 resulting from the repayment of long-term debt
obligations as well as the refinancing of our debt obligations
in the first quarter of 2004, which reduced the weighted average
interest rate on outstanding borrowings. In addition, we
converted $9.0 million of convertible subordinated notes
into shares of Stratagene common stock in connection with the
closing of the Hycor merger.

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The net increase in other income was also attributable to a gain
of $0.7 million as a result of payments in 2004 from a
litigation settlement in 2002, as well as a decrease in foreign
currency transaction losses of $0.9 million as a result of
the our hedging activities.



| |             
| | ------------
| | Income Taxes

We recorded $3.3 million of tax expense in 2004. The
effective tax rate decreased from 36.7% in 2003 to 30.5% in
2004. The change in the effective tax rate was primarily a
result of BCH recording a gain in equity in earnings of a joint
venture of $1.8 million related to the sale of certain
assets of the joint venture, in which BCH had a minority
interest. Prior to the BCH asset acquisition date, Stratagene
and BCH presented their financial statements on a combined basis
as a result of being under common control and because certain
Stratagene shareholders held substantially all the BCH
membership units. BCH consisted substantially of limited
liability companies that were treated as partnerships for income
tax purposes; therefore, any related income tax liabilities were
the responsibility of the members of BCH. As a result, the
operations of BCH did not reflect a provision for income taxes
prior to the acquisition date. The BCH members are responsible
for the income taxes attributable to the $1.8 million gain
and accordingly, the consolidated financial statements do not
include a provision for income taxes on this gain.
Non-deductible foreign entity losses, for which the company has
established valuation allowances due to the uncertainty of
recovery of these foreign net operating losses, offset the
change in the effective tax rate. On February 9, 2006, we
dissolved BCH.

We recognize state research and development and other credits
when we generated them. We recognize excess credits for mature
operating entities and we will use these excess credits to
offset future taxable income, as we believe it is more likely
than not that we will utilize the credits.

Liquidity and Capital Resources

Our liquidity requirements have historically consisted of
research and development expenses, selling and marketing
expenses, debt service, capital expenditures, working capital
and general corporate purposes. These expenses have been funded
primarily through cash from operations, supplemented with
borrowings under credit facilities and other debt instruments.

For the twelve months ended December 31, 2005 and 2004, we
generated net cash from operating activities of
$36.8 million and $10.9 million, respectively. We used
net cash for investing activities of $2.4 million for the
twelve months ended December 31, 2005 and generated net
cash from investing activities of $4.1 million for the
twelve months ended December 31, 2004. Cash acquired
related to the merger with Hycor, net of acquisition costs of
$1.8 million, totaled $4.5 million for the twelve months
ended December 31, 2004. Cash distributions from a joint
venture resulting from the sale of certain assets of the joint
venture and the sale of our minority interest in the joint
venture totaled $2.0 million for the year ended
December 31, 2004. Capital expenditures and additions to
patents for the twelve months ended December 31, 2005
totaled $1.5 million and $1.5 million, respectively,
as compared to $1.8 million and $1.3 million,
respectively, for the twelve months ended December 31, 2004.

We generated net cash of $1.3 million and used
$12.6 million in net cash for financing activities for the
twelve months ended December 31, 2005 and 2004,
respectively, which included the repayment of $5.7 million
and $30.2 million in debt offset by borrowings under our
credit facilities of $5.5 million and $18.0 million,
respectively.

Based on our review of our accounts receivables, an allowance
for doubtful accounts is accrued, however, we do not write off
individual accounts receivable until we have exhausted
substantially all avenues of legal recourse to collect the
outstanding amount. The actual write-off for the years ended
December 31, 2005 and 2004 was minimal and the allowance
decreased by approximately $0.2 million and
$0.3 million, respectively. This decrease in expected
uncollectible accounts was due in part to continued collection
efforts. No significant change to future liquidity is
anticipated.

Accounts receivable used cash of $1.0 million for the
twelve months ended December 31, 2005 primarily due to the
timing of sales within the fourth quarter of 2005 as compared to
the fourth quarter of 2004.

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Inventory used cash of $1.3 million for the twelve months
ended December 31, 2005 due to increased investment in
instrumentation products, new product introductions, and
increased needs from the our Japanese distribution center.

Prepaids and other current assets used cash of $0.5 million
for the twelve months ended December 31, 2005 due to costs
associated with our catalog as well as accruals for certain
foreign receivables such as value added tax. Prepaids and other
current assets provided cash of $1.5 million for the year
ended December 31, 2004 due to allocating merger related
expenses to goodwill and additional paid-in capital in
connection with the Hycor merger.

Accounts payable provided cash of $1.5 million for the
twelve months ended December 31, 2005 primarily due to
higher legal fees related to current patent litigation as
compared to the prior year. Accounts payable used cash of
$1.4 million for the twelve months ended December 31,
2004 primarily due to the payment of legal invoices related to
patent litigation.

Accrued expenses and other liabilities effected our
reconciliation of net income to net cash provided by operating
activities by $33.1 million due primarily to the fourth
quarter accrual of $20.6 million related to the Third Wave
Technology vs. Stratagene judgment, the change of
$12.4 million in accrued royalties and approximately
$0.4 million of accrued compensation. Accrued expenses and
other liabilities effected our reconciliation of net income to
net cash provided by operating activities by $0.5 million
for the twelve months ended December 31, 2004.

Capital expenditures for property and equipment during the
twelve months ended December 31, 2005 and 2004 were
approximately $1.5 million and $1.8 million,
respectively. We currently anticipate capital spending on
property and equipment to be in the range of $2.0 million
to $2.5 million in fiscal 2006.

We had cash, cash equivalents, restricted cash and marketable
securities totaling $40.7 million and $5.7 million at
December 31, 2005 and 2004, respectively, and working
capital of $18.9 million and $17.9 million at
December 31, 2005 and 2004, respectively.

As of December 31, 2005, BioCrest Manufacturing, L.P., our
consolidated subsidiary, had approximately $4.0 million in
total debt, which relates to industrial revenue bonds.

The obligations of BioCrest Manufacturing, L.P. under the
reducing revolving line of credit have been guaranteed by us and
each of our wholly owned domestic subsidiaries. The obligation
is also generally secured by substantially all of our personal
property assets and each of our wholly owned domestic
subsidiaries, as well as liens on the real property and
improvements related to our Texas manufacturing facility. The
reducing revolving line of credit is also secured by a pledge of
our interest in Iobion Informatics, LLC.

Borrowings under the reducing revolving line of credit bear
interest at a variable rate equal to the one-month LIBOR rate
plus 2.55%, and the reducing revolving line of credit under the
original credit facility agreement matures in January 2007. In
January 2006, we entered into an amendment to the credit
agreement, which provided for the extension of the reducing
revolving line of credit to July 2008. The reducing revolving
line of credit includes customary but significant restrictions
on the incurrence of additional debt, the payment of dividends,
acquisitions and capital expenditures above stated limits. The
reducing revolving line of credit also contains restrictive
covenants requiring us to maintain certain financial ratios,
including minimum debt service coverage ratios, fixed charge
coverage ratios and tangible net worth. As of December 31,
2005, we had $5.5 million in outstanding borrowings under
this line of credit, which was paid off on January 3, 2006.
As of December 31, 2005, we would not have been in
compliance with our fixed charge coverage ratio as a result of
an increase in our estimated income tax payments related to
receiving approximately $23.4 million before taxes for
royalties related to a settlement with Cambridge Antibody
Technology. However, we completed an amendment to the credit
agreement in January 2006, which cured the potential violation.
We were in compliance with all other covenants at
December 31, 2005.

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The industrial revenue bonds are secured by land, building and
equipment acquired in Bastrop County, Texas with the proceeds
from the issuance of the bonds. The average interest rate on the
industrial revenue bonds was 2.57% and 1.44% for the years ended
December 31, 2005 and 2004, respectively. Under the
instrument governing the industrial revenue bonds, we were
required to make sinking fund payments of $870,000 per year
through April 2004 and $735,000 in April 2005. Thereafter, we
are required to make sinking fund payments of $240,000 per
year through April 2021, and then $175,000 in April 2022 when
the bonds mature.

On January 24, 2006 and in relation to the jury verdict of
trebled damages of $15.9 million plus reimbursement of
attorneys fees and costs of $4.2 million and
pre-judgment interest of $0.5 million in the Third Wave
litigation, the total of which is $20.6 million with
post-judgment interest accruing at an annual percentage rate of
approximately 4.4%, we posted a $21.0 million surety bond
in order to permit us to appeal such decision without being
subject to collection activities by Third Wave. The cost of such
surety bond was $84,000, and the bond is secured by a
$21.0 million of cash, which is being held in an interest
bearing restricted account. If we are ultimately required to pay
out all or a portion of the $20.6 million upon an adverse
judgment rendered by the court and affirmed on appeal, it would
negatively impact our cash position. We currently have the
ability to pay such damage award with our existing cash
resources.

During the fourth quarter of 2005, our cash position was
positively impacted by receiving approximately
$34.1 million before taxes for royalties related to the
Cambridge Antibody Technology settlement. We used a portion of
these funds to pay a special one-time cash dividend of
$0.25 per common share payable on January 6, 2006 to
stockholders of record as of December 16, 2005, which
amounted to approximately $5.6 million. We received a
consent from the lender under our reducing revolving credit
facility with respect to the declaration and payment of this
dividend.

We expect that our current cash and cash equivalents, short-term
investments, funds from operations and interest income earned
thereon will be sufficient to fund our current operations for at
least 12 months and the foreseeable future. Our future
capital requirements and the adequacy of our available funds
will depend on many factors, including future business
acquisitions, scientific progress in our research and
development programs and the magnitude of those programs, our
ability to establish collaborative and licensing arrangements,
the cost involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims and competing technological and
market developments.



| |                        
| | -----------------------
| | Contractual Obligations

We lease certain facilities and equipment under noncancelable
operating leases, with facility leases for our headquarters in
La Jolla and our offices in Garden Grove, California,
Canada, the Netherlands, Germany, Scotland and Japan expiring on
various dates between September 30, 2005 and
September 30, 2008 and equipment leases expiring in
September 2005.

We have entered into employment agreements with certain of our
officers with salary ranges from $210,000 to $450,000. Such
agreements are typically short in duration but are subject to
successive automatic one year renewals unless one party gives
proper notice of its intention not to renew the employment
agreement. These agreements generally provide for severance
benefits if we terminate the officer other than for cause, as
defined in the employment agreements. See Note 3 to the
financial statements for a summary of Dr. Sorges new
employment agreement entered into in 2004.

As discussed in Corporate Collaborations we have
entered into several license or collaboration agreements. The
Strand Life Sciences (Strand) agreement requires us
to make aggregate milestone payments of $0.9 million to
Strand upon our acceptance of certain deliverables. In addition,
these agreements require us to make $1.5 million in minimum
annual payments to Strand in the first twelve months after our
first commercial sale or 60 days after our final acceptance
of the product. The minimum annual payments may be offset by
$0.5 million of the milestone payments in the first twelve
months. These agreements also required us to make
$1.7 million in minimum annual payments to Strand in the
second twelve months. The contractual obligations table below
reflects these obligations.

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In addition, in the normal course of operations, we enter into
purchase commitments with vendors and suppliers of key raw
materials and other goods and services through purchase orders
or other documentation. Such obligations are generally
outstanding for periods of less than one year and are settled by
cash payments upon delivery of goods and services. At
December 31, 2005, aggregate purchase commitments related
to various key raw materials and other goods and services was
approximately $3.0 million.

The following table summarizes the approximate future minimum
payments under the above contractual obligations at
December 31, 2005:

|                              |  |                       |            |           |  |       |            |       |  |         |           |  |  |   |         |  |  |   |           | 
|----------------------------- |  | --------------------- | ---------- | --------- |  | ----- | ---------- | ----- |  | ------- | --------- |  |  | - | ------- |  |  | - | --------- | 
|                              |  |                      
|                              |  | Payment Due by Period
|                              |  |                      
|                              |  |                       |            | Less Than |  | 1-3   |            | 4-5   |  | After  
|Contractual Obligations       |  | Total                 |            | 1 Year    |  | Years |            | Years |  | 5 Years
|                              |  |                       |            |           |  |       |            |       |  |        
|Operating leases              |  | $                     | 4,502,174  |           |  | $     | 1,969,071  |       |  | $       | 2,533,103 |  |  |   |        |  |  |   |          | 
|                             
|                             
|                             
|                             
|Principal on long-term debt   |  |                       | 9,515,000  |           |  |       | 5,740,000  |       |  |         | 720,000   |  |  | $ | 480,000 |  |  | $ | 2,575,000 | 
|                             
|                             
|                             
|                             
|Collaborative agreements      |  |                       | 3,200,000  |           |  |       | 1,500,000  |       |  |         | 1,700,000 |  |  |   |        |  |  |   |          | 
|                             
|                             
|                             
|                             
|Employment agreements         |  |                       | 794,382    |           |  |       | 597,507    |       |  |         | 196,875   |  |  |   |        |  |  |   |          | 
|                             
|                             
|                             
|                             
|Other purchase commitments    |  |                       | 3,056,000  |           |  |       | 3,056,000  |       |  |         |          |  |  |   |        |  |  |   |          | 
|                              |  |                       |            |           |  |       |            |       |  |         |           |  |  |   |         |  |  |   |           | 
|Total contractual obligations |  | $                     | 21,067,556 |           |  | $     | 12,862,578 |       |  | $       | 5,149,978 |  |  | $ | 480,000 |  |  | $ | 2,575,000 | 
|                              |  |                       |            |           |  |       |            |       |  |         |           |  |  |   |         |  |  |   |           | 

Assuming that long-term debt principal payments are made
according to their respective payment schedules, the future
aggregate interest expense on long-term debt would be
approximately $1.2 million.

Off-Balance Sheet Arrangements

At December 31, 2005 and December 31, 2004, we did not
have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured
finance, variable interest or special purpose entities, which
would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or
limited purposes. In addition, we do not engage in trading
activities involving non-exchange traded contracts. As such, we
are not materially exposed to any financing, liquidity, market
or credit risk that could arise if we had engaged in such
relationships.

Other Commitments and Contingencies

In connection with the closing of the Hycor merger in June 2004,
we entered into a new employment agreement with our CEO,
pursuant to which, among other things, we reduced the CEOs
base annual salary from $1.1 million to $450,000, and
granted our CEO an option to purchase 738,960 shares
of Stratagene common stock at an exercise price of
$9.34 per share. The agreement provides for the
compensation committee of the board of directors to review the
CEOs base salary on at least an annual basis, and the
committee may also increase the CEOs base salary from time
to time in its discretion. Pursuant to the employment agreement,
the CEO is entitled to participate in our bonus program on a
basis at least comparable to other senior executives. The CEO
may also receive bonuses at the discretion of the board of
directors upon the compensation committees recommendation.
The new employment agreement has an initial term of three years
and is subject to successive one year renewals unless either
party provides a notice of non-renewal at least 30 days
prior to the termination of the then current term.

New Accounting Pronouncements

Information regarding recent accounting pronouncements is
contained in Note 2 to the Consolidated Financial
Statements for the year ended December 31, 2005, which note
is incorporated herein by this reference and is included as part
of Item 8. Financial Statements and Supplementary
Data, to this Form 10-K.

37



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##### Table of Contents








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures about Market
    Risk

Our financial instruments include cash and cash equivalents,
investments and long-term debt. At December 31, 2005, the
carrying values of our financial instruments approximated their
fair values based on current market prices and rates.



| |                                          
| | -----------------------------------------
| | Foreign Currency Translation/ Transaction

We measure the accounts of our foreign subsidiaries and
affiliates using the local currency as the functional currency.
For these operations, we translate assets and liabilities
accounts into U.S. dollars at period-end exchange rates,
and we translate income and expense accounts at average monthly
exchange rates. We exclude net translation gains or losses from
net income and reflect them in accumulated other comprehensive
income (loss) in the accompanying consolidated balance sheets.

Our international sales expose us to foreign currency risk in
the ordinary course of our business. Our foreign subsidiaries
generated approximately 22%, 27% and 26% of our revenue for
2005, 2004 and 2003, respectively. The foreign subsidiaries sell
products in various local currencies that they collect at future
dates and purchase raw materials and finished goods in both
U.S. dollars and local currencies. Accordingly, we are
exposed to transaction gains and losses that could result from
changes in foreign currency exchange rates. We include realized
gains and losses from foreign currency transactions in
operations as incurred.

For financial reporting purposes, we translate the foreign
subsidiaries income statements from the local currency
into U.S. dollars at the exchange rates in effect during
the reporting period. When the local currency strengthens
compared to the U.S. dollar, there is a positive effect on
the foreign subsidiaries sales as reported in our
consolidated financial statements. Conversely, when the
U.S. dollar strengthens, there is a negative effect. For
the year ended December 31, 2005, the net impact to our
reported sales from the effect of exchange rate fluctuations was
a decrease of approximately $0.2 million, when compared to
the exchange rates for the year ended December 31, 2004.



| |                                 
| | --------------------------------
| | Derivative Financial Instruments

As part of distributing our products, we regularly enter into
intercompany transactions with our foreign subsidiaries. Our
currency exposures vary, but are primarily concentrated in the
Euro, British Pound, Swiss Franc and Japanese Yen. In the past,
we periodically entered into derivative instruments to mitigate
foreign currency risk on our European revenues, however, such
derivative instruments did not qualify for hedge accounting
under the provisions of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as
amended. Accordingly, we recognized both unrealized and realized
gains or losses resulting from changes in fair value as incurred
in gain (loss) on foreign currency transactions in the current
period income statement.

In 2005 and at present, we do not enter into foreign currency
hedging arrangements. We settled all futures contracts entered
into for fiscal year 2004 by December 31, 2004.



| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments

We consider the carrying amounts of cash, marketable securities,
restricted cash, foreign currency exchange contracts, accounts
receivable, prepaid expenses and other current assets, accounts
payable, accrued expenses, other current liabilities, and lines
of credit to be representative of their respective fair values
because of the short-term nature of these financial instruments.
The carrying amount of the long-term debt is a reasonable
estimate of fair value, as the loans have terms based on market
rates.

38



---



##### Table of Contents





| |               
| | --------------
| | Interest Rates

We generally invest our cash and cash equivalents in money
market accounts and short-term debt instruments of highly rated
credit issuers. We limit the amount of credit exposure to any
one issuer and seek to improve the safety and likelihood of
preserving our invested funds by limiting default risk and
market risk. Based on our short-term investment portfolio at
December 31, 2005, we believe that a 10% rise or fall in
interest rates would have had no material impact on our
financial statements.

The following table shows the average interest rate for the year
ended December 31, 2005 for each of our long-term debt
obligations:

|                                  |  |                           |       | 
|--------------------------------- |  | ------------------------- | ----- | 
|                                  |  | Average Interest Rate for
|                                  |  | the Year Ended           
|Long-Term Debt Obligations        |  | December 31, 2005        
|                                  |  |                          
|                                 
|                                 
|                                 
|                                 
|Reducing revolving line of credit |  |                           | 5.94% | 
|                                 
|                                 
|                                 
|                                 
|Industrial revenue bonds          |  |                           | 2.57% | 

Our interest income on marketable securities depends on the
interest rate attributable primarily to the debt securities that
we purchase. We have categorized these securities as available
for sale and, as a result, we stated them at fair value.
Marketable debt securities are available for current operations
and we classify them in the consolidated balance sheet as
current assets. We include unrealized holding gains and losses
as a component of accumulated other comprehensive income (loss),
net of tax, until realized.

39



---



##### Table of Contents








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

The following documents are filed as part of this report:

|                                                                                                                       |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                       |  | Page
|                                                                                                                       |  |     
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Report of Independent
    Registered Public Accounting Firm for the year ended
    December 31, 2005                   |  |      | 41 | 
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Report of Independent
    Registered Public Accounting Firm for the years ended
    December 31, 2004 and 2003         |  |      | 42 | 
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Consolidated Balance Sheets
    as of December 31, 2005 and 2004                                                       |  |      | 43 | 
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Consolidated Statements of
    Income for the years ended December 31, 2005, 2004 and
    2003                         |  |      | 44 | 
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Consolidated Statements of
    Stockholders Equity (Deficit) for the years ended
    December 31, 2005, 2004 and 2003 |  |      | 45 | 
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Consolidated Statements of
    Cash Flows for the years ended December 31, 2005, 2004 and
    2003                     |  |      | 47 | 
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|                                                                                                                      
|Notes to Consolidated
    Financial Statements for the years ended December 31,
    2005,
    2004 and 2003            |  |      | 48 | 

40



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM

To the Board of Directors and Stockholders of



We have audited the accompanying consolidated balance sheet of
Stratagene Corporation and subsidiaries (the
Company) as of December 31, 2005, and the
related consolidated statements of income, stockholders
equity (deficit) and comprehensive income, and cash flows
for the year then ended. Our audit also included the financial
statement schedule listed in the Index at Item 15(c). These
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2005, and the results of its
operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the financial
statement schedule presents fairly, in all material respects,
the information set forth therein.



| |                               
| | ------------------------------
| | /s/ Mayer Hoffman McCann, P.C.

San Diego, California



41



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##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of



We have audited the accompanying consolidated balance sheet of
Stratagene Corporation and subsidiaries (the
Company) as of December 31, 2004, and the
related consolidated statements of income, stockholders
equity (deficit) and comprehensive income, and cash flows
for each of the two years in the period ended December 31,
2004. Our audits also included the financial statement schedule
for 2004 and 2003 listed in the Index at Item 15(c). These
financial statements and the financial statement schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements and the financial statement schedule based on our
audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Stratagene Corporation and subsidiaries as of December 31,
2004 and 2003, and the results of their operations and their
cash flows for each of the two years in the period ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule for 2004 and 2003,
when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.



| |                           
| | --------------------------
| | /s/ DELOITTE & TOUCHE, LLP

San Diego, California



42



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS


|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |            |            |            | 
|---------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------------ | ---------- | ----------- | ----------- | ---------- | ---------- | ---------- | ---------- | 
|                                         |                                                                                                                                                                               |                           
|                                         |                                                                                                                                                                               | December 31,              
|                                         |                                                                                                                                                                               |                           
|                                         |                                                                                                                                                                               | 2005                       |                                            | 2004      
|                                         |                                                                                                                                                                               |                            |                                            |           
|                                        
|                                        
|                                        
|                                        
|ASSETS                                  
|                                        
|                                        
|                                        
|                                        
|Current assets:                          |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                        
|                                        
|                                        
|                                        
|                                         | Cash and cash equivalents                                                                                                                                                     |                            | $                                          | 40,508,365 |             |             | $          | 4,890,458  |           
|                                        
|                                        
|                                        
|                                        
|                                         | Marketable debt securities                                                                                                                                                    |                            |                                            |           |             |             |            | 197,125    |           
|                                        
|                                        
|                                        
|                                        
|                                         | Cash  restricted related to bond
    indenture                                                                                                                               |                            |                                            | 192,388    |             |             |            | 582,995    |           
|                                        
|                                        
|                                        
|                                        
|                                         | Accounts receivable, less allowance for doubtful
    accounts and sales returns of $580,182 and $766,772 at
    December 31, 2005 and 2004, respectively                      |                            |                                            | 11,530,214 |             |             |            | 11,059,464 |           
|                                        
|                                        
|                                        
|                                        
|                                         | Income taxes receivable                                                                                                                                                       |                            |                                            | 1,520,466  |             |             |            | 269,861    |           
|                                        
|                                        
|                                        
|                                        
|                                         | Inventories                                                                                                                                                                   |                            |                                            | 13,249,815 |             |             |            | 12,986,910 |           
|                                        
|                                        
|                                        
|                                        
|                                         | Deferred income tax assets                                                                                                                                                    |                            |                                            | 10,003,948 |             |             |            | 2,002,013  |           
|                                        
|                                        
|                                        
|                                        
|                                         | Prepaid expenses and other current assets                                                                                                                                     |                            |                                            | 2,134,828  |             |             |            | 1,713,729  |           
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                         |                                                                                                                                                                               | Total current assets       |                                            |            | 79,140,024  |             |            |            | 33,702,555 |           
|                                        
|                                        
|                                        
|                                        
|Property and equipment, net              |                                                                                                                                                                               |                            | 11,266,939                                 |            |             |             | 12,111,957 |           
|                                        
|                                        
|                                        
|                                        
|Other assets                             |                                                                                                                                                                               |                            | 395,453                                    |            |             |             | 541,091    |           
|                                        
|                                        
|                                        
|                                        
|Deferred income tax assets               |                                                                                                                                                                               |                            |                                           |            |             |             | 217,102    |           
|                                        
|                                        
|                                        
|                                        
|Goodwill                                 |                                                                                                                                                                               |                            | 27,234,214                                 |            |             |             | 27,234,214 |           
|                                        
|                                        
|                                        
|                                        
|Intangible assets                        |                                                                                                                                                                               |                            | 6,645,137                                  |            |             |             | 6,524,781  |           
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                         |                                                                                                                                                                               | Total assets               |                                            | $          | 124,681,767 |             |            | $          | 80,331,700 |           
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                        
|                                        
|                                        
|                                        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|                                        
|                                        
|                                        
|                                        
|Current liabilities:                     |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                        
|                                        
|                                        
|                                        
|                                         | Accounts payable                                                                                                                                                              |                            | $                                          | 5,373,865  |             |             | $          | 4,129,171  |           
|                                        
|                                        
|                                        
|                                        
|                                         | Dividend payable                                                                                                                                                              |                            |                                            | 5,571,321  |             |             |            |           |           
|                                        
|                                        
|                                        
|                                        
|                                         | Accrued expenses and other liabilities                                                                                                                                        |                            |                                            | 42,776,252 |             |             |            | 9,877,253  |           
|                                        
|                                        
|                                        
|                                        
|                                         | Current portion of long-term debt                                                                                                                                             |                            |                                            | 5,740,000  |             |             |            | 735,000    |           
|                                        
|                                        
|                                        
|                                        
|                                         | Deferred revenue, current                                                                                                                                                     |                            |                                            | 736,142    |             |             |            | 1,062,288  |           
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                         |                                                                                                                                                                               | Total current liabilities  |                                            |            | 60,197,580  |             |            |            | 15,803,712 |           
|                                        
|                                        
|                                        
|                                        
|Deferred revenue                         |                                                                                                                                                                               |                            | 315,634                                    |            |             |             | 395,881    |           
|                                        
|                                        
|                                        
|                                        
|Long-term debt, less current portion     |                                                                                                                                                                               |                            | 3,775,000                                  |            |             |             | 8,971,923  |           
|                                        
|                                        
|                                        
|                                        
|Deferred income tax liabilities          |                                                                                                                                                                               |                            | 1,621,040                                  |            |             |             |           |           
|                                        
|                                        
|                                        
|                                        
|Other liabilities                        |                                                                                                                                                                               |                            | 282,287                                    |            |             |             |           |           
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                         |                                                                                                                                                                               | Total liabilities          |                                            |            | 66,191,541  |             |            |            | 25,171,516 |           
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|Commitments and contingencies (Note 11)  |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                        
|                                        
|                                        
|                                        
|Stockholders equity:                    |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                        
|                                        
|                                        
|                                        
|                                         | Preferred stock, $.0001 par value;
    4,000,000 shares authorized; no shares issued and
    outstanding at December 31, 2005 and 2004                                        |                            |                                            |           |             |             |            |           |           
|                                        
|                                        
|                                        
|                                        
|                                         | Common stock, $.0001 par value;
    50,000,000 shares authorized; 22,319,250 and
    22,029,430 shares issued and outstanding at
    December 31, 2005 and 2004, respectively |                            |                                            | 2,232      |             |             |            | 2,203      |           
|                                        
|                                        
|                                        
|                                        
|                                         | Additional paid-in capital                                                                                                                                                    |                            |                                            | 54,398,471 |             |             |            | 52,880,192 |           
|                                        
|                                        
|                                        
|                                        
|                                         | Unearned stock-based compensation                                                                                                                                             |                            |                                            | (48,294    | )           |             |            | (420,677   | )         
|                                        
|                                        
|                                        
|                                        
|                                         | Retained earnings                                                                                                                                                             |                            |                                            | 5,731,260  |             |             |            | 3,514,811  |           
|                                        
|                                        
|                                        
|                                        
|                                         | Accumulated other comprehensive loss                                                                                                                                          |                            |                                            | (1,593,443 | )           |             |            | (816,345   | )         
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                         |                                                                                                                                                                               | Total stockholders equity |                                            |            | 58,490,226  |             |            |            | 55,160,184 |           
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           
|                                         |                                                                                                                                                                               |                            | Total liabilities and stockholders equity |            | $           | 124,681,767 |            |            | $          | 80,331,700 | 
|                                         |                                                                                                                                                                               |                            |                                            |            |             |             |            |           

See accompanying notes to consolidated financial statements.

43



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME


|                           |                                          |                              |            |            |             |      |            |            |            |  |            |            |            |  
|-------------------------- | ---------------------------------------- | ---------------------------- | ---------- | ---------- | ----------- | ---- | ---------- | ---------- | ---------- |  | ---------- | ---------- | ---------- | -
|                           |                                          |                             
|                           |                                          | Years Ended December 31,    
|                           |                                          |                             
|                           |                                          | 2005                         |            | 2004       |             | 2003
|                           |                                          |                              |            |            |             |     
|Revenue:                   |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                          
|                          
|                          
|                          
|                           | Product sales                            |                              | $          | 94,878,594 |             |      | $          | 84,032,817 |            |  | $          | 69,316,623 |           
|                          
|                          
|                          
|                          
|                           | Royalty revenue                          |                              |            | 35,406,711 |             |      |            | 779,786    |            |  |            | 386,027    |           
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                           |                                          | Total revenue                |            |            | 130,285,305 |      |            |            | 84,812,603 |  |            |            | 69,702,650 |  
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|Costs and expenses:        |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                          
|                          
|                          
|                          
|                           | Cost of revenues                         |                              |            | 45,157,925 |             |      |            | 29,324,218 |            |  |            | 23,145,014 |           
|                          
|                          
|                          
|                          
|                           | Research and development                 |                              |            | 12,444,663 |             |      |            | 10,754,317 |            |  |            | 10,454,583 |           
|                          
|                          
|                          
|                          
|                           | Selling and marketing                    |                              |            | 21,267,210 |             |      |            | 18,180,822 |            |  |            | 15,144,353 |           
|                          
|                          
|                          
|                          
|                           | General and administrative               |                              |            | 19,579,800 |             |      |            | 16,335,605 |            |  |            | 10,997,516 |           
|                          
|                          
|                          
|                          
|                           | Litigation charge                        |                              |            | 20,600,352 |             |      |            |           |            |  |            |           |           
|                          
|                          
|                          
|                          
|                           | Impairment of long-lived assets          |                              |            | 62,033     |             |      |            | 82,446     |            |  |            | 131,250    |           
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                           |                                          | Total costs and expenses     |            |            | 119,111,983 |      |            |            | 74,677,408 |  |            |            | 59,872,716 |  
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                           |                                          | Income from operations       |            |            | 11,173,322  |      |            |            | 10,135,195 |  |            |            | 9,829,934  |  
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|Other income and expenses: |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                          
|                          
|                          
|                          
|                           | Loss on foreign currency transactions    |                              |            | (427,041   | )           |      |            | (225,586   | )          |  |            | (1,151,145 | )         
|                          
|                          
|                          
|                          
|                           | Equity in income (loss) of joint venture |                              |            |           |             |      |            | 1,787,902  |            |  |            | (246,118   | )         
|                          
|                          
|                          
|                          
|                           | Other income (loss), net                 |                              |            | 926,899    |             |      |            | 495,237    |            |  |            | (9,874     | )         
|                          
|                          
|                          
|                          
|                           | Interest expense                         |                              |            | (279,190   | )           |      |            | (1,641,358 | )          |  |            | (3,526,235 | )         
|                          
|                          
|                          
|                          
|                           | Interest income                          |                              |            | 291,780    |             |      |            | 147,041    |            |  |            | 240,820    |           
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                           |                                          | Total other income (expense) |            |            | 512,448     |      |            |            | 563,236    |  |            |            | (4,692,552 | )
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|Income before income taxes |                                          |                              | 11,685,770 |            |             |      | 10,698,431 |            |            |  | 5,137,382  |           
|                          
|                          
|                          
|                          
|Income tax expense         |                                          |                              | (3,898,000 | )          |             |      | (3,260,000 | )          |            |  | (1,885,244 | )         
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                           |                                          | Net income                   |            | $          | 7,787,770   |      |            | $          | 7,438,431  |  |            | $          | 3,252,138  |  
|                           |                                          |                              |            |            |             |      |            |            |            |  |            |           
|Earnings per share:        |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                          
|                          
|                          
|                          
|                           |                                          | Basic                        |            | $          | 0.35        |      |            | $          | 0.39       |  |            | $          | 0.21       |  
|                          
|                          
|                          
|                          
|                           |                                          | Diluted                      |            | $          | 0.35        |      |            | $          | 0.39       |  |            | $          | 0.21       |  
|                          
|                          
|                          
|                          
|Weighted average shares:   |                                          |                              |            |            |             |      |            |            |            |  |            |           
|                          
|                          
|                          
|                          
|                           |                                          | Basic                        |            |            | 22,112,892  |      |            |            | 19,307,564 |  |            |            | 15,632,668 |  
|                          
|                          
|                          
|                          
|                           |                                          | Diluted                      |            |            | 22,259,057  |      |            |            | 19,313,364 |  |            |            | 15,632,668 |  

See accompanying notes to consolidated financial statements.

44



---



##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)


AND COMPREHENSIVE INCOME


Years Ended December 31, 2005, 2004 and 2003


|                                |                                                                                                                                                             |              |            |            |   |             |       |                   |   |          |            |            |   |   |          |          |   |   |            |            |  
|------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ---------- | - | ----------- | ----- | ----------------- | - | -------- | ---------- | ---------- | - | - | -------- | -------- | - | - | ---------- | ---------- | -
|                                |                                                                                                                                                             |              |            |            |   |             |       |                  
|                                |                                                                                                                                                             | Common Stock |            | Additional |   | Unearned    |       | (Accumulated)    
|                                |                                                                                                                                                             |              |            | Paid-in    |   | Stock-Based |       | Deficit) Retained
|                                |                                                                                                                                                             | Shares       |            | Amount     |   | Capital     |       | Compensation      |   | Earnings
|                                |                                                                                                                                                             |              |            |            |   |             |       |                   |   |         
|Balance as of January 1, 2003   |                                                                                                                                                             |              | 15,632,668 |            |   |             | 1,563 |                   |   |          | 1,748,609  |            |   |   |         |          |   |   | (6,154,771 | )         
|                               
|                               
|                               
|                               
|                                | Compensation expense from remeasurement of stock
    options                                                                                                |              |            |           |   |             |       |                  |   |          |            | 72,593     |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Notes receivable from stockholders of Stratagene                                                                                                            |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Distributions paid to BCH members                                                                                                                           |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            | (544,707   | )
|                               
|                               
|                               
|                               
|                                | Net income                                                                                                                                                  |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            | 3,252,138  |  
|                               
|                               
|                               
|                               
|                                | Foreign currency translation                                                                                                                                |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Comprehensive income                                                                                                                                        |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                                |                                                                                                                                                             |              |            |            |   |             |       |                   |   |          |            |            |   |   |          |          |   |   |            |           
|Balance as of December 31, 2003 |                                                                                                                                                             |              | 15,632,668 |            |   |             | 1,563 |                   |   |          | 1,821,202  |            |   |   |         |          |   |   | (3,447,340 | )         
|                               
|                               
|                               
|                               
|                                | Retirement of treasury stock                                                                                                                                |              |            |           |   |             |       |                  |   |          |            | (25,344    | ) |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Fair value of common shares issued resulting from
    Hycor merger, plus value attributed to Hycor options assumed,
    less registration costs of $105,234 |              |            | 5,015,453  |   |             |       | 502               |   |          |            | 43,867,108 |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Intrinsic value assigned to unvested options
    acquired in the Hycor merger                                                                               |              |            |           |   |             |       |                  |   |          |            |           |   |   |          | (781,622 | ) |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Amortization of unvested options acquired in the
    Hycor merger                                                                                           |              |            |           |   |             |       |                  |   |          |            | (28,619    | ) |   |          | 360,945  |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Common stock issued from conversion of
    subordinated debt                                                                                                |              |            | 1,753,604  |   |             |       | 175               |   |          |            | 9,179,825  |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Common stock issued to an officer                                                                                                                           |              |            | 41,250     |   |             |       | 4                 |   |          |            | (4         | ) |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Common stock issued for employee stock purchase
    plan                                                                                                    |              |            | 25,856     |   |             |       | 2                 |   |          |            | 157,020    |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Common stock issued upon exercise of stock options                                                                                                          |              |            | 127,382    |   |             |       | 14                |   |          |            | 176,283    |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Tax benefit received from the exercise of stock
    options                                                                                                 |              |            |           |   |             |       |                  |   |          |            | 89,009     |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Redemption of common stock for outstanding notes
    receivable from officers                                                                               |              |            | (524,160   | ) |             |       | (53               | ) |          |            | (3,404,874 | ) |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Redemption of common stock for outstanding notes
    receivable from affiliates                                                                             |              |            | (42,623    | ) |             |       | (4                | ) |          |            | (276,874   | ) |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Compensation expense from remeasurement of stock
    options                                                                                                |              |            |           |   |             |       |                  |   |          |            | 101,172    |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Compensation expense for non-employee stock
    options                                                                                                     |              |            |           |   |             |       |                  |   |          |            | 357,171    |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Interest accretion on notes receivable from
    stockholders of Stratagene                                                                                  |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Payment in full of notes receivable from
    stockholders of Stratagene                                                                                     |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Distributions paid to BCH members                                                                                                                           |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            | (476,280   | )
|                               
|                               
|                               
|                               
|                                | Deferred tax asset applicable to asset
    acquisition of BCH                                                                                               |              |            |           |   |             |       |                  |   |          |            | 874,495    |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Redemption of interests from BCH members                                                                                                                    |              |            |           |   |             |       |                  |   |          |            | (7,378     | ) |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Net income                                                                                                                                                  |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            | 7,438,431  |  
|                               
|                               
|                               
|                               
|                                | Foreign currency translation                                                                                                                                |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Unrealized gain on securities                                                                                                                               |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Comprehensive income                                                                                                                                        |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                                |                                                                                                                                                             |              |            |            |   |             |       |                   |   |          |            |            |   |   |          |          |   |   |            |           
|Balance as of December 31, 2004 |                                                                                                                                                             |              | 22,029,430 |            |   | $           | 2,203 |                   |   | $        | 52,880,192 |            |   | $ | (420,677 | )        |   | $ | 3,514,811  |           
|                               
|                               
|                               
|                               
|                                | Adjustment to deferred tax asset applicable to
    asset acquisition of BCH                                                                                 |              |            |           |   |             |       |                  |   |          |            | (514,403   | ) |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Amortization of unvested options acquired in the
    Hycor merger                                                                                           |              |            |           |   |             |       |                  |   |          |            |           |   |   |          | 303,030  |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Adjustment to stock-based compensation for
    terminated employees                                                                                         |              |            |           |   |             |       |                  |   |          |            | (69,353    | ) |   |          | 69,353   |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Common stock issued for employee stock purchase
    plan                                                                                                    |              |            | 51,609     |   |             |       | 5                 |   |          |            | 374,902    |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Common stock issued upon exercise of stock options                                                                                                          |              |            | 238,211    |   |             |       | 24                |   |          |            | 1,124,783  |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Tax benefit received from the exercise of stock
    options                                                                                                 |              |            |           |   |             |       |                  |   |          |            | 415,294    |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Compensation expense for non-employee stock
    options                                                                                                     |              |            |           |   |             |       |                  |   |          |            | 187,056    |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Dividend payable to stockholders                                                                                                                            |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            | (5,571,321 | )
|                               
|                               
|                               
|                               
|                                | Net income                                                                                                                                                  |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            | 7,787,770  |  
|                               
|                               
|                               
|                               
|                                | Foreign currency translation                                                                                                                                |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Unrealized gain on securities                                                                                                                               |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Comprehensive income                                                                                                                                        |              |            |           |   |             |       |                  |   |          |            |           |   |   |          |         |   |   |            |           |  
|                                |                                                                                                                                                             |              |            |            |   |             |       |                   |   |          |            |            |   |   |          |          |   |   |            |           
|Balance as of December 31, 2005 |                                                                                                                                                             |              | 22,319,250 |            |   | $           | 2,232 |                   |   | $        | 54,398,471 |            |   | $ | (48,294  | )        |   | $ | 5,731,260  |           
|                                |                                                                                                                                                             |              |            |            |   |             |       |                   |   |          |            |            |   |   |          |          |   |   |            |           

45



---



##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)

AND COMPREHENSIVE INCOME  (Continued)


|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                  |       |        |   |   |         |        |  |   |            |            |  
|------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ------------- | - | -------------- | ---------- | ------------- | - | ---------------- | ----- | ------ | - | - | ------- | ------ |  | - | ---------- | ---------- | -
|                                |                                                                                                                                                             |              |            | Accumulated   |   |                |            |               |   |                 
|                                |                                                                                                                                                             | Notes        |            | Other         |   |                |            |              
|                                |                                                                                                                                                             | Receivable   |            | Comprehensive |   | Treasury Stock |            | Total        
|                                |                                                                                                                                                             | from         |            | Income        |   |                |            | Stockholders
|                                |                                                                                                                                                             | Stockholders |            | (Loss)        |   | Shares         |            | Amount        |   | Equity (Deficit)
|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                 
|Balance as of January 1, 2003   |                                                                                                                                                             |              | (3,176,795 | )             |   |                | (641,717   | )             |   |                  | 7,040 |        |   |   | (25,344 | )      |  |   | (8,248,455 | )         
|                               
|                               
|                               
|                               
|                                | Compensation expense from remeasurement of stock
    options                                                                                                |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 72,593     |  
|                               
|                               
|                               
|                               
|                                | Notes receivable from stockholders of Stratagene                                                                                                            |              |            | (179,514      | ) |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (179,514   | )
|                               
|                               
|                               
|                               
|                                | Distributions paid to BCH members                                                                                                                           |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (544,707   | )
|                               
|                               
|                               
|                               
|                                | Net income                                                                                                                                                  |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 3,252,138  |  
|                               
|                               
|                               
|                               
|                                | Foreign currency translation                                                                                                                                |              |            |              |   |                |            | (298,797      | ) |                  |       |       |   |   |         |       |  |   |            | (298,797   | )
|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                  |       |        |   |   |         |        |  |   |            |           
|                                | Comprehensive income                                                                                                                                        |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 2,953,341  |  
|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                  |       |        |   |   |         |        |  |   |            |           
|Balance as of December 31, 2003 |                                                                                                                                                             |              | (3,356,309 | )             |   |                | (940,514   | )             |   |                  | 7,040 |        |   |   | (25,344 | )      |  |   | (5,946,742 | )         
|                               
|                               
|                               
|                               
|                                | Retirement of treasury stock                                                                                                                                |              |            |              |   |                |            |              |   |                  |       | (7,040 | ) |   |         | 25,344 |  |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Fair value of common shares issued resulting from
    Hycor merger, plus value attributed to Hycor options assumed,
    less registration costs of $105,234 |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 43,867,610 |  
|                               
|                               
|                               
|                               
|                                | Intrinsic value assigned to unvested options
    acquired in the Hycor merger                                                                               |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (781,622   | )
|                               
|                               
|                               
|                               
|                                | Amortization of unvested options acquired in the
    Hycor merger                                                                                           |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 332,326    |  
|                               
|                               
|                               
|                               
|                                | Common stock issued from conversion of
    subordinated debt                                                                                                |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 9,180,000  |  
|                               
|                               
|                               
|                               
|                                | Common stock issued to an officer                                                                                                                           |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Common stock issued for employee stock purchase
    plan                                                                                                    |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 157,022    |  
|                               
|                               
|                               
|                               
|                                | Common stock issued upon exercise of stock options                                                                                                          |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 176,297    |  
|                               
|                               
|                               
|                               
|                                | Tax benefit received from the exercise of stock
    options                                                                                                 |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 89,009     |  
|                               
|                               
|                               
|                               
|                                | Redemption of common stock for outstanding notes
    receivable from officers                                                                               |              |            | 3,289,181     |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (115,746   | )
|                               
|                               
|                               
|                               
|                                | Redemption of common stock for outstanding notes
    receivable from affiliates                                                                             |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (276,878   | )
|                               
|                               
|                               
|                               
|                                | Compensation expense from remeasurement of stock
    options                                                                                                |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 101,172    |  
|                               
|                               
|                               
|                               
|                                | Compensation expense for non-employee stock
    options                                                                                                     |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 357,171    |  
|                               
|                               
|                               
|                               
|                                | Interest accretion on notes receivable from
    stockholders of Stratagene                                                                                  |              |            | (83,132       | ) |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (83,132    | )
|                               
|                               
|                               
|                               
|                                | Payment in full of notes receivable from
    stockholders of Stratagene                                                                                     |              |            | 150,260       |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 150,260    |  
|                               
|                               
|                               
|                               
|                                | Distributions paid to BCH members                                                                                                                           |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (476,280   | )
|                               
|                               
|                               
|                               
|                                | Deferred tax asset applicable to asset
    acquisition of BCH                                                                                               |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 874,495    |  
|                               
|                               
|                               
|                               
|                                | Redemption of interests from BCH members                                                                                                                    |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (7,378     | )
|                               
|                               
|                               
|                               
|                                | Net income                                                                                                                                                  |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 7,438,431  |  
|                               
|                               
|                               
|                               
|                                | Foreign currency translation                                                                                                                                |              |            |              |   |                |            | 124,019       |   |                  |       |       |   |   |         |       |  |   |            | 124,019    |  
|                               
|                               
|                               
|                               
|                                | Unrealized gain on securities                                                                                                                               |              |            |              |   |                |            | 150           |   |                  |       |       |   |   |         |       |  |   |            | 150        |  
|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                  |       |        |   |   |         |        |  |   |            |           
|                                | Comprehensive income                                                                                                                                        |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 7,562,600  |  
|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                  |       |        |   |   |         |        |  |   |            |           
|Balance as of December 31, 2004 |                                                                                                                                                             | $            |           |               |   | $              | (816,345   | )             |   |                  |      |        |   | $ |        |        |  | $ | 55,160,184 |           
|                               
|                               
|                               
|                               
|                                | Adjustment to deferred tax asset applicable to
    asset acquisition of BCH                                                                                 |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (514,403   | )
|                               
|                               
|                               
|                               
|                                | Amortization of unvested options acquired in the
    Hycor merger                                                                                           |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 303,030    |  
|                               
|                               
|                               
|                               
|                                | Adjustment to stock-based compensation for
    terminated employees                                                                                         |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            |           |  
|                               
|                               
|                               
|                               
|                                | Common stock issued for employee stock purchase
    plan                                                                                                    |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 374,907    |  
|                               
|                               
|                               
|                               
|                                | Common stock issued upon exercise of stock options                                                                                                          |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 1,124,807  |  
|                               
|                               
|                               
|                               
|                                | Tax benefit received from the exercise of stock
    options                                                                                                 |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 415,294    |  
|                               
|                               
|                               
|                               
|                                | Compensation expense for non-employee stock
    options                                                                                                     |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 187,056    |  
|                               
|                               
|                               
|                               
|                                | Dividend payable to stockholders                                                                                                                            |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | (5,571,321 | )
|                               
|                               
|                               
|                               
|                                | Net income                                                                                                                                                  |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 7,787,770  |  
|                               
|                               
|                               
|                               
|                                | Foreign currency translation                                                                                                                                |              |            |              |   |                |            | (776,948      | ) |                  |       |       |   |   |         |       |  |   |            | (776,948   | )
|                               
|                               
|                               
|                               
|                                | Unrealized gain on securities                                                                                                                               |              |            |              |   |                |            | (150          | ) |                  |       |       |   |   |         |       |  |   |            | (150       | )
|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                  |       |        |   |   |         |        |  |   |            |           
|                                | Comprehensive income                                                                                                                                        |              |            |              |   |                |            |              |   |                  |       |       |   |   |         |       |  |   |            | 7,010,672  |  
|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                  |       |        |   |   |         |        |  |   |            |           
|Balance as of December 31, 2005 |                                                                                                                                                             | $            |           |               |   | $              | (1,593,443 | )             |   |                  |      |        |   | $ |        |        |  | $ | 58,490,226 |           
|                                |                                                                                                                                                             |              |            |               |   |                |            |               |   |                  |       |        |   |   |         |        |  |   |            |           

See accompanying notes to consolidated financial statements.

46



---



##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |            |           |            |            |  
|----------------------------------------------------- | ------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ------------------------------------------------------- | ---------- | ---------- | ---------- | ----------- | ---------- | ---------- | ----------- | ---------- | --------- | ---------- | ---------- | -
|                                                      |                                                                                       |                                                                                                                                                         
|                                                      |                                                                                       | Years Ended December 31,                                                                                                                                
|                                                      |                                                                                       |                                                                                                                                                         
|                                                      |                                                                                       | 2005                                                                                                                                                     |                                           | 2004                                                    |            | 2003      
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |           
|Cash flows from operating
    activities:             |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Net income                                                                            |                                                                                                                                                          | $                                         | 7,787,770                                               |            |            | $          | 7,438,431   |            |            | $           | 3,252,138  |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |            |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Depreciation and amortization                                                                                                                            |                                           |                                                         | 3,576,305  |            |            |             | 3,240,721  |            |             |            | 2,715,611 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Stock-based compensation                                                                                                                                 |                                           |                                                         | 453,533    |            |            |             | 903,236    |            |             |            | 72,593    |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Equity in (income) loss of joint venture                                                                                                                 |                                           |                                                         |           |            |            |             | (1,787,902 | )          |             |            | 246,118   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Impairment of long-lived assets                                                                                                                          |                                           |                                                         | 62,033     |            |            |             | 82,446     |            |             |            | 131,250   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Bad debt expense                                                                                                                                         |                                           |                                                         | 53,357     |            |            |             | (295,809   | )          |             |            | 323,116   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Excess and obsolete inventory expense                                                                                                                    |                                           |                                                         | 746,324    |            |            |             | (395,462   | )          |             |            | 721,442   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Loss on redemption of partnership interest                                                                                                               |                                           |                                                         |           |            |            |             | 242,959    |            |             |            |          |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Loss on disposal of assets                                                                                                                               |                                           |                                                         | 10,053     |            |            |             | 13,979     |            |             |            | 19,037    |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Interest accrued on notes receivable from
    stockholders                                                                                               |                                           |                                                         |           |            |            |             | (83,134    | )          |             |            | (179,514  | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Accretion of interest on long-term debt                                                                                                                  |                                           |                                                         |           |            |            |             | 740,842    |            |             |            | 3,236,143 |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Deferred income taxes                                                                                                                                    |                                           |                                                         | (6,169,860 | )          |            |             | 476,646    |            |             |            | 548,473   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Changes in assets and liabilities (net of impact
    of merger with Hycor):                                                                              |                                           |                                                         |            |            |            |             |            |            |             |            |           |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Foreign currency exchange contracts       |                                                         |            |           |            |             |            | 205,110    |             |            |           | 28,299     |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Accounts receivable                       |                                                         |            | (1,033,139 | )          |             |            | 937,805    |             |            |           | (1,925,063 | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Inventories                               |                                                         |            | (1,335,844 | )          |             |            | 8,852      |             |            |           | (1,681,098 | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Prepaid expenses and other current assets |                                                         |            | (508,478   | )          |             |            | 1,464,657  |             |            |           | (1,275,047 | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Due from related party                    |                                                         |            |           |            |             |            | 96,642     |             |            |           | (108,418   | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Due to related party                      |                                                         |            |           |            |             |            | 451,630    |             |            |           |           |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Income taxes receivable                   |                                                         |            | (1,250,605 | )          |             |            | (4,680     | )           |            |           | (93,804    | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Other assets                              |                                                         |            | 137,181    |            |             |            | 195,929    |             |            |           | (14,508    | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Accounts payable                          |                                                         |            | 1,514,647  |            |             |            | (1,392,321 | )           |            |           | 939,904    |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Accrued expenses and other liabilities    |                                                         |            | 33,091,382 |            |             |            | 442,296    |             |            |           | 1,438,277  |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Deferred revenue                          |                                                         |            | (352,824   | )          |             |            | (73,926    | )           |            |           | (193,020   | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Deferred compensation to employees        |                                                         |            |           |            |             |            | (268,200   | )           |            |           | (1,062,980 | )         
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Other liabilities                         |                                                         |            | 282,287    |            |             |            |           |             |            |           |           |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       |                                                                                                                                                          | Income taxes payable                      |                                                         |            | (240,745   | )          |             |            | (1,727,563 | )           |            |           | 554,429    |           
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                      |                                                                                       |                                                                                                                                                          |                                           | Net cash provided by operating activities               |            |            | 36,823,377 |             |            |            | 10,913,184  |            |           |            | 7,693,378  |  
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|Cash flows from investing
    activities:             |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Purchases of property and equipment                                                   |                                                                                                                                                          |                                           | (1,544,746                                              | )          |            |            | (1,796,755  | )          |            |             | (1,319,768 | )        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Additions to intangible assets                                                        |                                                                                                                                                          |                                           | (1,479,724                                              | )          |            |            | (1,309,391  | )          |            |             | (1,047,814 | )        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash acquired in merger, net of acquisition costs                                     |                                                                                                                                                          |                                           |                                                        |            |            |            | 4,520,153   |            |            |             |           |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from maturities of marketable debt
    securities                            |                                                                                                                                                          |                                           | 195,000                                                 |            |            |            | 699,847     |            |            |             |           |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from sales of property and equipment                                         |                                                                                                                                                          |                                           | 21,592                                                  |            |            |            |            |            |            |             |           |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Redemption of BCH member interests                                                    |                                                                                                                                                          |                                           |                                                        |            |            |            | (7,378      | )          |            |             |           |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Changes in restricted cash                                                            |                                                                                                                                                          |                                           | 390,607                                                 |            |            |            | (28,878     | )          |            |             | 19,117     |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash distributions from joint venture                                                 |                                                                                                                                                          |                                           |                                                        |            |            |            | 2,012,052   |            |            |             |           |          
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                      |                                                                                       |                                                                                                                                                          |                                           | Net cash provided by (used in) investing
    activities |            |            | (2,417,271 | )           |            |            | 4,089,650   |            |           |            | (2,348,465 | )
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|Cash flows from financing
    activities:             |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Principal payments on long-term debt                                                  |                                                                                                                                                          |                                           | (735,000                                                | )          |            |            | (23,203,760 | )          |            |             | (4,071,616 | )        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Issuance of long-term debt                                                            |                                                                                                                                                          |                                           |                                                        |            |            |            | 6,000,000   |            |            |             | 748,342    |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Borrowings under line of credit                                                       |                                                                                                                                                          |                                           | 5,546,620                                               |            |            |            | 11,977,647  |            |            |             | 900,000    |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Payments under line of credit                                                         |                                                                                                                                                          |                                           | (5,003,544                                              | )          |            |            | (7,040,724  | )          |            |             | (900,000   | )        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Distributions to BCH members                                                          |                                                                                                                                                          |                                           |                                                        |            |            |            | (476,280    | )          |            |             | (544,707   | )        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Proceeds from issuance of common stock                                                |                                                                                                                                                          |                                           | 1,499,715                                               |            |            |            | 176,283     |            |            |             |           |          
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                      |                                                                                       |                                                                                                                                                          |                                           | Net cash provided by (used in) financing
    activities |            |            | 1,307,791  |             |            |            | (12,566,834 | )          |           |            | (3,867,981 | )
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Effects of foreign currency exchange rates on cash                                    |                                                                                                                                                          |                                           | (95,990                                                 | )          |            |            | 450,696     |            |            |             | (681,062   | )        
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                      |                                                                                       |                                                                                                                                                          |                                           | Net increase in cash and cash equivalents               |            |            | 35,617,907 |             |            |            | 2,886,696   |            |           |            | 795,870    |  
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash and cash equivalents at beginning of period                                      |                                                                                                                                                          |                                           | 4,890,458                                               |            |            |            | 2,003,762   |            |            |             | 1,207,892  |          
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                      | Cash and cash equivalents at end of period                                            |                                                                                                                                                          | $                                         | 40,508,365                                              |            |            | $          | 4,890,458   |            |            | $           | 2,003,762  |          
|                                                      |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|Supplemental disclosure of cash flow
    information: |                                                                                       |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cash paid during the period for:                                                      |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |            |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Interest                                                                              |                                                                                                                                                          | $                                         | 168,473                                                 |            |            | $          | 1,350,652   |            |            | $           | 2,106,371  |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Income taxes                                                                                                                                             |                                           | $                                                       | 11,369,769 |            |            | $           | 4,067,514  |            |             | $          | 876,446   |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Non-cash financing and investing activities:                                          |                                                                                                                                                          |                                           |                                                         |            |            |            |             |            |            |             |            |          
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Shares of common stock issued in exchange for the
    outstanding shares of Hycor and fair value of $3,331,223
    assigned to the Hycor options assumed |                                           | $                                                       |           |            |            | $           | 43,972,844 |            |             | $          |          |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Shares of common stock issued with respect to the
    conversion of outstanding debt                                                                     |                                           | $                                                       |           |            |            | $           | 9,180,000  |            |             | $          |          |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Redemption of common stock for outstanding notes
    receivable from stockholders                                                                        |                                           | $                                                       |           |            |            | $           | (3,681,805 | )          |             | $          |          |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Deferred taxes recorded in connection with BCH
    asset purchase                                                                                        |                                           | $                                                       | (514,403   | )          |            | $           | 874,495    |            |             | $          |          |           
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      |                                                                                       | Dividends declared but not paid                                                                                                                          |                                           | $                                                       | 5,571,321  |            |            | $           |           |            |             | $          |          |           

See accompanying notes to consolidated financial statements.

47



---



##### Table of Contents






STRATAGENE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2005, 2004 and 2003




|   |                             
|-- | ----------------------------
|1. | The Company and Its Business

Description of Business  Stratagene
Corporation (Stratagene or the Company)
develops and manufactures biological products, instruments, and
software designed to improve the speed and accuracy of life
sciences research and clinical diagnosis. Stratagene markets its
products to researchers and clinicians in clinical laboratories
and academic, hospital and government institutions, as well as
to scientists in pharmaceutical and biotechnology companies, in
the U.S. and internationally. Scientist and clinicians use
Stratagenes products to identify genes and proteins, study
how cells are regulated by genes and proteins, determine the
molecular mechanisms of health and disease, search for new drug
therapies, and develop diagnostic tests.

Stratagene engages in business activity in two operating
segments: Research Supplies and Clinical Diagnostics. The
Company has marketed and sold its Research Supplies products for
over 20 years, while the Clinical Diagnostics products are
a new addition to Stratagenes product portfolio as a
result of a merger with Hycor Biomedical Inc. in June 2004. (See
Note 3)

Basis of Presentation  The financial
information of the Company has been presented on a consolidated
basis, and includes the results of operations of Hycor
Biomedical Inc. and subsidiaries (Hycor) since Hycor
was acquired by the Company on June 2, 2004. The financial
information also includes the results of operations of BioCrest
Holdings, L.L.C. (BCH), whose assets were acquired
by the Company on June 2, 2004. Prior to the acquisition,
BCH was under common control with Stratagene, and substantially
all of the BCH membership units were held by certain Stratagene
shareholders. The acquisition of the BCH assets has been
presented as a change in reporting entity. Accordingly, the
financial statements of Stratagene and BCH are presented on a
consolidated basis for all periods. (See Note 3.) On
February 9, 2006, the Company dissolved BCH.



|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies

Principles of Consolidation  The consolidated
financial statements of Stratagene include the accounts of
Stratagene Corporation and all of its wholly owned subsidiaries.
Intercompany balances and transactions have been eliminated as
appropriate in the consolidation of Stratagene.

Use of Estimates  The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements and disclosures made in
the accompanying notes. Actual results could differ from those
estimates.

Cash and cash equivalents  Stratagene
considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.

Restricted Cash  Restricted cash totaled
$192,388 and $582,995 at December 31, 2005 and 2004,
respectively. Total interest earned on restricted cash was
$5,014, $2,623 and $3,398 for the years ended December 31,
2005, 2004 and 2003, respectively. Restricted cash deposits
relate to the sinking fund payments required under the
reimbursement agreement relating to the Bastrop County bonds.
The Company makes monthly deposits into the sinking fund
account. Each April, the sinking fund deposits are then used to
make the required annual payment. Annual payments of $870,000
were required through April 2004 and an annual payment of
$735,000 was required in April 2005, reducing to $240,000
annually through April 2021 and to $175,000 in April 2022 when
the bonds mature.

Marketable Securities  Stratagene accounts for
marketable securities pursuant to Statement of Financial
Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. At December 31, 2004, marketable debt
securities have been categorized as available for sale and, as a
result, are stated at fair value. Marketable debt securities are
available for current operations and are

48



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

classified in the consolidated balance sheet as current assets.
Unrealized holding gains and losses are included as a component
of accumulated other comprehensive income (loss), net of tax,
until realized.

Accounts Receivable  The Company performs
ongoing credit evaluations of its customers and adjusts credit
limits based upon payment history and the customers
current creditworthiness. The Company regularly monitors
collections and payments from customers and maintains a
provision for estimated credit losses based upon historical
experience and any specific customer collection issues that have
been identified. The Companys credit losses have
historically been within expectations and the provisions
established.

Inventories  Inventories consist primarily of
biological products and instruments and are stated at the lower
of cost or market. Cost is determined on a first-in, first-out
basis. Stratagene regularly reviews inventory quantities on hand
and records a provision for excess and obsolete inventory on
specifically identified items based primarily on an estimated
forecast of product demand and production requirements.
Stratagenes losses from disposal of excess and obsolete
inventories have historically been within expectations and the
provisions established.

Inventories include the following at December 31,

|                           |       |      |           |            |  |   |           |            | 
|-------------------------- | ----- | ---- | --------- | ---------- |  | - | --------- | ---------- | 
|                           |       | 2005 |           | 2004      
|                           |       |      |           |           
|Raw materials and supplies |       | $    | 4,955,062 |            |  | $ | 5,710,213 |           
|                          
|                          
|                          
|                          
|Work-in-process            |       |      | 3,854,153 |            |  |   | 3,067,593 |           
|                          
|                          
|                          
|                          
|Finished goods             |       |      | 4,440,600 |            |  |   | 4,209,104 |           
|                           |       |      |           |            |  |   |           |           
|                           | Total |      | $         | 13,249,815 |  |   | $         | 12,986,910 | 
|                           |       |      |           |            |  |   |           |           

Research and Development Costs  Research and
development costs are expensed in the period incurred.

Property and Equipment  Property and equipment
are stated at cost. Depreciation of furniture and equipment and
vehicles is calculated using the straight-line method based upon
an estimated useful life of three to five years. Buildings are
depreciated over 25 years using the straight-line method.
Leasehold improvements are amortized using the straight-line
method over the shorter of the lease term or estimated useful
life of the asset, generally five years.

Property and equipment are summarized as follows:

|                                               |  |      |             |      |  |   |             |  
|---------------------------------------------- |  | ---- | ----------- | ---- |  | - | ----------- | -
|                                               |  | 2005 |             | 2004
|                                               |  |      |             |     
|Land                                           |  | $    | 607,890     |      |  | $ | 607,890     |  
|                                              
|                                              
|                                              
|                                              
|Building                                       |  |      | 8,772,090   |      |  |   | 8,749,192   |  
|                                              
|                                              
|                                              
|                                              
|Furniture and equipment                        |  |      | 14,867,943  |      |  |   | 13,891,305  |  
|                                              
|                                              
|                                              
|                                              
|Leasehold improvements                         |  |      | 1,247,965   |      |  |   | 821,344     |  
|                                              
|                                              
|                                              
|                                              
|Vehicles                                       |  |      | 171,717     |      |  |   | 184,702     |  
|                                              
|                                              
|                                              
|                                              
|Construction in process                        |  |      | 19,361      |      |  |   | 333,475     |  
|                                               |  |      |             |      |  |   |             |  
|                                               |  |      | 25,686,966  |      |  |   | 24,587,908  |  
|                                              
|                                              
|                                              
|                                              
|Less accumulated depreciation and amortization |  |      | (14,420,027 | )    |  |   | (12,475,951 | )
|                                               |  |      |             |      |  |   |             |  
|Total                                          |  | $    | 11,266,939  |      |  | $ | 12,111,957  |  
|                                               |  |      |             |      |  |   |             |  

Depreciation expense totaled approximately $2,277,000,
$2,304,000, and $2,211,000 for the twelve months ended
December 31, 2005, 2004, and 2003, respectively.

49



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Intangibles  Intangible assets include
long-lived assets associated with the merger with Hycor in June
2004. Intangibles also include costs incurred in connection with
patent applications, consisting principally of legal fees.
Amortization is calculated using the straight-line method over
the estimated useful lives of the patents, generally seven
years. Amortization expense totaled $1,272,029, $875,967, and
$359,419 for the years ended December 31, 2005, 2004 and
2003, respectively.

Revenue Recognition  Revenue from biological
products and basic instrumentation products is recognized under
the provisions of SAB No. 104, Revenue
Recognition, which is generally when products are shipped,
title has transferred and risk of loss has passed. In accordance
with SOP No. 97-2, Software Revenue Recognition, as
amended by SOP No. 98-9, for instrumentation products where
software is considered more than incidental to the product,
revenue is recognized when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or
determinable and collectibility is probable. Generally, these
criteria are met at the time product is shipped and title has
transferred. When contractual acceptance clauses exist, revenue
is recognized upon satisfaction of such clauses. Contract
research service revenues are earned and recognized in
accordance with contract provisions. Amounts received in advance
of performance or acceptance are recorded as deferred revenue.

The following table summarizes the types of deferred revenue and
the timing of when that revenue is recognized:

|                                                |  |                                                                                                                                                                                                                                                      
|----------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Type of Deferred Revenue                        |  | When Recognized                                                                                                                                                                                                                                      
|                                                |  |                                                                                                                                                                                                                                                      
|                                               
|                                               
|                                               
|                                               
|Extended warranty or maintenance
    agreements |  | Recognized over the term of the contract,
    generally 12 months. In most cases, these contracts were
    sold at the time of product purchase and the recognition of
    revenue begins after the warranty period, which is generally one
    year.
|                                               
|                                               
|                                               
|                                               
|License agreements                              |  | Recognized over the term of the agreement,
    generally 12 months                                                                                                                                                                                   

The following table provides the percentage of the ending
balance in deferred revenue that each type of deferred revenue
represents as of December 31 for each year presented:

|                                                             |  |      |     |      |  |  |     |  
|------------------------------------------------------------ |  | ---- | --- | ---- |  |  | --- | -
|Type of Deferred Revenue                                     |  | 2005 |     | 2004
|                                                             |  |      |     |     
|Extended warranty, installation or maintenance
    agreement |  |      | 59  | %    |  |  | 49  | %
|                                                            
|                                                            
|                                                            
|                                                            
|License agreements                                           |  |      | 41  | %    |  |  | 51  | %
|                                                             |  |      |     |      |  |  |     |  
|Total deferred revenue                                       |  |      | 100 | %    |  |  | 100 | %
|                                                             |  |      |     |      |  |  |     |  

Warranty  The Company warrants certain
equipment against defects in workmanship or materials for a
period of one year from the date of purchase. Upon shipment of
equipment sold that includes a warranty, the Company
establishes, as part of cost of products sold, a provision for
the expected costs of such warranty.

Accrued warranty activity for the years ended December 31,
2005 and 2004 is as follows:

|                               |  |      |          |      |  |   |          |  
|------------------------------ |  | ---- | -------- | ---- |  | - | -------- | -
|                               |  | 2005 |          | 2004
|                               |  |      |          |     
|Balance at beginning of year   |  | $    | 333,277  |      |  | $ | 596,788  |  
|                              
|                              
|                              
|                              
|Charged to costs and expenses  |  |      | 444,461  |      |  |   | 540,185  |  
|                              
|                              
|                              
|                              
|Reductions of accrued warranty |  |      | (544,439 | )    |  |   | (803,696 | )
|                               |  |      |          |      |  |   |          |  
|Balance at end of year         |  | $    | 233,299  |      |  | $ | 333,277  |  
|                               |  |      |          |      |  |   |          |  

50



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Income Taxes  Stratagene and its subsidiaries
record income taxes using the asset and liability method of
accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in operations in the period that includes the
enactment date.

Historically, BCH consisted of limited liability companies that
were treated as partnerships for income tax purposes; therefore,
any related income tax liabilities were the responsibility of
the members. As a result, the operations of BCH did not reflect
a provision for income taxes until these limited liability
companies were acquired when Stratagene acquired the assets of
BCH in June 2004. Since June 2004, income taxes have been
recorded based on the net income or loss of the limited
liability companies.

Foreign Currency Translation/ Transaction  The
accounts of foreign subsidiaries and affiliates of the Company
are measured using the local currency as the functional
currency. For these operations, assets and liabilities are
translated into U.S. dollars at period-end exchange rates,
and income and expense accounts are translated at average
monthly exchange rates. Net translation gains or losses are
excluded from net income and reflected in accumulated other
comprehensive income (loss) in the accompanying consolidated
balance sheets. Realized gains or losses from foreign currency
transactions are included in operations as incurred.

Derivative Financial Instruments  As part of
distributing its products, the Company regularly enters into
intercompany transactions with its foreign subsidiaries. The
Companys currency exposures vary, but are primarily
concentrated in the Euro, British Pound, Swiss Franc and
Japanese Yen. In the past, the Company periodically entered into
foreign currency exchange futures contracts to mitigate foreign
currency risk on its European revenues. The Company managed its
exposure over a maximum of twelve months. All futures contracts
entered into for fiscal year 2004 were settled by year end, and
the Company had no pending futures contracts outstanding as of
December 31, 2005 and 2004.

In the past, the Companys derivative instruments have not
qualified for hedge accounting in accordance with
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended
(SFAS No. 133). Accordingly, both
unrealized and realized gains or losses resulting from changes
in fair value are recognized as incurred in gain (loss) on
foreign currency transactions in the current period statement of
operations. The Company does not enter into derivative
instruments for trading or speculative purposes.

Fair Value of Financial Instruments  The
carrying amounts of cash, restricted cash, accounts receivable,
other current assets, accounts payable, other current
liabilities, and line of credit are considered to be
representative of their respective fair values because of the
short-term nature of these financial instruments. The carrying
amount of the long-term debt is a reasonable estimate of fair
value, as the loans have terms based on market rates.

Impairment of Long-Lived Assets  The Company
accounts for long-lived assets in accordance with the provisions
of SFAS No. 142, Goodwill and Intangibles, and
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. These Statements require that
long-lived assets and certain identifiable intangible assets
with finite lives be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Goodwill and non-amortizable
intangible assets are reviewed for impairment annually or
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to the future net
undiscounted cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair values of

51



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.

Accounting for Stock-Based Compensation  The
Company accounts for its stock-based compensation in accordance
with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, as amended, and Financial Accounting
Standards Board (FASB) Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation.

Pro forma information regarding net income is required by
Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-based Compensation,
and has been determined as if the Company had accounted for its
employee stock options under the fair value method of
SFAS No. 123. Under SFAS No. 123, the fair
value of stock-based awards to employees is calculated through
the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which
significantly differ from the Companys stock option
awards. The value of Stratagene employee stock options was
estimated at the dates of grant using the minimum value method
of SFAS No. 123 from the inception date of the
applicable stock option plan through June 2, 2004 and the
fair value method for all option grants made subsequent to that
date using the Black-Scholes pricing model. The fair value of
the Hycor employee stock options assumed by Stratagene in the
Hycor merger was estimated at the dates of grant using the
Black-Scholes pricing model for all option grants. For options
granted that have multiple cliff vesting periods, the Company
amortizes compensation cost using the graded vesting method
prescribed by FASB Interpretation No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option and
Award Plans. The following weighted average assumptions were
used for the years ended December 31, 2005, 2004 and 2003:

|                             |  |      |         |      |  |      |         |   |  |   |         |  
|---------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                             |  | 2005 |         | 2004 |  | 2003
|                             |  |      |         |      |  |     
|Risk free interest rate      |  |      | 4.0     | %    |  |      | 4.0     | % |  |   | 3.4     | %
|                            
|                            
|                            
|                            
|Dividend yield               |  |      | 0       | %    |  |      | 0       | % |  |   | 0       | %
|                            
|                            
|                            
|                            
|Volatility factor            |  |      | 45      | %    |  |      | 45      | % |  |   | 0       | %
|                            
|                            
|                            
|                            
|Expected life (in years)     |  |      | 6 years |      |  |      | 6 years |   |  |   | 6 years |  
|                            
|                            
|                            
|                            
|Resulting average fair value |  | $    | 3.40    |      |  | $    | 3.69    |   |  | $ | 0.00    |  

If the computed fair values of the stock options granted in
2005, 2004 and 2003 had been amortized to expense over the
vesting period of the awards, pro forma net income would have
been as follows:

|                                                                                                              |                       |                                  |            |      |  |      |           |      |  |   |           |      | 
|------------------------------------------------------------------------------------------------------------- | --------------------- | -------------------------------- | ---------- | ---- |  | ---- | --------- | ---- |  | - | --------- | ---- | 
|                                                                                                              |                       |                                 
|                                                                                                              |                       | Twelve Months Ended December 31,
|                                                                                                              |                       |                                 
|                                                                                                              |                       | 2005                             |            | 2004 |  | 2003
|                                                                                                              |                       |                                  |            |      |  |     
|Net income as reported                                                                                        |                       | $                                | 7,787,770  |      |  | $    | 7,438,431 |      |  | $ | 3,252,138 |     
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Stock-based employee compensation expense
    included in reported net income, net of related tax effects     |                       |                                  |           |      |  |      | 64,751    |      |  |   | 47,346    |     
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Stock-based compensation expense determined under
    SFAS No. 123 for all awards, net of related tax effects |                       |                                  | (2,331,204 | )    |  |      | (821,573  | )    |  |   | (4,917    | )   
|                                                                                                              |                       |                                  |            |      |  |      |           |      |  |   |           |     
|Pro forma net income                                                                                          |                       | $                                | 5,456,566  |      |  | $    | 6,681,609 |      |  | $ | 3,294,567 |     
|                                                                                                              |                       |                                  |            |      |  |      |           |      |  |   |           |     
|Earnings per common share:                                                                                    |                       |                                  |            |      |  |      |           |      |  |   |           |     
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Basic  as reported   |                                  | $          | 0.35 |  |      | $         | 0.39 |  |   | $         | 0.21 | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Basic  pro forma     |                                  | $          | 0.25 |  |      | $         | 0.35 |  |   | $         | 0.21 | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Diluted  as reported |                                  | $          | 0.35 |  |      | $         | 0.39 |  |   | $         | 0.21 | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                              | Diluted  pro forma   |                                  | $          | 0.25 |  |      | $         | 0.35 |  |   | $         | 0.21 | 

52



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The acceleration of certain outstanding employee stock options
in the first quarter of 2005 impacted the pro forma stock-based
compensation expense determined under SFAS No. 123
presented in the table above. On March 31, 2005, the
Compensation Committee of the Board of Directors of the Company
accelerated the vesting of certain unvested non-qualified stock
options previously awarded to the Companys executive
officers and other employees under the Companys Amended
and Restated Year 2000 Stock Option Plan that had an exercise
price greater than or equal to $8.05, the closing price of the
Companys common stock on the date preceding the
Compensation Committees action. Options to purchase
approximately 1.2 million shares of common stock (of which
approximately 905,000 shares were subject to options held
by executive officers) were subject to this acceleration.
Options held by non-employee directors and advisory board
members and incentive stock options were not
accelerated.

Because these options had exercise prices at or in excess of the
fair market value of the Companys common stock at the time
they were accelerated, and were not fully achieving their
original objectives of incentive compensation and employee
retention, the Company believes that the acceleration had a
positive effect on employee morale, retention and perception of
option value. The acceleration will eliminate any future
compensation expense the Company would otherwise recognize in
its income statement with respect to these options with the
implementation of SFAS No. 123(R), Share-Based
Payment, which becomes effective for the Companys
first quarterly reporting period in 2006. At the date of
acceleration of the options, management estimated that the
future expense that would be eliminated beginning in 2006 as a
result of the acceleration of the vesting of these options is
approximately $1.6 million, or approximately
$1.0 million net of tax, of which approximately
$1.2 million, or $775,000 net of tax, is attributable
to options held by executive officers. The option acceleration
did not result in compensation expense in the first quarter of
2005 under APB No. 25 and FASB Interpretation No. 44
because these options had exercise prices at or in excess of the
fair market value of the Companys common stock at the time
they were accelerated.

Charges for options granted to non-employees have been
determined in accordance with SFAS No. 123 and
Emerging Issues Task Force (EITF) No. 96-18,
Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, as the estimated fair value of the
consideration received or the estimated fair value of the equity
instruments issued, whichever is more reliably measured. The
fair value for these options is based on the Black-Scholes
pricing model using the assumptions described above. The Company
recognized $187,056, $357,171 and $25,235 of stock-based
compensation expense for years ended December 31, 2005,
2004 and 2003, respectively. The expense was recorded in
research and development expense. The total deferred charges for
options granted to non-employees are re-measured quarterly as
the underlying options vest and are included in additional
paid-in capital in the financial statements.

Segment Reporting  The Company currently
operates in two operating segments: Research Supplies and
Clinical Diagnostics.

Recent Accounting Pronouncements  In November
2004, the FASB issued SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4, to
clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage). SFAS No. 151 requires that such items be
recognized as current-period charges regardless of whether they
meet the so abnormal criterion outlined in
Accounting Research Bulletin (ARB) No. 43.
SFAS No. 151 also introduces the concept of
normal capacity and requires the allocation of fixed
production overhead to inventory based on the normal capacity of
the production facilities. Unallocated overhead must be
recognized as an expense in the period in which such costs are
incurred. SFAS No. 151 is effective for inventory
costs incurred during fiscal years beginning after June 15,
2005. The Company expects that the adoption of
SFAS No. 151 will not have a material impact on its
financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which will be effective for the
Companys first quarterly reporting period in 2006.
SFAS No. 123(R) replaces SFAS No. 123,

53



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accounting for Stock-Based Compensation, and supersedes
APB Opinion No. 25, Accounting for Stock Issued to
Employees. The new standard requires that the compensation
cost relating to share-based payments be recognized in financial
statements at fair value. As such, reporting employee stock
options under the intrinsic value-based method prescribed by APB
No. 25 will no longer be allowed. The Company has
historically elected to use the intrinsic value method and has
not recognized expense for employee stock options granted. The
Company expects that it will follow the modified prospective
method in the application of the new standard and that it will
follow the Black-Scholes option pricing model. The effect on
earnings after tax from the amortization of existing outstanding
unvested options is expected to be approximately $295,000 in
2006, $157,000 in 2007, $73,000 in 2008, and $21,000 in 2009.

In March 2005, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 107 to provide public companies
additional guidance in applying the provisions of
SFAS No. 123(R). Among other things,
SAB No. 107 describes the staffs expectations in
determining the assumptions that underlie the fair value
estimates and discusses the interaction of
SFAS No. 123(R) with certain existing staff guidance.
SAB No. 107 should be applied upon the adoption of
SFAS No. 123(R).

In December 2004, the FASB staff issued FASB Staff Position
(FSP) SFAS No. 109-1, Application of
FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004, to provide guidance on
the application of SFAS No. 109 to the provision
within the American Jobs Creation Act of 2004 (the
Act) that provides tax relief to U.S. domestic
manufacturers. The FSP states that the manufacturers
deduction provided for under the Act should be accounted for as
a special deduction in accordance with SFAS No. 109
and not as a tax rate reduction. A special deduction is
accounted for by recording the benefit of the deduction in the
year in which it can be taken in the Companys tax return,
and not by adjusting deferred tax assets and liabilities in the
period of the Acts enactment (which would have been done
if the deduction on qualified production activities were treated
as a change in enacted tax rates). The FSP also reminds
companies that the special deduction should be considered by an
enterprise in (a) measuring deferred taxes when the
enterprise is subject to graduated tax rates and
(b) assessing whether a valuation allowance is necessary as
required by SFAS No. 109. The FSP was effective upon
issuance. In accordance with the FSP, the Company has recorded
the benefit of the tax deduction in the year in which the
deduction becomes available.

In December 2004, the FASB staff issued FSP
FAS No. 109-2, Accounting and Disclosure Guidance
for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004, to provide accounting
and disclosure guidance for the repatriation provisions included
in the Act. The Act introduced a special limited-time dividends
received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer. As a result, an issue has
arisen as to whether an enterprise should be allowed additional
time beyond the financial reporting period in which the Act was
enacted to evaluate the effects of the Act on its plan for
reinvestment or repatriation of foreign earnings for purposes of
applying SFAS No. 109. The FSP was effective upon
issuance. The adoption of FSP FAS No. 109-2 will not
have a material impact on the Companys results of
operations or financial position.

In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections.
SFAS No. 154 establishes retrospective application as
the required method for reporting a change in accounting
principle in the absence of explicit transition requirements
specific to the newly adopted accounting principle.
SFAS No. 154 also provides guidance for determining
whether retrospective application is impractical.
SFAS No. 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company does not expect that the
adoption of SFAS No. 154 will have a material impact
on its results of operations or financial position.

Reclassification  Certain reclassifications
have been made to conform prior period financial information to
the current presentation. Revenues for 2004 and 2003 have been
broken out into product sales and royalty revenue for
consistency with the current year presentation.

54



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                      
|-- | ---------------------
|3. | Business Combinations



| |             
| | ------------
| | Hycor Merger

On June 2, 2004, Stratagene acquired all of the outstanding
shares of Hycor through a merger of a wholly owned subsidiary of
Stratagene and Hycor, with Hycor surviving as a wholly owned
subsidiary of Stratagene. Hycor engages in researching,
developing, manufacturing and marketing clinical diagnostic
products throughout the United States and in many foreign
countries. The primary reasons for the merger were the following:



| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the combination of Stratagenes molecular diagnostics
    technology and Hycors Good Manufacturing Practice
    (GMP) approved facilities and U.S. Food and
    Drug Administration (FDA) experience allows the
    Company to enter the clinical diagnostics market;
|
| |  | potential growth from increased earnings and revenue;                                                                                                                                                                                                                     
|
| |  | expanded access to capital markets; and                                                                                                                                                                                                                                   
|
| |  | diversified customer base and product lines.                                                                                                                                                                                                                              

As a result of the merger, Hycors former shareholders
received 0.6158 of a share of Stratagene common stock in
exchange for each share of Hycor common stock, plus cash for
fractional shares. The fair value of the consideration exchanged
in the merger was calculated based upon the fair value of
Hycors publicly-traded common shares, as their fair value
was determined to be more clearly evident than that of
Stratagenes common shares. In accordance with Emerging
Issues Task Force (EITF) No. 99-12,
Determining the Measurement Date for the Market Price for an
Acquirer of Securities Issued in a Business Combination, the
market price was determined based on an average of the closing
prices of the Hycor stock for the trading days nearest
July 24, 2003, the date on which the merger agreement was
originally signed. Using the 0.6158 exchange ratio,
5,015,453 shares of Stratagene common stock were issued to
the former Hycor stockholders in connection with the merger and
655 fractional shares were redeemed through a cash payment by
Stratagene.

Stratagene also assumed each outstanding option to purchase
shares of Hycor common stock issued under the stock option plans
of Hycor, whether or not then exercisable, on substantially the
same terms and conditions as were applicable prior to the merger
date, except that



| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the options are now exercisable for shares of Stratagene common
    stock, and                                                                                                                                                 
|
| |  | the number of shares of Stratagene common stock that may be
    purchased are equal to the number of shares of Hycor common
    stock underlying the option multiplied by 0.6158, rounded down
    to the nearest whole number.

The stock option plans of Hycor included the following:



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | the Hycor Biomedical Inc. 2001 Stock Option Plan;                                                   
|
| |  | the Hycor Biomedical Inc. 1992 Incentive Stock Plan; and                                            
|
| |  | the Hycor Biomedical Inc. Nonqualified Stock Option Plan for
    Non-Employee Directors, as amended.

The exercise price per share for the Stratagene common stock
issuable under each Hycor option equals the per share exercise
price of the Hycor common stock purchasable under the Hycor
option divided by the exchange ratio of 0.6158, rounded up to
the nearest whole cent.

Stratagene has reserved for issuance a number of shares of
Stratagene common stock at least equal to the number of shares
of Stratagene common stock that are issuable upon the exercise
of options assumed by Stratagene in connection with the Hycor
merger. Stratagene assumed options to purchase an aggregate of
756,822 shares of Stratagene common stock in connection
with the merger.

55



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The total purchase consideration for the acquisition of Hycor
was $45,714,053, based on the following components:

|                        |                                                                                |                              |   |            |            | 
|----------------------- | ------------------------------------------------------------------------------ | ---------------------------- | - | ---------- | ---------- | 
|                       
|                       
|                       
|                       
|Purchase consideration: |                                                                                |                              |   |           
|                       
|                       
|                       
|                       
|                        | Fair value of 5,015,453 Stratagene common shares
    issued at $8.10 per share |                              | $ | 40,641,622 |           
|                       
|                       
|                       
|                       
|                        | Fair value of Hycor fractional shares acquired
    with cash                   |                              |   | 6,120      |           
|                       
|                       
|                       
|                       
|                        | Fair value of Hycor common stock options assumed                               |                              |   | 3,331,223  |           
|                       
|                       
|                       
|                       
|                        | Merger related costs                                                           |                              |   | 1,735,088  |           
|                        |                                                                                |                              |   |           
|                        |                                                                                | Total purchase consideration |   | $          | 45,714,053 | 
|                        |                                                                                |                              |   |           

The following represents an allocation of the purchase price to
the acquired assets and the assumed liabilities of Hycor.
Stratagene considered a number of factors in determining the
allocation of the purchase price, including the results of a
third-party valuation. Stratagene completed its final analysis
of the purchase price allocation related to the Hycor merger in
the fourth quarter of 2004 and recorded an adjustment to
increase deferred tax assets by $619,509 based on the completion
of the tax returns as of the merger date. The offset of $619,509
was reflected in goodwill. The purchase was a non-taxable
transaction and accordingly, no goodwill was established for tax
purposes.

|                           |                                                                          |                           |   |            |            |  
|-------------------------- | ------------------------------------------------------------------------ | ------------------------- | - | ---------- | ---------- | -
|                          
|                          
|                          
|                          
|Purchase price allocation: |                                                                          |                           |   |           
|                          
|                          
|                          
|                          
|                           | Current assets                                                           |                           | $ | 15,631,593 |           
|                          
|                          
|                          
|                          
|                           | Property and equipment                                                   |                           |   | 2,269,676  |           
|                          
|                          
|                          
|                          
|                           | Goodwill                                                                 |                           |   | 27,234,214 |           
|                          
|                          
|                          
|                          
|                           | Other non-amortizable intangible assets                                  |                           |   | 1,575,000  |           
|                          
|                          
|                          
|                          
|                           | Amortizable intangible assets                                            |                           |   | 1,669,000  |           
|                          
|                          
|                          
|                          
|                           | Unearned stock-based compensation for unvested
    stock options assumed |                           |   | 781,622    |           
|                          
|                          
|                          
|                          
|                           | Deferred tax assets, net                                                 |                           |   | 1,024,239  |           
|                           |                                                                          |                           |   |           
|                           |                                                                          | Total assets acquired     |   |            | 50,185,344 |  
|                          
|                          
|                          
|                          
|                           |                                                                          | Total liabilities assumed |   |            | (4,471,291 | )
|                           |                                                                          |                           |   |           
|                           |                                                                          | Net assets acquired       |   | $          | 45,714,053 |  
|                           |                                                                          |                           |   |           

Goodwill represents the excess of the purchase price over the
fair value of the tangible and identifiable intangible assets.
The other non-amortizable intangible assets represent $1,575,000
for a trade name with an indefinite life. The amortizable
intangible assets include $480,000 for patents and trademarks,
which will be amortized over 1 to 5 years, and $1,189,000
for contractually based customer relationships, which will be
amortized over 1 to 5 years.

Unearned stock-based compensation for unvested Hycor stock
options assumed is the sum of the intrinsic value of each
unvested stock option assumed by Stratagene in the merger with
Hycor. The unvested portion of the assumed options will be
amortized over the remaining vesting period using the graded
vesting method prescribed under FASB Interpretation
(FIN) No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans.

In connection with the merger, the following events occurred on
June 2, 2004:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stratagene forgave $390,000 of the shareholder note receivable
    due to Stratagene by Dr. Joseph A. Sorge,
    Stratagenes Chief Executive Officer
    (Dr. Sorge), and paid the income taxes related
    to the forgiveness, which resulted in a charge to Stratagene of
    $650,000. This forgiveness was applied to reduce
    Dr. Sorges note receivable to the Company, which was
    $3,351,311 at June 2, 2004, including interest.
    Dr. Sorge satisfied the remaining portion of his
    shareholder note receivable on June 2, 2004 by

56



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | tendering an aggregate of 524,160 shares of common stock to
    Stratagene at a price of approximately $6.50 per share. The
    share price was based on Hycors stock price of
    approximately $4.00 at the time Stratagene and Hycor agreed on
    the repurchase, adjusted for the exchange ratio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In addition, another shareholder paid off the balance of her
    note, which was $276,877 at June 2, 2004, including
    interest, by tendering 42,623 shares of common stock to
    Stratagene at a price of approximately $6.50 per share.
    This price was based on Hycors stock price of
    approximately $4.00 at the time Stratagene and Hycor agreed on
    the repurchase price, adjusted for the exchange ratio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Dr. Sorge received a bonus in the amount of approximately
    $1,670,000, which was evidenced by a promissory note with a
    39-month term and an interest rate of 3.89% per annum. This
    promissory note was paid in full by Stratagene in December 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Stratagene entered into a new employment agreement with
    Dr. Sorge, pursuant to which, among other things,
    Dr. Sorges base annual salary was reduced from
    $1.1 million to $450,000, and Dr. Sorge was granted an
    option to purchase 738,960 shares of Stratagene common
    stock at an exercise price of $9.34 per share. The contract
    provides for Dr. Sorges base salary to be reviewed on
    at least an annual basis by the compensation committee of the
    board of directors, which may also increase
    Dr. Sorges base salary from time to time in its
    discretion. Pursuant to the employment agreement, the CEO is
    entitled to participate in the Companys bonus program on a
    basis at least comparable to other senior executives.
    Dr. Sorge may also receive bonuses at the discretion of the
    board of directors upon the recommendation of the compensation
    committee. The new employment agreement has an initial term of
    three years and is subject to successive one-year renewals
    unless either party provides a notice of non-renewal at least
    30 days prior to the termination of the then current term.
|
| |  | In accordance with the terms of the instrument governing its
    then outstanding subordinated notes, Stratagene converted
    $9.0 million in principal amount of the subordinated notes
    into 1,753,604 shares of Stratagene common stock. As a
    result of the conversion, there are no subordinated notes
    outstanding subsequent to the merger.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |                      
| | ---------------------
| | Pro Forma Information

The results of operations of Hycor have been included in the
accompanying consolidated financial statements of Stratagene
from the date of acquisition. However, the following unaudited
pro forma information assumes that the June 2, 2004 Hycor
merger occurred on January 1, 2004 and 2003, respectively.
These unaudited pro forma results have been prepared for
comparative purposes only and are not indicative of the results
of operations that would have actually resulted had the
acquisition been in effect as of the periods indicated above, or
of future results of operations. The unaudited pro forma results
for the years ended December 31, 2004 and 2003 are as
follows:

|                         |         |      |            |            |  |   |            |            | 
|------------------------ | ------- | ---- | ---------- | ---------- |  | - | ---------- | ---------- | 
|                         |         | 2004 |            | 2003      
|                         |         |      |            |           
|Revenues                 |         | $    | 93,779,136 |            |  | $ | 89,459,683 |           
|                        
|                        
|                        
|                        
|Net income               |         | $    | 8,715,988  |            |  | $ | 6,692,972  |           
|                        
|                        
|                        
|                        
|Earnings per share:      |         |      |            |            |  |   |            |           
|                        
|                        
|                        
|                        
|                         | Basic   |      | $          | 0.40       |  |   | $          | 0.31       | 
|                        
|                        
|                        
|                        
|                         | Diluted |      | $          | 0.40       |  |   | $          | 0.30       | 
|                        
|                        
|                        
|                        
|Weighted average shares: |         |      |            |            |  |   |            |           
|                        
|                        
|                        
|                        
|                         | Basic   |      |            | 21,909,391 |  |   |            | 21,790,580 | 
|                        
|                        
|                        
|                        
|                         | Diluted |      |            | 21,915,191 |  |   |            | 22,032,381 | 

57



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The unaudited pro forma information presented above has been
adjusted for charges for material, nonrecurring items that
include the following:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | removing interest income on shareholder loans that were paid off
    upon the closing of the merger;             
|
| |  | removing interest expense on subordinated debt that converted to
    common stock upon the closing of the merger;
|
| |  | recording amortization expense on acquired other intangible
    assets;                                          
|
| |  | recording amortization expense on unearned stock-based
    compensation for assumed stock options;               
|
| |  | reducing the CEOs salary pursuant to a new employment
    agreement effective on the merger date;               
|
| |  | removing Hycors merger related costs incurred in the
    periods presented; and                                 
|
| |  | recording the tax provision adjustment to the pro forma
    statement of operations at the statutory rate of 36%.



| |                
| | ---------------
| | BCH Acquisition

Concurrently with the closing of the Hycor merger, Stratagene
acquired substantially all of the assets of BCH, including
BCHs interests in its subsidiaries. In exchange,
Stratagene forgave all of the outstanding intercompany
indebtedness owed by BCH and its subsidiaries to Stratagene of
approximately $5.4 million and assumed all of the other
outstanding liabilities of BCH and its subsidiaries of
approximately $0.8 million. Because Stratagene and BCH were
under common control, and substantially all of the BCH
membership units were held by certain Stratagene shareholders,
the acquisition of BCH was recorded on a historical cost basis.
As such, there was no adjustment of BCHs assets and
liabilities to fair value and no goodwill resulting from the
purchase. As of and for the periods ended December 31,
2004, Stratagenes financial statements are presented on a
consolidated basis, which represents a change in reporting
entity under Accounting Principles Board (APB)
Opinion No. 20, Accounting Changes. Previously
combined statements are now presented on a consolidated basis as
a result of the transaction. There is no change to income for
previous periods presented on a combined basis. For tax
purposes, this transaction is taxable. The financial statements
in 2004 reflected net deferred tax assets of approximately
$875,000 for differences between the tax and book basis of
assets and liabilities acquired by Stratagene. With the
completion of the initial consolidated tax returns in 2005, the
Company adjusted the deferred tax asset associated with the
acquired assets and liabilities and reflected a $514,000
reduction to the net deferred tax asset and additional paid-in
capital in accordance with SFAS No. 109, Accounting
for Income Taxes.

Prior to the acquisition date, Stratagene presented its
financial statements on a combined basis with BCH. BCH consisted
substantially of limited liability companies that were treated
as partnerships for income tax purposes; therefore, any related
income tax liabilities were the responsibility of the members of
BCH. As a result, the operations of BCH did not reflect a
provision for income taxes in the combined financial statements,
including its share of the $1.8 million gain in equity in
earnings of a joint venture on June 1, 2004. (See
Note 13) Beginning on June 2, 2004, the consolidated
results of Stratagene, which includes the results of BCH,
include a provision for income taxes.

As part of the BCH acquisition, Stratagene acquired BCHs
interests in its subsidiaries, which include Phenogenex, LLC
(Phenogenex), Iobion Informatics, LLC and
subsidiaries (Iobion) and an investment in a joint
venture consisting of a 49% interest in a limited partnership
that operates a research lab. The investment is accounted for
under the equity method.

As a result of the acquisition, Stratagene owned 100% of
Phenogenex and approximately 78% of Iobion. The remaining 22%
interest in Iobion was represented by membership units held by
two individuals, one of which is now an employee of Iobion and
one is a consultant to the Company. In October 2004, the Company

58



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchased the remaining 22% outstanding membership
interests in Iobion owned by these individuals. As a result of
the purchase of these minority interests, Stratagene now owns
100% of Iobion. Total cash consideration of $330,000 and an
intangible asset of $330,000 was recorded and is being amortized
to expense over 36 months.

During 2005, the Company merged Iobion and Phenogenex into
Stratagene, leaving only the Iobion Informatics (Canada), Ltd.
subsidiary, and on February 9, 2006, Stratagene dissolved
BCH. There was no financial statement impact to this merger or
dissolution.



|   |                           
|-- | --------------------------
|4. | Earnings Per Share (EPS)

Basic EPS is based on the weighted-average number of shares
outstanding during the periods, while diluted EPS additionally
includes the dilutive effects of the Companys outstanding
common stock options computed using the treasury stock method.
The number of shares used in computing EPS is as follows:

|                         |                                         |                                  |  |            |  |      |  |            |  |  |  |            | 
|------------------------ | --------------------------------------- | -------------------------------- |  | ---------- |  | ---- |  | ---------- |  |  |  | ---------- | 
|                         |                                         |                                 
|                         |                                         | Twelve Months Ended December 31,
|                         |                                         |                                 
|                         |                                         | 2005                             |  | 2004       |  | 2003
|                         |                                         |                                  |  |            |  |     
|Weighted average shares: |                                         |                                  |  |            |  |      |  |            |  |  |  |           
|                        
|                        
|                        
|                        
|                         | Basic                                   |                                  |  | 22,112,892 |  |      |  | 19,307,564 |  |  |  | 15,632,668 | 
|                        
|                        
|                        
|                        
|                         | Effect of dilutive common stock options |                                  |  | 146,165    |  |      |  | 5,800      |  |  |  |           | 
|                         |                                         |                                  |  |            |  |      |  |            |  |  |  |           
|                         | Diluted                                 |                                  |  | 22,259,057 |  |      |  | 19,313,364 |  |  |  | 15,632,668 | 
|                         |                                         |                                  |  |            |  |      |  |            |  |  |  |           

Options outstanding totaling 1,950,631, 2,338,395 and 1,660,338
for the years ended December 31, 2005, 2004 and 2003,
respectively, were excluded from the calculations of earnings
per common share, as their effect would have been antidilutive.



|   |                               
|-- | ------------------------------
|5. | Intangible Assets and Goodwill

The following sets forth the Companys intangible assets by
major asset class:

|                                               |                                   |             |  |                   |  |                   |            |            |  |       |           |              |  |          |            |            |  |   |            |            |  |   |           |           |  |   |            |            | 
|---------------------------------------------- | --------------------------------- | ----------- |  | ----------------- |  | ----------------- | ---------- | ---------- |  | ----- | --------- | ------------ |  | -------- | ---------- | ---------- |  | - | ---------- | ---------- |  | - | --------- | --------- |  | - | ---------- | ---------- | 
|                                               |                                   |             |  |                   |  |                  
|                                               |                                   |             |  | December 31, 2005 |  | December 31, 2004
|                                               |                                   |             |  |                   |  |                  
|                                               |                                   | Useful Life |  |                   |  | Accumulated       |            | Net Book   |  |       |           | Accumulated  |  | Net Book
|                                               |                                   | (Years)     |  | Gross             |  | Amortization      |            | Value      |  | Gross |           | Amortization |  | Value   
|                                               |                                   |             |  |                   |  |                   |            |            |  |       |           |              |  |         
|Intangible assets subject to amortization:     |                                   |             |  |                   |  |                   |            |            |  |       |           |              |  |          |            |            |  |   |            |            |  |   |           |           |  |   |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Amortizable patents and other     |             |  | 2 - 7 years       |  |                   | $          | 8,696,142  |  |       | $         | 4,284,418    |  |          | $          | 4,411,724  |  |   | $          | 7,303,757  |  |   | $         | 3,324,128 |  |   | $          | 3,979,629  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Amortizable intangible assets     |             |  | 1 - 5 years       |  |                   |            | 1,189,000  |  |       |           | 530,587      |  |          |            | 658,413    |  |   |            | 1,189,000  |  |   |           | 218,848   |  |   |            | 970,152    | 
|                                              
|                                              
|                                              
|                                              
|Intangible assets not subject to amortization: |                                   |             |  |                   |  |                   |            |            |  |       |           |              |  |          |            |            |  |   |            |            |  |   |           |           |  |   |            |           
|                                              
|                                              
|                                              
|                                              
|                                               | Non-amortizable intangible assets |             |  |                   |  |                   |            | 1,575,000  |  |       |           |             |  |          |            | 1,575,000  |  |   |            | 1,575,000  |  |   |           |          |  |   |            | 1,575,000  | 
|                                              
|                                              
|                                              
|                                              
|                                               | Goodwill                          |             |  |                   |  |                   |            | 27,234,214 |  |       |           |             |  |          |            | 27,234,214 |  |   |            | 27,234,214 |  |   |           |          |  |   |            | 27,234,214 | 
|                                               |                                   |             |  |                   |  |                   |            |            |  |       |           |              |  |          |            |            |  |   |            |            |  |   |           |           |  |   |            |           
|                                               |                                   |             |  |                   |  | $                 | 38,694,356 |            |  | $     | 4,815,005 |              |  | $        | 33,879,351 |            |  | $ | 37,301,971 |            |  | $ | 3,542,976 |           |  | $ | 33,758,995 |           
|                                               |                                   |             |  |                   |  |                   |            |            |  |       |           |              |  |          |            |            |  |   |            |            |  |   |           |           |  |   |            |           

Amortizable patents and other includes costs incurred in
connection with patent applications, which consist principally
of legal fees. Amortizable intangible assets, non-amortizable
intangible assets and goodwill were established in connection
with the merger with Hycor. Goodwill represents the excess of
the purchase price over the fair value of the tangible and
identifiable intangible assets. The other non-amortizable
intangible assets represent $1,575,000 for a trade name with an
indefinite life. The intangible assets subject to

59



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

amortization include $480,000 for patents and trademarks, which
will be amortized over 2 to 7 years, and $1,189,000 for
contractually based customer relationships, which will be
amortized over 1 to 5 years.

Amortization expense totaled $1,272,029, $875,967 and $359,419
for the years ended December 31, 2005, 2004 and 2003,
respectively. Amortization expense in each of the next five
fiscal years is expected to be as follows:

|           |  |        |           | 
|---------- |  | ------ | --------- | 
|Year       |  | Amount
|           |  |       
|2006       |  | $      | 1,157,658 | 
|          
|          
|          
|          
|2007       |  |        | 1,010,175 | 
|          
|          
|          
|          
|2008       |  |        | 738,229   | 
|          
|          
|          
|          
|2009       |  |        | 598,315   | 
|          
|          
|          
|          
|2010       |  |        | 408,290   | 
|          
|          
|          
|          
|Thereafter |  |        | 1,157,470 | 
|           |  |        |           | 
|Total      |  | $      | 5,070,137 | 
|           |  |        |           | 



|   |                                       
|-- | --------------------------------------
|6. | Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

|                                       |       |              |            |            |  |   |           |           | 
|-------------------------------------- | ----- | ------------ | ---------- | ---------- |  | - | --------- | --------- | 
|                                       |       |             
|                                       |       | December 31,
|                                       |       |             
|                                       |       | 2005         |            | 2004      
|                                       |       |              |            |           
|Accrued compensation                   |       | $            | 3,406,685  |            |  | $ | 3,008,605 |          
|                                      
|                                      
|                                      
|                                      
|Accrued royalties                      |       |              | 17,208,443 |            |  |   | 4,825,246 |          
|                                      
|                                      
|                                      
|                                      
|Litigation accrual                     |       |              | 20,600,352 |            |  |   |          |          
|                                      
|                                      
|                                      
|                                      
|Warranty                               |       |              | 233,299    |            |  |   | 333,277   |          
|                                      
|                                      
|                                      
|                                      
|Other accrued expenses and liabilities |       |              | 1,327,473  |            |  |   | 1,710,125 |          
|                                       |       |              |            |            |  |   |           |          
|                                       | Total |              | $          | 42,776,252 |  |   | $         | 9,877,253 | 
|                                       |       |              |            |            |  |   |           |          

See Note 11, Commitments and Contingencies, Royalty
Payments.



|   |               
|-- | --------------
|7. | Long-Term Debt

The Company has debt instruments bearing interest at variable
rates (up to 6.94% as of December 31, 2005), most of which
are guaranteed by Stratagene and secured by substantially all of
the assets of Stratagene. The outstanding debt instruments
contain restrictive covenants requiring the Company to maintain
certain financial ratios, including minimum debt service
coverage ratios, fixed charge coverage ratios and tangible net
worth. The debt instruments also restrict the payments of
dividends to the Companys stockholders. As of
December 31, 2005, the Company would not have been in
compliance with its fixed charge coverage ratio as a result of
an increase in the Companys estimated income tax payments
related to the receipt of approximately $23.4 million
before taxes for royalties received from Cambridge Antibody
Technology. However, the Company completed an amendment to the
credit agreement in January 2006, which cured the potential

60



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

violation. The Company was in compliance with all other
covenants at December 31, 2005. Long-term debt and line of
credit consist of the following:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |           |      |  |   |           | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | December 31,
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |             
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 2005         |           | 2004
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |           |     
|Reducing revolving line of credit not to exceed
    $9,000,000 bearing interest at LIBOR plus 2.55% (6.94% and 4.95%
    at December 31, 2005 and 2004, respectively; 5.94% and
    4.08% average rate for the years ended December 31, 2005
    and 2004, respectively); amendment to credit agreement entered
    into in January 2006 extends maturity to July 31, 2008;
    debt held by subsidiary of the Company, guaranteed by the
    Company and secured by substantially all of its assets(1)                                                                                                     |  | $            | 5,500,000 |      |  | $ | 4,956,923 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Debt held by subsidiary of the Company from bond
    indenture agreement with Bastrop County, Texas in the original
    principal amount of $9,100,000, at an average interest rate of
    2.57% and 1.44% for the years ended December 31, 2005 and
    2004, respectively (3.65% and 2.10% at December 31, 2005
    and 2004, respectively); sinking fund payment of $735,000
    required in April 2005, reducing to $240,000 per year
    through April 2021, and then to $175,000 in April 2022 when the
    bonds mature; proceeds are restricted to the purchase of land,
    building and equipment |  |              | 4,015,000 |      |  |   | 4,750,000 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |           |      |  |   |           | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |              | 9,515,000 |      |  |   | 9,706,923 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Current portion of long-term debt(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |              | 5,740,000 |      |  |   | 735,000   | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |           |      |  |   |           | 
|Long-term debt, less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | $            | 3,775,000 |      |  | $ | 8,971,923 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |              |           |      |  |   |           | 



---



|    |                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------
|(1) | The Company paid off $5.5 million on the reducing revolving
    line of credit in full on January 3, 2006.

The Company received a written consent from the credit facility
holder to pay a special cash dividend of $0.25 per share on
the Companys common stock to holders of record on
December 16, 2005. The special cash dividend of $5,571,321
was paid on January 6, 2006.

The aggregate maturities of long-term debt principal payments
for each of the five years subsequent to December 31, 2005
are as follows:

|                   |  |           |           | 
|------------------ |  | --------- | --------- | 
|                   |  | Principal
|                   |  | Payment  
|                   |  |          
|Less than one year |  | $         | 5,740,000 | 
|                  
|                  
|                  
|                  
|One year           |  |           | 240,000   | 
|                  
|                  
|                  
|                  
|Two years          |  |           | 240,000   | 
|                  
|                  
|                  
|                  
|Three years        |  |           | 240,000   | 
|                  
|                  
|                  
|                  
|Four years         |  |           | 240,000   | 
|                  
|                  
|                  
|                  
|Thereafter         |  |           | 2,815,000 | 
|                   |  |           |           | 
|Total              |  | $         | 9,515,000 | 
|                   |  |           |           | 



|   |                           
|-- | --------------------------
|8. | Related Party Transactions

Activity for related parties during 2005, 2004, and 2003 is as
follows:

The Company had a promissory note in the amount of $240,000 due
from two stockholders, one of which is an officer and director
of the Company. The note was secured by a second deed of trust
on certain real property located in San Diego County,
California and bore interest at 8%, compounded annually.
Principal and

61



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

interest were due August 12, 2002. Upon failure to pay the
note at maturity in 2002, the note provided for the interest
rate to become 10%, compounded annually, on the entire remaining
principal balance. The note was paid in full in June 2004 (see
Note 3) in the amount of $276,877, including interest.
Total interest income for this note was $0, $11,240 and $23,913
for the years ended December 31, 2005, 2004 and 2003,
respectively. A second promissory note in the amount of $250,000
with the same parties was also outstanding. This note was
secured by a second mortgage on certain real property located in
Wyoming and bore interest at 8%, compounded annually. Principal
and interest was due upon the earlier of the sale of the related
property or July 9, 2005. The second mortgage provided that
the Company may, at its option, release the indebtedness, extend
the due date, alter the terms of payment of the note, or alter,
substitute or release property securing the indebtedness. The
note was paid in full in December 2004 in the amount of
$302,422, including interest. Total interest income for the
years ended December 31, 2005, 2004 and 2003 was $0,
$21,686 and $21,014, respectively.

Additional amounts due from related parties totaled $170,895 at
December 31, 2003. Total interest earned on these notes was
$0, $1,553 and $3,519 for the years ended December 31,
2005, 2004 and 2003, respectively. These amounts are comprised
of an unsecured loan and a receivable due from a stockholder of
Stratagene. The unsecured bore interest at 6% and was due on
August 15, 2001 and was paid in full in June 2004. The
receivable totaled $130,315 at December 31, 2003, including
interest. This receivable was paid in full in June 2004. See
Note 3 for further information on the additional amounts
with related parties.

In June 2004, the Company entered into a promissory note payable
to an officer of the Company in the principal amount of
approximately $1,670,000. The promissory note had a 39-month
term and an interest rate of 3.89% per annum. In December
2004, the Board of Directors approved the pre-payment in full of
the outstanding principal and interest under the promissory
note. Total interest paid for the year ended December 31,
2004 totaled $33,898.

In June 2004, Dr. Sorge entered into a lock-up agreement
with Hycor. Dr. Sorge agreed to vote all of the shares of
Stratagene common stock he controls in favor of the merger with
Hycor and in favor of a slate of directors containing two
nominees for the board of directors of Stratagene recommended by
the board of directors of Hycor. Dr. Sorge also agreed to
use his reasonable best efforts to provide that one or more of
the Hycor nominees are members of the audit, compensation and
nominating committees of the Stratagene board of directors until
after the second annual meeting of Stratagene after the closing
of the merger.



|   |                     
|-- | --------------------
|9. | Stockholders Equity

Stratagenes Common Stock  Each share of
common stock is entitled to one vote. The holders of common
stock are also entitled to receive dividends out of legally
available funds when declared by the board of directors, subject
to the rights of any preferred stock.

In July 2003, the Board of Directors approved a 1 for 2 reverse
stock split of Stratagenes common stock. Financial and
share data appropriately reflect this reverse stock split.

Registration Rights Agreement  In relation to
the merger with Hycor in June 2004, Stratagene entered into a
registration rights agreement with Dr. Sorge, pursuant to
which Dr. Sorge was granted the right, subject to certain
conditions, to require the registration of 2,000,000 shares
of Stratagene common stock controlled by Dr. Sorge or one
of his affiliates and customary piggyback registration rights to
participate in other registrations.

2000 Stock Option Plan, as amended and
restated  In 2000, Stratagene adopted a
non-qualified stock option plan (Plan), which
provides for the grant of options to employees of Stratagene or
a subsidiary of Stratagene and BCH or a subsidiary of BCH to
purchase up to 2,000,000 shares of common stock at exercise
prices of not less than the fair value of the common stock.
Options under the 2000 Plan vest over a period

62



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

determined by Stratagenes Board of Directors, but not
longer than five years. The options expire seven years after the
grant date.

In 2000, the Board of Directors approved the Plan, a form of
Non-Qualified Stock Option Agreement (Option
Agreement) to be used with the Plan, and the granting of
options, effective December 31, 2000, to purchase an
aggregate of 1,272,543 shares of common stock subject to
the execution of the Option Agreements. For the years ended
December 31, 2005, 2004 and 2003, options to purchase
additional shares of common stock totaling 50,000, 0 and
335,871, respectively, were granted, subject to execution of the
Option Agreements, in employment offer letters or by special
grant of the Plan Administrator pursuant to the Plan.

In 2004, prior to the completion of the merger with Hycor,
Stratagene amended and restated its existing 2000 stock option
plan. As amended and restated, the stock option plan permits the
issuance of options to purchase an aggregate of
3,000,000 shares of common stock. Options under the amended
and restated 2000 plan vest over a period determined by
Stratagenes Board of Directors, but not longer than five
years. The options expire ten years after the grant date.

In accordance with APB No. 25, the Company records
compensation expense based on the fair value of stock-based
awards to non-employees. The fair value for these options is
based on the Black-Scholes pricing model using the assumptions
described in Note 2, Accounting for Stock-Based
Compensation. The Company recognized $187,056, $357,171 and
$25,235 of stock-based compensation expense, which has been
recorded in research and development expense for the years ended
December 31, 2005, 2004 and 2003, respectively.

2004 Independent Directors Option Plan  In
June 2004, the Company adopted a directors stock option
plan for its independent directors. Approximately
300,000 shares of the Companys common stock have been
reserved for issuance under this plan. The independent directors
each received an automatic award of an option to
purchase 20,000 shares of common stock under the
directors stock option plan upon initial appointment or
election to the Companys board of directors and,
thereafter, will receive an automatic award of an option to
purchase up to 10,000 shares of common stock at each annual
meeting occurring during their term as a member of
Stratagenes board of directors. The options vest in three
equal annual installments on the anniversary date of such grant
and expire ten years after the grant date. The price per share
of these options shall equal 100% of the fair market value of a
share of common stock on the date the option was granted.

63



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes option activity for all plans:

|                               |                                          |         |           |           |   |   |       |       | 
|------------------------------ | ---------------------------------------- | ------- | --------- | --------- | - | - | ----- | ----- | 
|                               |                                          |         |           | Weighted-
|                               |                                          |         |           | Average  
|                               |                                          |         |           | Exercise 
|                               |                                          | Options |           | Price    
|                               |                                          |         |           |          
|Outstanding, January 1, 2003   |                                          |         | 1,533,329 |           |   | $ | 10.44 |      
|                              
|                              
|                              
|                              
|                               | Granted                                  |         |           | 335,870   |   |   |       | 8.44  | 
|                              
|                              
|                              
|                              
|                               | Exercised                                |         |           |          |   |   |       |      | 
|                              
|                              
|                              
|                              
|                               | Forfeited                                |         |           | (420,177  | ) |   |       | 9.00  | 
|                               |                                          |         |           |           |   |   |       |      
|Outstanding, December 31, 2003 |                                          |         | 1,449,022 |           |   | $ | 10.34 |      
|                              
|                              
|                              
|                              
|                               | Options assumed from Hycor in the merger |         |           | 756,822   |   |   |       | 5.34  | 
|                              
|                              
|                              
|                              
|                               | Granted                                  |         |           | 1,514,960 |   |   |       | 8.75  | 
|                              
|                              
|                              
|                              
|                               | Exercised                                |         |           | (184,829  | ) |   |       | 3.34  | 
|                              
|                              
|                              
|                              
|                               | Forfeited                                |         |           | (540,566  | ) |   |       | 10.05 | 
|                               |                                          |         |           |           |   |   |       |      
|Outstanding, December 31, 2004 |                                          |         | 2,995,409 |           |   | $ | 8.76  |      
|                              
|                              
|                              
|                              
|                               | Granted                                  |         |           | 364,750   |   |   |       | 8.61  | 
|                              
|                              
|                              
|                              
|                               | Exercised                                |         |           | (300,186  | ) |   |       | 5.81  | 
|                              
|                              
|                              
|                              
|                               | Forfeited                                |         |           | (389,375  | ) |   |       | 9.35  | 
|                               |                                          |         |           |           |   |   |       |      
|Outstanding, December 31, 2005 |                                          |         | 2,670,598 |           |   | $ | 8.98  |      
|                               |                                          |         |           |           |   |   |       |      

The following table summarizes information about Stratagene
stock options outstanding as of December 31, 2005:

|                         |  |                     |           |                     |  |           |      |              |  |           |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------- |  | --------- | ---- | ------------ |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                    
|                         |  | Options Outstanding |           | Options Exercisable
|                         |  |                     |           |                    
|                         |  | Number              |           | Weighted-           |  |           |      | Number       |  |          
|                         |  | Outstanding         |           | Average             |  | Weighted- |      | Exercisable  |  | Weighted-
|                         |  | as of               |           | Remaining           |  | Average   |      | as of        |  | Average  
|                         |  | December 31,        |           | Contractual         |  | Exercise  |      | December 31, |  | Exercise 
|Range of Exercise Prices |  | 2005                |           | Life (in Years)     |  | Price     |      | 2005         |  | Price    
|                         |  |                     |           |                     |  |           |      |              |  |          
|$1.63-$7.95              |  |                     | 274,731   |                     |  |           | 3.61 |              |  | $         | 6.02  |  |  |  | 221,438   |  |  | $ | 6.19  | 
|                        
|                        
|                        
|                        
|$8.00-$8.05              |  |                     | 222,602   |                     |  |           | 5.20 |              |  |           | 8.01  |  |  |  | 117,954   |  |  |   | 8.02  | 
|                        
|                        
|                        
|                        
|$8.11                    |  |                     | 477,750   |                     |  |           | 8.46 |              |  |           | 8.11  |  |  |  | 421,750   |  |  |   | 8.11  | 
|                        
|                        
|                        
|                        
|$8.47                    |  |                     | 50,000    |                     |  |           | 8.41 |              |  |           | 8.47  |  |  |  | 12,500    |  |  |   | 8.47  | 
|                        
|                        
|                        
|                        
|$8.61                    |  |                     | 271,750   |                     |  |           | 9.42 |              |  |           | 8.61  |  |  |  |          |  |  |   |      | 
|                        
|                        
|                        
|                        
|$9.00-$9.20              |  |                     | 39,500    |                     |  |           | 6.24 |              |  |           | 9.11  |  |  |  | 18,000    |  |  |   | 9.00  | 
|                        
|                        
|                        
|                        
|$9.34                    |  |                     | 818,960   |                     |  |           | 8.42 |              |  |           | 9.34  |  |  |  | 765,628   |  |  |   | 9.34  | 
|                        
|                        
|                        
|                        
|$9.60-$11.18             |  |                     | 127,103   |                     |  |           | 4.15 |              |  |           | 9.86  |  |  |  | 120,353   |  |  |   | 9.82  | 
|                        
|                        
|                        
|                        
|$11.50                   |  |                     | 17,750    |                     |  |           | 1.00 |              |  |           | 11.50 |  |  |  | 17,750    |  |  |   | 11.50 | 
|                        
|                        
|                        
|                        
|$12.00                   |  |                     | 370,452   |                     |  |           | 2.26 |              |  |           | 12.00 |  |  |  | 370,452   |  |  |   | 12.00 | 
|                         |  |                     |           |                     |  |           |      |              |  |           |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 2,670,598 |                     |  |           | 6.63 |              |  | $         | 8.98  |  |  |  | 2,065,825 |  |  | $ | 9.19  | 
|                         |  |                     |           |                     |  |           |      |              |  |           |       |  |  |  |           |  |  |   |       | 

In April 2004, 41,250 shares were delivered to an officer
on a deferred basis pursuant to an option exercised in 2001.
During 2005, 2004 and 2003, the Company recognized $0, $101,172
and $47,346 of general and administrative expense (benefit)
associated with this transaction, respectively.

Employee Stock Purchase Plan  In June 2004,
the Company adopted the Stratagene Corporation Employee Stock
Purchase Plan (ESPP) that provides for the issuance
of up to 1,000,000 shares of the

64



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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys common stock. The ESPP is intended to qualify
under Section 423 of the Internal Revenue Code and is for
the benefit of qualifying employees as designated by the board
of directors. Under the terms of the ESPP, purchases are made
quarterly. Participating employees may elect to have a maximum
of 15% of their compensation, up to a maximum of $25,000 of the
fair market value of the common stock per calendar year,
withheld through payroll deductions to purchase shares of common
stock under the ESPP. The price of the common stock purchased
under the ESPP will be equal to 85% of the fair market value of
the common stock on the offering or purchase date, whichever is
lower. The initial quarterly purchase period began on
July 1, 2004. During fiscal years 2005 and 2004, 51,609 and
25,856 shares of common stock were issued under the ESPP
from proceeds of $374,902 and $157,022, respectively.



|    |             
|--- | ------------
|10. | Income Taxes

Components of income tax expense of the Company are as follows:

|                   |         |      |            |            |   |      |           |           |   |   |           |           |  
|------------------ | ------- | ---- | ---------- | ---------- | - | ---- | --------- | --------- | - | - | --------- | --------- | -
|                   |         | 2005 |            | 2004       |   | 2003
|                   |         |      |            |            |   |     
|Current:           |         |      |            |            |   |      |           |           |   |   |           |          
|                  
|                  
|                  
|                  
|                   | Federal |      | $          | 10,144,673 |   |      | $         | 2,617,912 |   |   | $         | 1,345,136 |  
|                  
|                  
|                  
|                  
|                   | State   |      |            | 110,860    |   |      |           | 174,550   |   |   |           | 58,142    |  
|                  
|                  
|                  
|                  
|                   | Foreign |      |            | 69,809     |   |      |           | 38,906    |   |   |           | 15,696    |  
|                   |         |      |            |            |   |      |           |           |   |   |           |          
|                   |         |      | 10,325,342 |            |   |      | 2,831,368 |           |   |   | 1,418,974 |          
|                   |         |      |            |            |   |      |           |           |   |   |           |          
|Deferred:          |         |      |            |            |   |      |           |           |   |   |           |          
|                  
|                  
|                  
|                  
|                   | Federal |      |            | (6,654,205 | ) |      |           | 450,792   |   |   |           | 461,825   |  
|                  
|                  
|                  
|                  
|                   | State   |      |            | 156,533    |   |      |           | (22,160   | ) |   |           | 8,522     |  
|                  
|                  
|                  
|                  
|                   | Foreign |      |            | 70,330     |   |      |           |          |   |   |           | (4,077    | )
|                   |         |      |            |            |   |      |           |           |   |   |           |          
|                   |         |      | (6,427,342 | )          |   |      | 428,632   |           |   |   | 466,270   |          
|                   |         |      |            |            |   |      |           |           |   |   |           |          
|Income tax expense |         | $    | 3,898,000  |            |   | $    | 3,260,000 |           |   | $ | 1,885,244 |          
|                   |         |      |            |            |   |      |           |           |   |   |           |          

The actual income taxes differ from the expected income taxes
(computed by applying the federal income tax rate of 34% to the
Companys earnings before income taxes) as follows:

|                                                          |  |      |           |      |  |      |           |   |  |   |           |  
|--------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                                                          |  | 2005 |           | 2004 |  | 2003
|                                                          |  |      |           |      |  |     
|Computed expected federal income taxes of the
    Company |  | $    | 3,984,994 |      |  | $    | 3,637,467 |   |  | $ | 1,746,710 |  
|                                                         
|                                                         
|                                                         
|                                                         
|Foreign operations, net of tax                            |  |      | 183,804   |      |  |      | 253,118   |   |  |   | (115,922  | )
|                                                         
|                                                         
|                                                         
|                                                         
|State income taxes, net of federal benefit                |  |      | 176,479   |      |  |      | 93,727    |   |  |   | 43,999    |  
|                                                         
|                                                         
|                                                         
|                                                         
|General business credits                                  |  |      | (172,311  | )    |  |      | (185,191  | ) |  |   | (165,677  | )
|                                                         
|                                                         
|                                                         
|                                                         
|BCH (income) loss not included in corporate group         |  |      |          |      |  |      | (570,689  | ) |  |   | 288,523   |  
|                                                         
|                                                         
|                                                         
|                                                         
|Section 199 and foreign income deductions                 |  |      | (471,755  | )    |  |      | (170,000  | ) |  |   | (127,541  | )
|                                                         
|                                                         
|                                                         
|                                                         
|Non-deductible expenses and other, net                    |  |      | 196,789   |      |  |      | 201,568   |   |  |   | 215,152   |  
|                                                          |  |      |           |      |  |      |           |   |  |   |           |  
|                                                          |  | $    | 3,898,000 |      |  | $    | 3,260,000 |   |  | $ | 1,885,244 |  
|                                                          |  |      |           |      |  |      |           |   |  |   |           |  

The Company estimates a provision for income taxes for all tax
jurisdictions in which it operates. During 2004, Stratagene
merged with Hycor and filed combined tax returns that included
the results of operations of Hycor since the merger date. In
connection with the allocation of purchase price to the net
assets of Hycor, Stratagene recorded the fair value of the Hycor
deferred tax assets as of the merger date. The net deferred tax
assets of Hycor were approximately $2.5 million and
primarily related to net operating loss carryforwards, research
and other credits and temporary differences between the book and
tax basis of the Hycor net assets

65



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STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recorded at the merger date. These net operating losses and
credits are subject to an annual limitation by Section 382
of the Internal Revenue Code and have a 20 year life.
Stratagene believes that the Hycor NOLs and other credits
recorded under purchase accounting will be realized within the
carryforward periods.

For the twelve months ended December 31, 2005, the Company
reversed approximately $320,000 of tax reserves due to the
completion of an IRS review of its 2001 and 2002 federal tax
returns. As a result, all reserves pertaining to these tax years
were no longer necessary.

Deferred income taxes result from temporary differences between
the tax basis of an asset or a liability and its reported amount
in the accompanying consolidated balance sheets. The components
of deferred tax assets and liabilities at December 31, 2005
and 2004 are as follows:

|                          |                                        |                     |            |            |            |   |            |           |           | 
|------------------------- | -------------------------------------- | ------------------- | ---------- | ---------- | ---------- | - | ---------- | --------- | --------- | 
|                          |                                        | 2005                |            | 2004      
|                          |                                        |                     |            |           
|Deferred tax assets:      |                                        |                     |            |            |            |   |            |          
|                         
|                         
|                         
|                         
|                          | Accounts receivable                    |                     | $          | 230,253    |            |   | $          | 284,631   |          
|                         
|                         
|                         
|                         
|                          | Inventories                            |                     |            | 1,722,039  |            |   |            | 1,372,872 |          
|                         
|                         
|                         
|                         
|                          | Accrued expenses and other liabilities |                     |            | 9,205,164  |            |   |            | 1,139,405 |          
|                         
|                         
|                         
|                         
|                          | Long-term debt, net                    |                     |            | 44,240     |            |   |            | 49,311    |          
|                         
|                         
|                         
|                         
|                          | General business credits               |                     |            | 434,331    |            |   |            | 1,675,539 |          
|                         
|                         
|                         
|                         
|                          | Net operating losses                   |                     |            | 1,727,959  |            |   |            | 2,292,062 |          
|                          |                                        |                     |            |            |            |   |            |          
|                          |                                        | Deferred tax assets |            |            | 13,363,986 |   |            |           | 6,813,820 | 
|                         
|                         
|                         
|                         
|Deferred tax liabilities: |                                        |                     |            |            |            |   |            |          
|                         
|                         
|                         
|                         
|                          | State taxes                            |                     |            | (433,087   | )          |   |            | (379,753  | )        
|                         
|                         
|                         
|                         
|                          | Patents                                |                     |            | (1,313,770 | )          |   |            | (983,241  | )        
|                         
|                         
|                         
|                         
|                          | Property and equipment                 |                     |            | (495,354   | )          |   |            | (315,108  | )        
|                         
|                         
|                         
|                         
|                          | Acquired intangibles and other         |                     |            | (941,557   | )          |   |            | (908,063  | )        
|                          |                                        |                     |            |            |            |   |            |          
|                          |                                        |                     | (3,183,768 | )          |            |   | (2,586,165 | )        
|                         
|                         
|                         
|                         
|Valuation allowance       |                                        |                     | (1,797,310 | )          |            |   | (2,008,540 | )        
|                          |                                        |                     |            |            |            |   |            |          
|Net deferred tax assets   |                                        | $                   | 8,382,908  |            |            | $ | 2,219,115  |          
|                          |                                        |                     |            |            |            |   |            |          

At December 31, 2005 the Company had approximately $369,000
of Federal NOLs and approximately $121,000 of state
research credits. Utilization of the Federal NOLs are
limited due to changes in ownership by the Internal Revenue Code
section 382. The Company recognizes state research credits
when they are generated. Excess credits are recognized and will
be used to offset future taxable income, as management believes
it is more likely than not that the credits will be utilized.
The state research credits have an indefinite carryforward
period.

At December 31, 2005 the Company had $4,900,000 of foreign
NOL carryforwards. These foreign NOLs have an indefinite
carryforward period. The Company has established a valuation
allowance for the full amount of the foreign NOLs based on
an evaluation of the history of operating profitability of each
operation and the projection of the future taxable income for
each entity. Approximately $1.34 million of the valuation
allowance relates to acquired NOLs which to the extent
recognized in the future will result in a reduction of goodwill.

Concurrent with the closing of the Hycor merger, the Company
acquired the assets of BCH, which consists of substantially
limited liability companies that are treated as partnerships for
income tax purposes. Through the acquisition date, any related
income tax liabilities were the responsibility of the members of

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STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

BCH, and the Company did not reflect a provision for income
taxes. Beginning on June 2, 2004, Stratagene has provided a
provision for income taxes in the consolidated statements for
the results of operations of BCH.



|    |                              
|--- | -----------------------------
|11. | Commitments and Contingencies

Operating Lease Commitments  The Company
leases certain facilities and equipment under noncancelable
operating leases, with facility leases for the Companys
headquarters in La Jolla and its other offices expiring on
various dates between September 30, 2005 and
September 30, 2008 and equipment leases expiring through
January 2007. Total rental expense under all operating leases
was $2,064,014, $1,686,494 and $1,215,123 in 2005, 2004 and
2003, respectively. Future minimum lease payments under
noncancelable operating leases are as follows:

|      |  |                |           | 
|----- |  | -------------- | --------- | 
|      |  | Future Minimum
|      |  | Payment       
|      |  |               
|2006  |  | $              | 1,969,071 | 
|     
|     
|     
|     
|2007  |  |                | 1,766,155 | 
|     
|     
|     
|     
|2008  |  |                | 766,948   | 
|      |  |                |           | 
|Total |  | $              | 4,502,174 | 
|      |  |                |           | 

License Agreements  In connection with its
research and development efforts, Stratagene has entered into
various license agreements with unrelated third parties which
provide Stratagene with rights to develop, produce and market
products using certain technologies and patent rights maintained
by the third parties. The terms of the various agreements
require Stratagene to pay royalties ranging generally from 1% to
10% of biological and instrumentation sales and 50% of sales on
software products that have been produced using the
technologies. Such agreements generally provide for terms that
commence upon execution and continue until expiration of the
last patent relative to the technology. During 2005, 2004 and
2003, royalty expenses related to product sales were
approximately $3,840,000, $4,281,000 and $3,805,000,
respectively, and were included in cost of products sold in the
accompanying consolidated statements of operations.

Royalty Payments  The Company accrues and pays
royalties in accordance with the applicable royalty contracts to
which it is a party. Accrued expenses and other liabilities at
December 31, 2005 and 2004 include $5.9 million and
$4.1 million, respectively, of accrued royalties due to an
unrelated third party license holder for estimated royalties due
from the second quarter of 2003 through the third quarter of
2005. The Company accrued royalties under this patent license
agreement based on an estimate of the amounts payable in
accordance with the terms of the patent license agreement. The
Companys calculations of royalty payments are subject to
review by the license holder. Beginning in the second half of
2003 through late 2005, such royalty payments were withheld by
the Company while the Company evaluated a possible overpayment
of royalties paid in prior periods. However, no assurances can
be made that the Company will recover any of the overpayments.
Stratagenes financial position or results of operations
could be materially affected if the parties subsequently
determine that the royalties differ significantly from the
amounts recorded by Stratagene. The patent underlying this
royalty obligation expired in the United States in March 2005.
The corresponding foreign patents will expire in 2006 and 2007.
Following the expiration of these PCR process patents,
Stratagene will no longer be required to pay royalties on future
product sales related to such patents. The expiration of the
subject United States patent in March 2005 resulted in an
approximately $250,000 per quarter reduction in royalty
expense beginning in the second quarter of 2005. In addition,
upon the expiration of the corresponding foreign patents,
Stratagene expects an additional $350,000 reduction in royalty
expense beginning in the second quarter of 2006. The Company
anticipates that this decrease in royalty expense may be
partially offset by decreases in the average unit selling price
of products using the patented technology following the
expiration of the patents.

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STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Corporate Collaboration  Stratagene entered
into a strategic partnership with Strand Life Sciences in
December 2005 to develop a suite of next generation
bioinformatics software tools. Under the terms of the agreement,
Strand and Stratagene will collaborate on the design and
development of innovative software tools to address the
increasingly complex demands of biological data analysis for
life scientists. Stratagene will exclusively market and sell the
jointly developed products. Under the agreements, Stratagene is
required to make aggregate milestone payments of
$0.9 million to Strand upon acceptance of certain
deliverables In addition, Stratagene is required to make
$1.5 million in minimum annual payments to Strand in the
first twelve months after the first commercial sale or
60 days after final acceptance of the product. The minimum
annual payments may be offset by $0.5 million of the
milestone payments in the first twelve months. Stratagene will
also be required to make $1.7 million in minimum annual
payments to Strand in the second twelve months.

In addition, in the normal course of operations, we enter into
purchase commitments with vendors and suppliers of key raw
materials and other goods and services through purchase orders
or other documentation. Such obligations are generally
outstanding for periods of less than one year and are settled by
cash payments upon delivery of goods and services. At
December 31, 2005, aggregate purchase commitments relating
to key raw materials and other goods and services was
approximately $3.0 million.

Legal  Stratagene is a party to litigation in
the ordinary course of business. Due to the uncertainties
inherent in litigation, no assurances can be given as to the
outcome of these proceedings. If any of these matters were
resolved in a manner unfavorable to Stratagene, its business,
financial condition, results of operations, and cash flows could
be materially harmed. Additionally, favorable outcomes or gain
contingencies that may result from these matters, if any, are
not recognized until they are realized. Information on the most
significant of these matters follows.



| |                       
| | ----------------------
| | Invitrogen Corporation

In June 2000, Stratagene was sued by Invitrogen Corporation
(formerly Life Technologies, Inc.) in the United States District
Court for the District of Maryland. The complaint alleges that
Stratagene willfully infringed United States patent no.
6,063,608 (and United States patent nos. 5,244,797 and
5,405,776) for making, using and selling products derived from,
using or containing RNase H minus reverse transcriptase enzymes.
Invitrogens motion for a preliminary injunction was denied
and the case was stayed pending a trial in a related action
involving Invitrogen and a third party regarding the same
patents. Invitrogen appealed the denial of an injunction and the
stay to the Federal Circuit Court of Appeals. In February 2002,
the Federal Circuit Court of Appeals affirmed the district
courts decision. The case against Stratagene remains
administratively stayed.

In March 2001, Stratagene was sued by Invitrogen Corporation in
the United States District Court for the Western District of
Texas (Austin). The complaint alleges (1) that Stratagene
willfully infringed United States patent no. 4,981,797 for
making, using and selling competent E. colicell products
and (2) for lost profits and/or reasonable royalty damages
of up to approximately $22.0 million. In November 2001, the
district court granted Stratagenes motion for summary
judgment, finding that the 797 patent was not infringed by
Stratagene. Invitrogen appealed the judgment to the Federal
Circuit Court of Appeals which, in May 2003, reversed the
district courts decision in part and remanded the case for
further proceedings. In January 2004, on remand from the Federal
Circuit Court, the district court determined on
Invitrogens motion for partial summary judgment that
Stratagene infringed the 797 patent based on
Stratagenes then existing manufacturing process and
further held on partial summary judgment, that while the
797 patent was not invalid for indefiniteness, the
797 patent was invalid because of public use under
35 U.S.C. § 102(b). Invitrogen appealed the
district courts ruling of invalidity, and oral arguments
were heard before the Federal Circuit Court of Appeals in May
2005. In October 2005, the Federal Circuit Court reversed the
district courts summary judgment of invalidity due to
public use, affirmed the district courts partial summary
judgment of

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STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

infringement, affirmed the district courts denial of
summary judgment of invalidity due to indefiniteness, and
remanded the case for further proceedings. Upon remand, the
district court has set the case for trial in July 2006.
Stratagene intends to vigorously pursue its claims and
affirmative defenses, including various alternative grounds of
invalidity of the 797 patent and that its current
manufacturing process does not infringe the
797 patent.

In November 2001, Stratagene filed a complaint in the United
States District Court for the District of Maryland charging
Invitrogen Corporation with willful infringement and inducing
others to infringe United States patent no. 5,556,772 for
making, using, selling and offering for sale certain polymerase
blend products. Stratagene seeks a permanent injunction against
continued infringement as well as monetary damages (compensatory
and enhanced) and recovery of its attorneys fees and
costs. Given the nature of patent litigation, at the present
time Stratagene is unable to quantify the amount of remuneration
it will ultimately seek in this proceeding or the likelihood of
recovering any portion of such remuneration once quantified. No
trial date is currently set for this case.



| |           
| | ----------
| | Takara Bio

In November 2002, Stratagene filed a complaint in the United
States District Court for the District of Maryland charging
Takara Bio with willful infringement and inducing others to
infringe United States patent no. 5,556,772 for making, using,
selling and offering for sale certain polymerase blend products.
Stratagene seeks a permanent injunction, monetary damages
(compensatory and enhanced) and recovery of its attorneys
fees and costs. Given the nature of patent litigation, at the
present time Stratagene is unable to quantify the amount of
remuneration it will ultimately seek in this proceeding or the
likelihood of recovering any portion of such remuneration once
quantified. Takara filed a counterclaim in a separate action in
the United States District Court for the Southern District of
California. By its counterclaim, Takara seeks joint ownership of
Stratagenes 772 patent. In June 2003, Stratagene
successfully moved to transfer the California action to
Maryland. In August 2003, the Maryland district court denied
Takaras motion to dismiss or transfer the complaint, and
the cases have been consolidated for pretrial and trial. The
parties entered into a joint stipulation, effective as of
September 20, 2005, to stay the proceedings to continue to
pursue settlement of this action. No trial date is currently set
for this case.



| |                        
| | -----------------------
| | Third Wave Technologies

In September 2004, Stratagene was sued by Third Wave
Technologies, Inc. (Third Wave) in the United States
District Court for the Western District of Wisconsin. The
complaint alleged that Stratagene infringed United States patent
nos. 6,348,314 and 6,090,543, and has induced or contributed to
infringement of the patents-in-suit, by making, using,
importing, offering for sale and/or selling assays employing
cleavage of nucleic acids, including at least its Full Velocity
products. Third Wave sought a preliminary and permanent
injunction, monetary damages (compensatory and enhanced), and
recovery of its attorneys fees and costs. In October 2004,
Stratagene filed its answer to the complaint responding that it
did not infringe a valid or enforceable claim of either patent.
Stratagene also asserted affirmative defenses, including
invalidity and unenforceability, and counterclaims of invalidity
and non-infringement. Stratagene sought an award of its fees and
costs incurred in defending itself in this action. A jury trial
commenced on August 22, 2005. The jury returned a verdict
that the patents-in-suit were valid and infringed by Stratagene.
Additionally, the jury returned a verdict for monetary damages
in the amount of $5.3 million and that Stratagenes
infringement was willful. Based on the jurys verdict, the
district court permanently enjoined Stratagene from making,
advertising, promoting the use of, selling, offering to sell,
using, permitting to be used, contributing to the use, sale or
offering for sale of, or inducing the use, sale or offering for
sale the FullVelocity QPCR and FullVelocity QRT-PCR products, or
any other product used in a method that meets all of the
limitations of any of the asserted claims. Stratagene filed post
trial motions to reverse or modify the jury verdicts and/or for
a new trial. Third Wave filed post trial motions to treble the
damages up to $15.9 million, and requested an

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STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

award of attorneys fees and costs. On December 19,
2005, the district court awarded Third Wave treble damages of
$15.9 million, attorneys fees and costs in an amount
to be determined by the district court and pre-judgment
interest. In January 2006, Stratagene posted a
$21.0 million civil supersedeas bond to stay payment of the
judgment of the district court, and filed an appeal to the
Federal Circuit Court of Appeals. On February 22, 2006, the
district court confirmed the award of Third Wave attorneys
fees and costs in the amount of $4.2 million. Stratagene
appealed the district courts award of attorneys fees
and costs to the Federal Circuit Court of Appeals. In
considering whether to record a loss contingency and, if so, an
amount, Stratagene considered the guidance provided by FASB
Statement No. 5, Accounting for Contingencies. The
Company accrued $20.6 million in expense for the judgment
awarded in this matter. This amount includes total damages of
$15.9 million, attorneys fees and costs of
$4.2 million, and pre-judgment interest of
$0.5 million. Although the Company has now appealed the
district court judgment to the Federal Circuit Court of Appeals,
the Company has accrued $20.6 million, as management
believes that it has met the conditions for accrual as stated in
FASB Statement No. 5. Post-judgment interest at the rate of
approximately 4.4% compounded annually remains in effect and
unpaid unless the judgment is reversed.

During 2005, the Company paid $2.9 million in legal fees to
an outside law firm that represented the Company in a litigation
matter that was tried before a jury. Subsequent to year end, the
Company ended its attorney/client relationship with this firm.
As of December 31, 2005, accrued but unpaid legal fees
amounted to $0.8 million. Subsequent to year end, the
Company indicated that it may pursue claims for damages against
the outside law firm and the outside law firm indicated that it
may adjust billing credits previously applied to payments made
through the third quarter of 2005 in the amount of
$1.1 million. The Company believes that it has fairly
stated its legal expenses in 2005 after considering these
unresolved issues.

In May 2005, Stratagene filed a complaint in the United States
District Court for the District of Delaware charging Third Wave
Technologies with willful infringement of and inducing others to
infringe United States patent nos. 6,528,254 and 6,548,250 for
making, using, selling and offering for sale certain of its
Invader®
Plus products. Stratagene seeks a permanent injunction against
continued infringement as well as monetary damages (compensatory
and enhanced) and recovery of its attorneys fees and
costs. On September 21, 2005, Third Wave answered
Stratagenes complaint asserting affirmative defenses of
invalidity and non-infringement and counterclaims for invalidity
and non-infringement. On October 11, 2005, Stratagene
answered Third Waves counterclaims asserting the
patents-in-suit as valid and enforceable. Given the nature of
patent litigation, at the present time Stratagene is unable to
quantify the amount of damages it will ultimately seek in this
proceeding or the likelihood of recovering any portion of such
damages once quantified. The trial is scheduled to begin in
November 2007.



| |                    
| | -------------------
| | Applera Corporation

In November 2004, Stratagene received notice of a patent
infringement suit filed by Applera Corporation against it and
other parties in the United States District Court for the
District of Connecticut for alleged infringement of
U.S. patent no. 6,814,934. The Stratagene products alleged
to infringe are the Mx4000 and Mx3000P instruments and certain
related reagents. In December 2004, Stratagene filed its answer
to the complaint responding that it does not infringe, directly
or indirectly, any valid and enforceable claim of the 934
patent and asserting related counterclaims of invalidity and
non-infringement. An estimate of the possible loss or range of
loss cannot be made at this time and Stratagene is unable to
determine whether the outcome of the litigation could have a
material impact on its results of operations or financial
condition in any future period. This case is currently scheduled
to be placed on the Courts trial ready list in October
2006.

In June 2005, Stratagene received notice that Applera had filed
an action against it in the Dusseldorf District Court in Germany
relating to EP patent 0 872 562, the European counterpart of the
934 patent. By decision of the European Patent Office
dated January 7, 2005, the 562 patent was revoked.
Based upon that

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STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

revocation, Stratagene moved to stay the district court
proceeding in July 2005. Applera has consented to
Stratagenes request to stay this proceeding.



| |                 
| | ----------------
| | Ariadne Genomics

In March 2005, Stratagene filed a demand for arbitration with
the American Arbitration Association (AAA) against
Ariadne Genomics, Inc. (Ariadne) for declaratory
relief and damages relating to the Exclusive Marketing and
Distribution Agreement (the Agreement) executed in
December 2002 between the parties. Ariadne filed counterclaims
in the AAA, which Stratagene denied. The parties have now
reached an amicable settlement of this matter. In October 2005,
Stratagene and Ariadne executed a Binding Settlement Agreement
Term Sheet (the Term Sheet) to resolve all of their
disputes, and the parties are in the process of completing a
comprehensive Settlement Agreement. In brief, the settlement
memorialized in the Term Sheet provides that Stratagenes
exclusive right to market, sell and distribute the software
products covered by the Agreement between the parties has been
confirmed, and that the term of that Agreement has been extended
through December 31, 2005. In addition, Ariadne agreed to
pay Stratagene a sum of $300,000 by December 31, 2005,
which has now been paid. All proceedings between the parties
will be dismissed with prejudice, and all disputes in the United
States Patent & Trademark Office will be dismissed by
agreement. After executing the Term Sheet, Stratagene and
Ariadne entered into negotiations for a comprehensive settlement
agreement, but have been unable to resolve certain remaining
issues. Pursuant to the Term Sheet, any remaining disputes
regarding the settlement or the parties claims against
each other are to be submitted to binding arbitration before a
single neutral arbitrator in San Diego County. That
arbitration occurred on February 27, 2006 and the Company
is awaiting a final decision.



| |                    
| | -------------------
| | Other Legal Matters

Pursuant to the terms of a 2002 litigation settlement,
Stratagene was entitled to receive 35,290 shares of a
European company. Stratagene received 11,763 shares in
August 2004, 11,764 shares in September 2004 and the final
11,763 shares in March 2005. These shares were sold and
converted into cash upon receipt, resulting in a gain in other
income of approximately $530,000 during the quarter ended
March 31, 2005 and $664,000 during the quarter ended
September 30, 2004.

In October, 2005 Stratagene realized pre-tax income of
approximately $34.1 million from the settlement with
Cambridge Antibody Technology related to certain patent rights.
and other third parties. This $34.1 million was offset by a
$10.7 million royalty obligation related to this settlement
due to a third party.

401(k) Savings Plan  The Company has a
qualified 401(k) Employee Savings Plan (the Savings
Plan) available to substantially all full-time employees
over the age of 21.

The Company matches 25% of the contributions of employees with
one to three years of service up to a maximum of $1,000, 25% of
the contributions of employees with three to six years of
service up to a maximum of $1,750, and 30% of the contributions
of employees with six or more years of service up to a maximum
of $2,500. The contributions vest immediately. The company
matching expense for the years ended December 31, 2005,
2004 and 2003 was $308,013, $242,669 and $194,621, respectively.

Employment Agreements  Stratagene has entered
into employment agreements with certain of its officers with
salary ranges from $210,000 to $450,0000. Such agreements are
typically short in duration but are subject to successive
automatic one year renewals unless one party gives proper notice
of its intention not to renew the employment agreement. These
agreements generally provide for severance benefits if the
officer is terminated by Stratagene other than for cause, as
defined in the employment agreements. See Note 3 to the
financial statements for a summary of Dr. Sorges new
employment agreement entered into in 2004.

Manufacturing move to Texas  In June 2004, the
Company made the decision to move the remaining manufacturing
operations it conducts in San Diego, California to its
primary manufacturing facility near

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##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Austin, Texas. The products affected by this move represent
approximately 20% of total revenue for the twelve months ended
December 31, 2005. As a result of the move, the Company
incurred relocation and severance costs for employees affected
by the transition. In accordance with SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, the Company estimated the employee severance
costs associated with the move and charged those costs to
expense ratably over the future service period. Approximately
$29,000 and $73,000 of the expense was recorded in 2005 and
2004, respectively. The entire obligation was paid by the
Company by the end of the second quarter of 2005.



|    |                    
|--- | -------------------
|12. | Segment Information

The Company operates in two business segments: research supplies
and clinical diagnostics. In 2004, the Company referred to its
clinical diagnostics segment as medical diagnostics. No changes
have been made to the amounts in this segment as a result of the
name change. The segment information provided for the years
ended December 31, 2005, 2004 and 2003 includes only seven
months of clinical diagnostics segment information in 2004, due
to the establishment of separate reporting segments by the
Company in connection with the Hycor merger on June 2, 2004.

|                              |  |                                       |             |             |  |       |            |  |  |   |             | 
|----------------------------- |  | ------------------------------------- | ----------- | ----------- |  | ----- | ---------- |  |  | - | ----------- | 
|                              |  |                                      
|                              |  | Twelve Months Ended December 31, 2005
|                              |  |                                      
|                              |  | Research                              |             | Clinical    |  |      
|                              |  | Supplies                              |             | Diagnostics |  | Total
|                              |  |                                       |             |             |  |      
|                             
|                             
|                             
|                             
|Total revenue                 |  | $                                     | 106,986,369 |             |  | $     | 23,298,936 |  |  | $ | 130,285,305 | 
|                             
|                             
|                             
|                             
|Income before income taxes(1) |  | $                                     | 5,414,643   |             |  | $     | 6,271,127  |  |  | $ | 11,685,770  | 

|                                 |  |                                       |            |             |  |       |            |  |  |   |            | 
|-------------------------------- |  | ------------------------------------- | ---------- | ----------- |  | ----- | ---------- |  |  | - | ---------- | 
|                                 |  |                                      
|                                 |  | Twelve Months Ended December 31, 2004
|                                 |  |                                      
|                                 |  | Research                              |            | Clinical    |  |      
|                                 |  | Supplies                              |            | Diagnostics |  | Total
|                                 |  |                                       |            |             |  |      
|                                
|                                
|                                
|                                
|Total revenue                    |  | $                                     | 71,460,980 |             |  | $     | 13,351,623 |  |  | $ | 84,812,603 | 
|                                
|                                
|                                
|                                
|Income before income taxes(1)(2) |  | $                                     | 7,188,899  |             |  | $     | 3,509,532  |  |  | $ | 10,698,431 | 

|                                 |  |                                       |            |             |  |       |   |  |  |   |            | 
|-------------------------------- |  | ------------------------------------- | ---------- | ----------- |  | ----- | - |  |  | - | ---------- | 
|                                 |  |                                      
|                                 |  | Twelve Months Ended December 31, 2003
|                                 |  |                                      
|                                 |  | Research                              |            | Clinical    |  |      
|                                 |  | Supplies                              |            | Diagnostics |  | Total
|                                 |  |                                       |            |             |  |      
|                                
|                                
|                                
|                                
|Total revenue                    |  | $                                     | 69,702,650 |             |  | $     |  |  |  | $ | 69,702,650 | 
|                                
|                                
|                                
|                                
|Income before income taxes(1)(2) |  | $                                     | 5,137,382  |             |  | $     |  |  |  | $ | 5,137,382  | 



---



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Income before income taxes related to the Research Supplies
    segment includes impairment charges on long-lived assets.                                             
|   
|(2) | In 2004 and 2003, income before income before income taxes
    related to the Research Supplies segment also include the equity
    in income (loss) of joint venture.

At December 31, 2005 and 2004, total assets for each
business segment were as follows:

|                |  |             |  |             |  |              |  |             |  |             |  |            
|--------------- |  | ----------- |  | ----------- |  | ------------ |  | ----------- |  | ----------- |  | -----------
|                |  |             |  |            
|                |  | 2005        |  | 2004       
|                |  |             |  |            
|                |  | Research    |  | Clinical    |  |              |  | Research    |  | Clinical    |  |            
|                |  | Supplies    |  | Diagnostics |  | Total        |  | Supplies    |  | Diagnostics |  | Total      
|                |  |             |  |             |  |              |  |             |  |             |  |            
|               
|               
|               
|               
|Total assets(1) |  | $82,611,880 |  | $42,069,887 |  | $124,681,767 |  | $38,202,779 |  | $42,128,921 |  | $80,331,700



---



|    |                                                                                 
|--- | --------------------------------------------------------------------------------
|(1) | Goodwill of $27,234,214 is associated with the Clinical
    Diagnostics segment.

72



---



##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information about the Companys revenue by market category
and operations by geographic location for the years ended
December 31, 2005, 2004 and 2003 is shown below:

|                                    |  |      |             |   |  |      |      |   |  |      |            |   |  |  |       |   |  |   |            |  |  |  |       |  
|----------------------------------- |  | ---- | ----------- | - |  | ---- | ---- | - |  | ---- | ---------- | - |  |  | ----- | - |  | - | ---------- |  |  |  | ----- | -
|Market Category Information:        |  | 2005 |             | % |  | 2004 |      | % |  | 2003 |            | %
|                                    |  |      |             |   |  |      |      |   |  |      |            |  
|Total revenue by market categories: |  |      |             |   |  |      |      |   |  |      |            |   |  |  |       |   |  |   |            |  |  |  |       |  
|                                   
|                                   
|                                   
|                                   
|Genetic analysis                    |  | $    | 46,215,481  |   |  |      | 35.5 | % |  | $    | 43,592,400 |   |  |  | 51.4  | % |  | $ | 41,258,877 |  |  |  | 59.2  | %
|                                   
|                                   
|                                   
|                                   
|Protein analysis and cell biology   |  |      | 12,701,820  |   |  |      | 9.7  | % |  |      | 12,909,065 |   |  |  | 15.2  | % |  |   | 10,561,318 |  |  |  | 15.1  | %
|                                   
|                                   
|                                   
|                                   
|Gene discovery                      |  |      | 8,529,415   |   |  |      | 6.5  | % |  |      | 9,661,546  |   |  |  | 11.4  | % |  |   | 11,921,401 |  |  |  | 17.1  | %
|                                   
|                                   
|                                   
|                                   
|Urinalysis                          |  |      | 10,932,718  |   |  |      | 8.4  | % |  |      | 6,265,786  |   |  |  | 7.4   | % |  |   |           |  |  |  |      |  
|                                   
|                                   
|                                   
|                                   
|Allergy                             |  |      | 10,318,800  |   |  |      | 7.9  | % |  |      | 5,811,118  |   |  |  | 6.8   | % |  |   |           |  |  |  |      |  
|                                   
|                                   
|                                   
|                                   
|Autoimmune                          |  |      | 1,630,050   |   |  |      | 1.3  | % |  |      | 985,103    |   |  |  | 1.2   | % |  |   |           |  |  |  |      |  
|                                   
|                                   
|                                   
|                                   
|Other(a)                            |  |      | 39,957,021  |   |  |      | 30.7 | % |  |      | 5,587,585  |   |  |  | 6.6   | % |  |   | 5,961,054  |  |  |  | 8.6   | %
|                                    |  |      |             |   |  |      |      |   |  |      |            |   |  |  |       |   |  |   |            |  |  |  |       |  
|                                    |  | $    | 130,285,305 |   |  |      | 100  | % |  | $    | 84,812,603 |   |  |  | 100.0 | % |  | $ | 69,702,650 |  |  |  | 100.0 | %
|                                    |  |      |             |   |  |      |      |   |  |      |            |   |  |  |       |   |  |   |            |  |  |  |       |  

|                                       |             |      |             |             |  |      |     |      |   |      |            |            |  |  |     |      |   |   |            |            |  |  |       |      |  
|-------------------------------------- | ----------- | ---- | ----------- | ----------- |  | ---- | --- | ---- | - | ---- | ---------- | ---------- |  |  | --- | ---- | - | - | ---------- | ---------- |  |  | ----- | ---- | -
|Geographic Information:                |             | 2005 |             | %           |  | 2004 |     | %    |   | 2003 |            | %         
|                                       |             |      |             |             |  |      |     |      |   |      |            |           
|Total revenue by geographic region(b): |             |      |             |             |  |      |     |      |   |      |            |            |  |  |     |      |   |   |            |            |  |  |       |     
|                                      
|                                      
|                                      
|                                      
|                                       | U.S.(a)     |      | $           | 101,174,782 |  |      |     | 77.7 | % |      | $          | 61,335,195 |  |  |     | 72.3 | % |   | $          | 51,889,266 |  |  |       | 74.4 | %
|                                      
|                                      
|                                      
|                                      
|                                       | Netherlands |      |             | 17,837,175  |  |      |     | 13.7 | % |      |            | 19,048,552 |  |  |     | 22.5 | % |   |            | 17,813,384 |  |  |       | 25.6 | %
|                                      
|                                      
|                                      
|                                      
|                                       | Japan       |      |             | 5,589,276   |  |      |     | 4.3  | % |      |            | 1,187,017  |  |  |     | 1.4  | % |   |            |           |  |  |       |     | %
|                                      
|                                      
|                                      
|                                      
|                                       | Scotland    |      |             | 1,848,564   |  |      |     | 1.4  | % |      |            | 1,128,987  |  |  |     | 1.3  | % |   |            |           |  |  |       |     | %
|                                      
|                                      
|                                      
|                                      
|                                       | Germany     |      |             | 3,835,508   |  |      |     | 2.9  | % |      |            | 2,112,852  |  |  |     | 2.5  | % |   |            |           |  |  |       |     | %
|                                       |             |      |             |             |  |      |     |      |   |      |            |            |  |  |     |      |   |   |            |            |  |  |       |     
|                                       |             | $    | 130,285,305 |             |  |      | 100 | %    |   | $    | 84,812,603 |            |  |  | 100 | %    |   | $ | 69,702,650 |            |  |  | 100.0 | %   
|                                       |             |      |             |             |  |      |     |      |   |      |            |            |  |  |     |      |   |   |            |            |  |  |       |     



---



|    |  |                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------
|(a) |  | 2005 includes approximately $34.1 million of royalties
    related to a settlement with Cambridge Antibody Technology.
|   
|(b) |  | Total revenue by geographic region is presented based on the
    shipping point of the product.                       

Long-lived assets by geographic region at December 31, 2005
and 2004 are as follows:

|            |  |      |            |      |  |   |            | 
|----------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|            |  | 2005 |            | 2004
|            |  |      |            |     
|U.S.        |  | $    | 44,785,322 |      |  | $ | 45,643,613 | 
|           
|           
|           
|           
|Netherlands |  |      | 193,859    |      |  |   | 202,736    | 
|           
|           
|           
|           
|Japan       |  |      | 142,112    |      |  |   | 199,137    | 
|           
|           
|           
|           
|Scotland    |  |      | 184,163    |      |  |   | 117,296    | 
|           
|           
|           
|           
|Germany     |  |      | 236,287    |      |  |   | 249,261    | 
|            |  |      |            |      |  |   |            | 
|            |  | $    | 45,541,743 |      |  | $ | 46,412,043 | 
|            |  |      |            |      |  |   |            | 



|    |                              
|--- | -----------------------------
|13. | Transactions in Joint Venture

Until December of 2004, the Company had a 49% minority interest
in a limited partnership (LP) that operated a
research lab. This investment was accounted for using the equity
method of accounting. On June 1, 2004, prior to the BCH
asset acquisition by the Company (Note 3), the LP sold the
assets related to its clinical diagnostics business to a third
party for approximately $4.5 million. The consolidated
financial

73



---



##### Table of Contents



STRATAGENE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

statements reflect a $1.8 million gain in equity in
earnings of joint venture for BCHs share of the realized
gain on the sale of these assets. The taxes attributable to the
gain are the responsibility of the members of BCH and
accordingly, the consolidated financial statements do not
include a provision for income taxes on this $1.8 million
gain. The LP made a partial distribution of the cash proceeds to
BCH on June 1, 2004. In turn, BCH made a distribution to
its members to pay for the taxes related to the sale in the
amount of $476,280.

On December 23, 2004, the Companys rights and
interests in the LP were redeemed by the LP. In return, the
Company received cash consideration of approximately
$1.0 million and recorded a non-operating loss of
approximately $0.2 million for the difference between the
carrying basis in the entity on December 23, 2004 and the
consideration received. As a result of the redemption
transaction, the Company has rights to additional amounts
realized by the LP from future royalty streams and future
clinical trial revenues. These amounts are recorded by the
Company as other non-operating income when the amounts are known
and the collection is assured.



|    |                                    
|--- | -----------------------------------
|14. | Selected Quarterly Data (unaudited)

Quarterly financial data for the year ended December 31,
2005 is as follows:

|                             |  |         |            |         |  |         |            |         |  |   |            |  |  |   |            | 
|---------------------------- |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- |  |  | - | ---------- | 
|                             |  | First   |            | Second  |  | Third   |            | Fourth 
|                             |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                             |  |         |            |         |  |         |            |        
|Total revenue                |  | $       | 24,600,040 |         |  | $       | 24,891,395 |         |  | $ | 23,695,883 |  |  | $ | 57,097,987 | 
|                            
|                            
|                            
|                            
|Gross profit                 |  |         | 16,134,012 |         |  |         | 16,198,154 |         |  |   | 15,248,943 |  |  |   | 37,546,271 | 
|                            
|                            
|                            
|                            
|Net income                   |  |         | 2,935,292  |         |  |         | 2,137,444  |         |  |   | 688,428    |  |  |   | 2,026,606  | 
|                            
|                            
|                            
|                            
|Basic net income per share   |  | $       | 0.13       |         |  | $       | 0.10       |         |  | $ | 0.03       |  |  | $ | 0.09       | 
|                            
|                            
|                            
|                            
|Diluted net income per share |  | $       | 0.13       |         |  | $       | 0.10       |         |  | $ | 0.03       |  |  | $ | 0.09       | 

Quarterly financial data for the year ended December 31,
2004 is as follows:

|                             |  |         |            |         |  |         |            |         |  |   |            |  |  |   |            | 
|---------------------------- |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- |  |  | - | ---------- | 
|                             |  | First   |            | Second  |  | Third   |            | Fourth 
|                             |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                             |  |         |            |         |  |         |            |        
|Total revenue                |  | $       | 19,422,022 |         |  | $       | 19,746,529 |         |  | $ | 23,076,572 |  |  | $ | 22,567,480 | 
|                            
|                            
|                            
|                            
|Gross profit                 |  |         | 13,496,437 |         |  |         | 12,621,319 |         |  |   | 14,989,050 |  |  |   | 14,381,579 | 
|                            
|                            
|                            
|                            
|Net income                   |  |         | 2,073,912  |         |  |         | 1,459,277  |         |  |   | 2,208,794  |  |  |   | 1,696,448  | 
|                            
|                            
|                            
|                            
|Basic net income per share   |  | $       | 0.13       |         |  | $       | 0.08       |         |  | $ | 0.10       |  |  | $ | 0.08       | 
|                            
|                            
|                            
|                            
|Diluted net income per share |  | $       | 0.13       |         |  | $       | 0.08       |         |  | $ | 0.10       |  |  | $ | 0.08       | 



|    |                 
|--- | ----------------
|15. | Subsequent Event

On January 24, 2006 and in relation to the jury verdict of
trebled damages of $15.9 million, reimbursement of
attorneys fees and costs of $4.2 million, and
pre-judgment interest of $0.5 million in the Third Wave
litigation, the total of which is $20.6 million, the
Company posted a $21.0 million surety bond in order to
permit the Company to appeal such decision without being subject
to collection activities by Third Wave. The cost of such surety
bond was $84,000, and the bond is secured by $21.0 million
of cash, which is being held in an interest bearing restricted
account. If the Company is ultimately required to pay out all or
a portion of the $20.6 million upon an adverse judgment
rendered by the court and affirmed on appeal, it would
negatively impact the Companys cash position. The Company
currently has the ability to pay such damage award with its
existing cash resources.

On January 6, 2006, the Company paid a special cash
dividend of $0.25 per share to holders of record of
Stratagenes common stock on December 16, 2005 in the
amount of $5,571,321. The special cash dividend was paid in
connection with the recognition of approximately
$23.4 million in pre-tax income in the fourth quarter of
2005 due to a settlement related to licensing certain Stratagene
technology to Cambridge Antibody Technology. The Company has no
intentions of paying any subsequent cash dividends in the
foreseeable future. The Companys credit facilities
restrict the payment of dividends, and the Company received a
consent from the credit facility holder to pay the
January 6, 2006 dividend.

74



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in the reports filed by the Company pursuant to the Securities
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission, and
that such information is accumulated and communicated to
management, including the Companys Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and in reaching a
reasonable level of assurance, management necessarily was
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

The Company carried out an evaluation, under the supervision and
with the participation of management, including its Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures as of the end of the period
covered by this annual report. Based on the foregoing, the
Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls
and procedures were effective at the reasonable assurance level.



| |                            
| | ---------------------------
| | Changes in Internal Control

There have been no changes in the Companys internal
control over financial reporting during the Companys
fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.




Item 9B.     Other
Information

None.




PART III.






|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant

The information required by this item will be contained in
Stratagenes definitive proxy statement to be filed with
the Securities and Exchange Commission in connection with the
Annual Meeting of our Stockholders (the Proxy
Statement), which is expected to be filed not later than
120 days after the end of the fiscal year ended
December 31, 2005, and which is incorporated in this report
by reference.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference;
provided, however, that the Compensation Committee Report on
Executive Compensation and the Performance Graph (1) shall
not be deemed incorporated by reference in this Annual Report on
Form 10-K and (2) shall not otherwise be deemed
filed as part of this Annual Report on
Form 10-K.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management

The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.

75



---



##### Table of Contents








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions

The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.






|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services

The information required by this item will be set forth in the
Proxy Statement and is incorporated in this report by reference.




PART IV






|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

(a) List the following documents filed as a part of this
report:



| |                         
| | ------------------------
| | 1. Financial statements.

The Consolidated Financial Statements required by this Item are
included in Part II, Item 8 of this Annual Report on
Form 10-K.



| |                                          
| | -----------------------------------------
| | 2. List of financial statement schedules.

The financial statement schedules listed under Item 15(c)
hereof are filed as part of this Annual Report on Form 10-K.



| |                     
| | --------------------
| | 3. List of exhibits.

The exhibits listed under Item 15(b) hereof are filed as
part of this Annual Report on Form 10-K.

(b) Exhibits.

The following exhibits are filed with this Annual Report on
Form 10-K:

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                           
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1(1)       |  | Agreement and Plan of Reorganization dated as of
    July 24, 2003 by and among the registrant, SHC Acquisition
    Sub, Inc. and Hycor Biomedical Inc.                                                                                                                                                                                   
|        | 2  | .2(1)       |  | Amendment No. 1 to Agreement and Plan of
    Reorganization dated as of December 29, 2003 by and among
    the registrant, SHC Acquisition Sub, Inc. and Hycor Biomedical
    Inc.                                                                                                                                                        
|        | 2  | .3(1)       |  | Amendment No. 2 to Agreement and Plan of
    Reorganization dated as of February 25, 2004 by and among
    the registrant, SHC Acquisition Sub, Inc. and Hycor Biomedical
    Inc.                                                                                                                                                        
|        | 3  | .1(2)       |  | Second Amended and Restated Certificate of
    Incorporation of the registrant                                                                                                                                                                                                                                                            
|        | 3  | .2(2)       |  | Amended and Restated Bylaws of the registrant                                                                                                                                                                                                                                                                                             
|        | 4  | .1(1)       |  | Specimen common stock certificate of the
    registrant                                                                                                                                                                                                                                                                                   
|        | 4  | .2(2)       |  | Registration Rights Agreement dated as of
    June 2, 2004 by and among the registrant and
    Dr. Joseph A. Sorge, the J. A. Sorge Trust I, the J.
    A. Sorge Trust II, the J. A. Sorge Trust III, the J.
    A. Sorge Trust IV, Biosense Partners, L.P. and the Joseph
    A. Sorge Charitable Remainder Trust dated December 26, 2002
|        | 4  | .3(1)       |  | Form of Lock-up Agreement executed by
    Dr. Joseph A. Sorge for the benefit of Hycor Biomedical Inc.                                                                                                                                                                                                                                    
|        | 10 | .1(3)#      |  | The Year 2000 Stock Option Plan of the
    registrant, as amended and restated                                                                                                                                                                                                                                                            
|        | 10 | .2(3)#      |  | The 2004 Independent Directors Option Plan of the
    registrant                                                                                                                                                                                                                                                                          
|        | 10 | .3(3)#      |  | Employee Stock Purchase Plan of the registrant                                                                                                                                                                                                                                                                                            
|        | 10 | .4(3)#      |  | Hycor Biomedical Inc. 2001 Stock Option Plan                                                                                                                                                                                                                                                                                              
|        | 10 | .5(3)#      |  | Hycor Biomedical Inc. 1992 Incentive Stock Plan                                                                                                                                                                                                                                                                                           

76



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                          
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .6(3)#      |  | Hycor Biomedical Inc. Nonqualified Stock Option
    Plan For Non-Employee Directors                                                                                                                                                      
|        | 10 | .7(2)#      |  | Amended and Restated Employment Agreement dated
    as of June 2, 2004 by and between the registrant and
    Dr. Joseph A. Sorge                                                                                                         
|        | 10 | .8(1)#      |  | Amended Employment Agreement dated as of
    September 1, 2002 by and between the registrant and John R.
    Pouk                                                                                                                        
|        | 10 | .9(4)#      |  | First Amendment to Restated Employment Agreement
    dated as of January 27, 2005 by and between the registrant
    and John R. Pouk                                                                                                     
|        | 10 | .10(1)      |  | Loan Agreement dated as of April 1, 1997 by
    and between Bastrop County Industrial Development Corporation
    and BioCrest Manufacturing, L.P., a wholly owned subsidiary of
    the registrant                                      
|        | 10 | .11(1)     |  | Thermal Cycler Supplier Authorization Agreement
    dated as of January 1, 1995 by and between The Perkin-Elmer
    Corporation and Stratagene California (formerly known as
    Stratagene), a wholly owned subsidiary of the registrant
|        | 10 | .12(1)     |  | Patent License Agreement dated as of
    July 26, 1994 by and between Roche Molecular Systems, P.
    Hoffmann-La Roche Ltd. and Stratagene California (formerly
    known as Stratagene), a wholly owned subsidiary of the registrant   
|        | 10 | .13(1)      |  | Lease Agreement by and between Slough TPSP LLC
    and Stratagene California (formerly known as Stratagene), a
    wholly owned subsidiary of the registrant, for 11011 North
    Torrey Pines Road, La Jolla, California                
|        | 10 | .14(1)      |  | Credit Agreement dated as of January 21,
    2004 by and among Merrill Lynch Business Financial Services
    Inc., the registrant, BioCrest Holdings, L.L.C. and BioCrest
    Manufacturing, L.P.                                        
|        | 10 | .15(5)      |  | Amendment No. 1 to Credit Agreement dated as
    of May 26, 2004 by and among Merrill Lynch Business
    Financial Services Inc., the registrant, BioCrest Holdings,
    L.L.C. and BioCrest Manufacturing, L.P.                         
|        | 10 | .16(5)      |  | Amendment No. 2 to Credit Agreement dated as
    of September 28, 2004 by and among Merrill Lynch Business
    Financial Services Inc., the registrant, BioCrest Holdings,
    L.L.C. and BioCrest Manufacturing, L.P.                   
|        | 10 | .17(6)      |  | Amendment No. 3 to Credit Agreement dated as
    of February 24, 2005 by and among Merrill Lynch Business
    Financial Services Inc., the registrant, BioCrest Holdings,
    L.L.C. and BioCrest Manufacturing, L.P.                    
|        | 10 | .18         |  | Amendment No. 4 to Credit Agreement dated as
    of January 24, 2006 by and among Merrill Lynch Business
    Financial Services Inc., the registrant, BioCrest Holdings,
    L.L.C. and BioCrest Manufacturing, L.P.                     
|        | 10 | .19(7)#     |  | Form of Employment Agreement dated March 10,
    2006, with Steve R. Martin, David W. Weber and John R. Pouk.                                                                                                                            
|        | 21 | .1          |  | List of subsidiaries of the registrant                                                                                                                                                                                                   
|        | 23 | .1          |  | Consent of Mayer Hoffman McCann P.C., Independent
    Registered Public Accounting Firm                                                                                                                                                  
|        | 23 | .2          |  | Consent of Deloitte & Touche LLP,
    Independent Registered Public Accounting Firm                                                                                                                                                      
|        | 31 | .1          |  | Certification of Chief Executive Officer pursuant
    to Rules 13a-14 and 15d-14 promulgated under the Securities
    Exchange Act of 1934                                                                                               
|        | 31 | .2          |  | Certification of Chief Financial Officer pursuant
    to Rules 13a-14 and 15d-14 promulgated under the Securities
    Exchange Act of 1934                                                                                               
|        | 32 | .1*         |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, as created by
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                         
|        | 32 | .2*         |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, as created by
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                         



---



|    |                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Registration Statement on
    Form S-4 (No. 333-109420) filed on October 2, 2003, as
    amended.

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|    |                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------
|(2) | Incorporated by reference to the Quarterly Report on
    Form 10-Q for the period ended June 30, 2004.          
|   
|(3) | Incorporated by reference to the Registration Statement on
    Form S-8 (No. 333-116544) filed on June 16, 2004.
|   
|(4) | Incorporated by reference to the Current Report on Form 8-K
    filed on February 1, 2005.                      
|   
|(5) | Incorporated by reference to the Quarterly Report on
    Form 10-Q for the period ended September 30, 2004.     
|   
|(6) | Incorporated by reference to the Annual Report on Form 10-K
    for the year ended December 31, 2004.           
|   
|(7) | Incorporated by reference to the Current Report on Form 8-K
    filed on March 15, 2006                         



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| | # | Indicates a management contract or compensatory plan or
    arrangement.



| |   |                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain confidential portions of this exhibit were omitted by
    means of redacting a portion of the text. An unredacted version
    of this exhibit was filed separately with the Secretary of the
    Commission pursuant to the registrants Application
    Requesting Confidential Treatment pursuant to Rule 406
    under the Securities Act.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | These certifications are being furnished solely to accompany
    this annual report pursuant to 18 U.S.C. Section 1350,
    and are not being filed for purposes of Section 18 of the
    Exchange Act and are not to be incorporated by reference into
    any filing of Stratagene Corporation, whether made before or
    after the date hereof, regardless of any general incorporation
    language in such filing.

(c) Financial Statement Schedules.

The following financial statement schedule is filed as part of
this Annual Report on Form 10-K:

|                |  |                                   |  |      |    | 
|--------------- |  | --------------------------------- |  | ---- | -- | 
|Schedule Number |  | Description                       |  | Page
|                |  |                                   |  |     
|II              |  | Valuation and Qualifying Accounts |  |      | 80 | 

78



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| |                       
| | ----------------------
| | STRATAGENE CORPORATION



| |     |                    
| | --- | -------------------
| | By: | /s/ JOSEPH A. SORGE

| |                                      
| | -------------------------------------
| |                                      
| | Joseph A. Sorge, M.D.                
| | Chairman of the Board,               
| | Chief Executive Officer and President



| |     |                    
| | --- | -------------------
| | By: | /s/ STEVE R. MARTIN

| |                                           
| | ------------------------------------------
| |                                           
| | Steve R. Martin                           
| | Vice President and Chief Financial Officer

Date: March 20, 2006

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.

|                                         |  |                                                                                                               |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                         |  |                                                                                                               |  |               
|Signature                                |  | Title                                                                                                         |  | Date          
|                                         |  |                                                                                                               |  |               
|                                        
|/s/ JOSEPH A. SORGEJoseph A. Sorge, M.D. |  | Chairman of the Board, Chief Executive Officer
    and President (Principal Executive Officer)                |  | March 20, 2006
|                                        
|/s/ STEVE R. MARTINSteve R. Martin       |  | Vice President and Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer) |  | March 20, 2006
|                                        
|/s/ CARLTON J. EIBLCarlton J. Eibl       |  | Director                                                                                                      |  | March 20, 2006
|                                        
|/s/ ROBERT C. MANIONRobert C. Manion     |  | Director                                                                                                      |  | March 20, 2006
|                                        
|/s/ PETER ELLMANPeter Ellman             |  | Director                                                                                                      |  | March 20, 2006
|                                        
|/s/ JOHN C. REEDJohn C. Reed             |  | Director                                                                                                      |  | March 20, 2006

79



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Schedule II




STRATAGENE CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS


FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003


|                                                               |  |            |           |            |  |            |           |             |  |  |         |  |  |  |           | 
|-------------------------------------------------------------- |  | ---------- | --------- | ---------- |  | ---------- | --------- | ----------- |  |  | ------- |  |  |  | --------- | 
|                                                               |  | Balance at |           | Charged to |  |            |           |            
|                                                               |  | Beginning  |           | Costs and  |  |            |           | Balance at 
|                                                               |  | of Year    |           | Expenses   |  | Deductions |           | End of Year
|                                                               |  |            |           |            |  |            |           |            
|Allowance for doubtful accounts
    receivable                 |  |            |           |            |  |            |           |             |  |  |         |  |  |  |           | 
|                                                              
|                                                              
|                                                              
|                                                              
|2003                                                           |  |            | 517,581   |            |  |            | 473,503   |             |  |  | 235     |  |  |  | 990,849   | 
|                                                              
|                                                              
|                                                              
|                                                              
|2004                                                           |  |            | 990,849   |            |  |            | (220,734  | )           |  |  | 3,343   |  |  |  | 766,772   | 
|                                                              
|                                                              
|                                                              
|                                                              
|2005                                                           |  |            | 766,772   |            |  |            | 53,357    |             |  |  | 239,947 |  |  |  | 580,182   | 
|                                                              
|                                                              
|                                                              
|                                                              
|Allowance for excess, obsolete and short-dated
    inventories |  |            |           |            |  |            |           |             |  |  |         |  |  |  |           | 
|                                                              
|                                                              
|                                                              
|                                                              
|2003                                                           |  |            | 1,872,121 |            |  |            | 494,931   |             |  |  | 552,765 |  |  |  | 1,814,287 | 
|                                                              
|                                                              
|                                                              
|                                                              
|2004                                                           |  |            | 1,814,287 |            |  |            | 1,730,830 |             |  |  | 216,117 |  |  |  | 3,329,000 | 
|                                                              
|                                                              
|                                                              
|                                                              
|2005                                                           |  |            | 3,329,000 |            |  |            | 1,708,848 |             |  |  | 962,524 |  |  |  | 4,075,324 | 

80