UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
      10-K





(Mark
      One)x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Fiscal Year Ended December 31, 2008o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the Transition Period From ____________ to ____________




Commission
File No. 000-22400




STRATEGIC
DIAGNOSTICS INC.


(Exact
name of Registrant as specified in its charter)





Delaware
            
            56-1581761(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            identification
      no.)111
      Pencader DriveNewark,
      Delaware
            
            19702(Address
      of principal executive offices)
            
            (Zip
      Code)




Registrant’s
telephone number, including area code: (302) 456-6789







Securities
registered pursuant to Section 12(b) of the Act: None




Title
      of Each Class
            
            
            Name
      of Each Exchange on Which RegisteredCommon
      Stock, $0.01 par value
            
            The
      NASDAQ Stock Market LLC




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




None







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 x




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




Indicate
by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o




Indicate
by check mark 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, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
      Accelerated Filer o
            Accelerated
      Filer o
            Non-Accelerated
      Filer o
            Smaller
      Reporting Company x(Do
      not check if a smallerreporting
      company)




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




The
aggregate market value of the common stock held by non-affiliates of the
Registrant was $52,166,704, calculated by using the number of shares outstanding
and the closing price of the common stock on June 30, 2008 (the last business
day of the Registrant’s most recently completed second fiscal
quarter).




As
of March 31, 2009 there were 20,273,895 shares outstanding of the Registrant’s
common stock, par value $0.01 per share.




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed
no later than April 30, 2009 with the Securities and Exchange Commission
relative to the Company’s 2009 Annual Meeting of Stockholders are incorporated
by reference into Part III of this Report.












PART
      I
              
              
              1ITEM
      1.
              BUSINESS
              
              1Overview
              
              1Life
      Sciences
              
              1Industrial
      BioDetection Tests
              
              2Antibody
      Products and Services
              
              3Food
      Safety Products
              
              4Agricultural
      Testing
              
              5Water
      Quality
              
              6Environmental
      Contamination Detection Products
              
              6Sales
      and Marketing Strategy
              
              7Competition
              
              7Markets
      and Products
              
              8Geographic
      and Customer Information
              
              8Regulatory
      Approvals
              
              8Manufacturing
              
              9Research
      and Development
              
              10Proprietary
      Technology and Patents
              
              11Employees
              
              12Organizational
      History
              
              12ITEM
      1A.
              RISK
      FACTORS
              
              13ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS
              
              18ITEM
      2.
              PROPERTIES
              
              18ITEM
      3.
              LEGAL
      PROCEEDINGS
              
              19ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              19PART
      II
              
              
              20ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES
              
              20Stock
      Performance Graph
              
              21ITEM
      6.
              SELECTED
      FINANCIAL DATA
              
              22ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              
              23Forward
      Looking Statements
              
              23Overview
              
              23Results
      of Operations
              
              24Year
      ended December 31, 2008 versus year ended December 31,
2007
              
              24Year
      ended December 31, 2007 versus year ended December 31,
2006
              
              26Liquidity
      and Capital Resources
              
              27Off-Balance
      Sheet Arrangements
              
              29Contractual
      Obligations
              
              30Critical
      Accounting Policies
              
              30New
      Accounting Standards and Disclosures
              
              32ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              
              34ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
              
              34ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
              
              34ITEM
      9A.
              CONTROLS
      AND PROCEDURES
              
              34ITEM
      9B.
              OTHER
      INFORMATION
              
              35PART
      III
              
              
              36ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
              
              36ITEM
      11.
              EXECUTIVE
      COMPENSATION
              
              37ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
              
              37ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
              
              37ITEM
      14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              
              37PART
      IV
              
              
              38ITEM
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
              
              38







PART
I




Item
1. Business




Overview




Strategic
Diagnostics Inc. (“SDI” or the “Company”) is a biotechnology company with a core
mission of developing, commercializing and marketing innovative and proprietary
products, services and solutions that preserve and enhance the quality of human
health and wellness.




The
Company’s Life Sciences portfolio includes products and custom services that
supply critical reagents used across the Life Science research and development
markets. The Company’s Genomic Antibody TechnologyTM (“GATTM”) is gaining wide
adoption in proteomic research, disease understanding and drug/biomarker
discovery among academic, biotech, in-vitro diagnostic and large pharmaceutical
customers.




The
Company’s Industrial BioDetection portfolio includes immunoassays which
represent advanced technology for rapid, cost-effective detection of food
pathogens as well as water and soil contaminants. SDI’s RapidChek®and
SELECT TM kits are experiencing growing adoption for the detection of pathogens
such as E. coli, Salmonella and Listeria in the production,
processing and manufacturing of food and beverages.




The
Company’s technology is also finding potential new applications in strategic
emerging markets such as renewable bio-fuel, where the application of the
Company’s patent pending phage technology is being developed to increase
corn-to-ethanol profits through improvements in plant efficiency that generate
higher yields at a lower operational cost, while increasing the value of
by-products used in animal feed by eliminating antibiotic contamination of those
feeds.




By
applying its core competencies of creating proprietary antibodies and assay
development, the Company has produced sophisticated testing and reagent systems
that are responsive to each customer’s analytical information
needs.




SDI
is a customer-centric organization. The Company’s goals are to consistently
deliver increased value to its customers that facilitate their business results,
reduce costs and help in the management of risk. SDI sales professionals focus
on delivering a quantifiable “return on investment” to their customers by
reducing time and total costs associated with applications for which the
Company’s products are used. In addition, the Company believes its tests provide
high levels of accuracy and reliability, which deliver more actionable test
results to the customer as compared to alternative products. The Company is
focused on sustaining profitable growth by leveraging its expertise in
antibodies and immuno-technologies to successfully develop proprietary products
and services that enhance the competitive advantage of its
customers.




The
Company believes that its competitive position has been enhanced through the
combination of talent, technology and resources resulting from the business
development activities it has pursued since its inception. The Company has
achieved meaningful economies of scale for the products it offers through the
utilization of its facilities in Newark, Delaware for the manufacture of test
kits and antibodies, and its facilities located in Dallas, Texas and Windham,
Maine for the manufacture of antibodies.




The
Company currently meets its customers’ needs and generates revenues through two
business units: Life Sciences and Industrial BioDetection Tests, which are
described below.




Life
Sciences




SDI
is a leader in the Life Sciences industry in providing a wide range of products
and services, including custom antibodies, pre-made catalog antibodies, bulk
“diagnostic-grade” antibodies, proprietary critical reagent products, and
associated bio-processing services. The Company partners with its customers for
the design, development and production of monoclonal and polyclonal antibodies
by deploying robust, refined process-oriented traditional methods and its
proprietary GATTM as determined by the customer’s application requirements. The
Company’s products and services are sold to, and often embedded in other
commercial products used by a wide range of customers including pharmaceutical,
biotechnology and diagnostic companies, and major biomedical research centers
both domestically and internationally. The Company is fully integrated to
deliver a full range of services encompassing its customers’ antibody needs from
antigen design and antibody development through large scale production and post
production bio-processing and immunoassay design and development. The Company’s
Certified Good Manufacturing Practices (cGMP) and ISO9001:2000 accredited
facilities employ sophisticated production processes that are reliable and
deliver high quality to its customers.


1




Genomic
Antibody TechnologyTM (GATTM). The human genome project has been a major
driving factor in the emergence of the study of proteomics. With a new knowledge
of genomes, the biomedical research community is exploring many new proteins,
their functions and the clues they reveal about human health. The study of gene
and protein functionality often requires the use of antibodies which has created
a growing demand; commercially available antibodies exist to less than 10% of
the human proteome. GATTM was developed to address this growing need for high
quality reagents and advanced biomolecules in the Life Science
industry.




Innovation
is a key element of the Company’s Life Science strategy for establishing and
maintaining sustainable differentiation in key markets. GATTM products and
services utilize sophisticated bioinformatics and immunization strategies to
produce high value antibody reagents and biomolecules. SDI’s application of
powerful proprietary algorithms provides GATTM the ability to “dial in” the
precise gene or protein sequence to produce a recombinant protein inside the
host animal which elicits an immune response to the encoded protein. This
“specificity by design” approach generates antibodies which recognize the
conformational epitopes on the native protein. The ability of any antibody to
recognize a protein’s naturally folded state has the potential to expand a
biomolecule’s utility to advance platforms like flow cytometry and therapeutic
candidate generation. Among the many advantages of GATTM is the technology’s
ability to produce reagents and biomolecules against traditionally difficult
cellular targets, such as highly conserved and transmembrane proteins. The
system is highly efficient and scalable, allowing the generation of custom
libraries consisting of hundreds of antibodies for use in the drug discovery,
biomarker discovery, diagnostic, and research markets.




Immunoassay Technology.An
immunoassay is an analytical test that uses antibodies to detect the presence of
a target substance in a complex sample matrix such as blood or other tissue with
high degrees of sensitivity, precision and accuracy. In the burgeoning fields of
proteomics and biomarker discovery, immunoassays play a central role in the
detection and quantification of proteins associated with disease diagnosis,
prognosis and progression, and therapeutic toxicity, efficacy and outcome. The
Company’s scientists are experts in the design and development of antibodies and
immunoassays in all fields of use including medical diagnostics and human
healthcare. The Company’s scientific expertise with multiple immunoassay
formats, coupled with a thorough understanding of the needs of markets and
specific customer applications, has allowed the Company to develop a diverse
array of immunoassay products designed to meet the analytical needs of multiple,
sizable markets. Recent activities by Company scientists have been focused on
developing multiplexed immunoassay tests employing the Company’s genomic
antibodies for commercial sale and in the field of biomarker discovery,
especially relating to cancer research.




Industrial
BioDetection Tests




The
Company’s detection technologies allow industrial customers to rapidly and
cost-effectively identify the presence of adulterants, such as chemical toxins,
biological pathogens and other contaminants, which can compromise human or
environmental safety, and/or financially impact efficiencies of production
processes. Many of the Company’s products are in the form of single use test
devices, sample prep materials and reagents, thus creating recurring revenue
opportunities. Specific industry applications include:




●
                Food and Beverage
      Manufacturing: Systems for high efficiency testing for the
      identification of pathogens and toxins in food, water and the
      manufacturing environment.●
                Water Utilities:
      Drinking water facilities test for chemical toxins and pathogens.
      Wastewater treatment facilities manage pollution control by testing for
      influent and effluent toxicity, pesticides, metals and efficiency
      maintenance in biological processing systems.●
                Environmental
      Management: On-site testing systems to increase the speed and
      accuracy of environmental remediation of soil and ground water
      pollutants.


2




●
              Agriculture and
      Agro-science: Systems for the detection, identity preservation, and
      quantification testing of genetically modified organisms, and test systems
      for feed and grain safety testing, including for the presence of
      mycotoxins.




By
leveraging its expertise in immunology, proteomics, bio-luminescence and other
bio-reactive technologies with innovative application and production
capabilities, the Company is able to provide sophisticated diagnostic testing
and reagent systems to a diverse customer base serving multiple vertical
markets.




Bacteriophage
Technology. Bacteriophage, or phage, are viruses that infect bacteria.
They are highly specific for the type of bacteria that they infect and do not
infect any other living cell from any other organism including animal, plant,
fungus or yeast. Because lytic bacteriophage specifically kill their bacterial
hosts and not other living cells, purified preparations of phage have been used
medicinally to treat bacterial infections of plants and animals, including
humans. The use of bacteriophage as a human therapeutic attests to the
biological specificity and safety of these viruses. In the last two years, the
U.S. Food and Drug Administration (“FDA”) has approved the use of bacteriophage
products for direct application to ready-to-eat foods for reduction of Listeria bacteria based on
the determination that phage are “generally recognized as safe”
(“GRAS”).




The
Company is applying its bacteriophage technology in its test kit products for
the detection of bacterial food pathogens, including its Salmonella SELECT TM product
and an E. coli SELECT TM
product that is currently in development. The Company has filed patent
applications claiming the use of bacteriophage to control competing and
cross-reacting bacteria, thereby reducing false positive and negative results
and improving analytical test performance.




The
Company has also filed patent applications claiming the use of specific lytic
bacteriophage to control contaminating bacteria in large scale industrial
fermentation processes such as ethanol and lysine production. The
Company believes that the use of bacteriophage is a significant improvement over
the use of antibiotics and will have an impact on yield and cost associated with
the production of ethanol from feedstock. The Company’s scientists are actively
engaged in the development of specific bacteriophage reagents together with
industry-leading producers of ethanol products.




Bioluminescence
Technology. The Company’s
Microtox® and
Deltatox® tests
use a specific strain of luminescent bacteria as biosensors of toxicity,
especially in water samples. These bacteria, when exposed to certain chemicals,
undergo a chemical reaction resulting in the emission of visible light. Light
output is inversely proportional to the toxicity of the sample being
tested.




SDI’s
solutions include the instrumentation, reagents and technology necessary to
employ testing. The Company has developed proprietary technology to analyze the
results and calculate toxicity according to industry standard and regulatory
methods. These solutions are highly reliable and offer significantly greater
precision than other commonly applied measures of toxicity employing small
numbers of living organisms (e.g., fish). The Company’s products, reagent kits,
instruments and software provide for rapid and inexpensive assessment of
toxicity in multiple applications including official regulatory methods in many
countries worldwide.




Life
Science Products and Services




The
Life Science proteomic tools and technologies market is experiencing growth due
to the expansion of research in further translating the information of the
genomic era into understanding of the role of proteins in biology and medicine.
According to Frost & Sullivan and other market researchers, the global
market for antibody-based reagents and tools in 2008 was approximately $1.8
billion with estimated growth in the range of 5-7%. Custom reagent development
and production account for approximately $450 million with an estimated 10-12%
growth rate and premade reagent products comprised approximately $1.4 billion
with an estimated growth rate in the 5-7% range. Customers in these markets
regard the Company as a leader in the design, development and production of
critical tools used to target, differentiate, quantify, and profile the vast
number of proteins related to human health. The Company links its historical
expertise in immunotools and immunoassays with the speed and agility of its
proprietary GATTM platform. Post-genomics drug development is a rapidly emerging
sector for proteomic immunotools. Within this market, investment has largely
shifted from discovery activities into more information-rich integrated
development activities. Within the past two years, the Company has supplied 20
of the top 30 pharmaceutical and biopharmaceutical companies with proteomic
immunotools to further their drug development programs as well as initial
clinical candidates for monoclonal antibody therapeutics. The Company produces
antibodies to targets and biomarkers of interest allowing customers to quickly
assess the feasibility, efficacy and safety of compounds in their developmental
pipelines.


3


The
Company sees rapid advances in the use of antibodies as tools to measure
biomarkers. The advent of profiling protein biomarkers as predictive,
prognostic, diagnostic, and reporters of activity throughout the drug discovery
and development workflow has created increased needs for protein identification
and quantitation tools. Biomarkers of disease play an important role in medicine
and have begun to assume a greater role in drug discovery and development. The
Company’s experience in antibodies and immunoassay design together with the GATTM
platform puts it in a strong position to address these needs.




The
Company is a supplier to many major manufacturers of antibody-based diagnostic
tests. The Company maintains regulatory compliance, industrial scale and
efficiencies, and requisite quality systems to assure a secure supply of
critical reagents to its partners. The Company provides proprietary reagents as
well as large scale Original Equipment Manufacturer (OEM) production of custom
antibodies.




The
Company supplies research reagents to a large number of academic and government
investigators. In 2008, SDI was selected through an open Request for Proposal by
Science Applications International Corporation (“SAIC”) in cooperation with the
National Cancer Institute to generate a library of monoclonal reagents against
cancer biomarkers. These antibodies will become part of a reference set of
validated tools for researchers.




The
Company has a portfolio of catalog antibodies made using its proprietary GATTM
platform available for sale online. Within the past year, many new customers
have benefitted from these oncology-focused research reagents. In many cases, a
singular product has been selected by a client to become a critical testing
reagent in long term projects, precipitating the transition of a per-unit sale
into a critical reagent supply agreement. These antibodies are now a resource
for the Company to assess application in novel platforms, assays, and multiplex
applications.




Customer
service, innovation, and expertise are the foundation of the Company’s
competitive advantage. SDI is among the largest custom antibody providers in the
United States. The Company’s facilities are purposely built and managed for
antibody production. These facilities are ISO 9001:2000 certified and accredited
by the Association for the Assessment and Accreditation of Laboratory Animal
Care (“AAALAC”), the highest standard in laboratory animal care. The Company is
licensed by the U.S. Department of Agriculture (“USDA”) and registered with the
National Institute of Health (“NIH”) Office of Laboratory Animal
Welfare.




Food
Safety Products




The
Company’s food safety product line includes enrichment media and rapid tests to
detect food pathogens, including E. coliO157 (including H7),
Listeriaand Salmonella. The Company is a
leader in tests for targeted traits in genetically engineered plants, tests to
detect Genetically Modified (GM) traits in grain, seeds, food ingredients and
food fractions and tests to detect naturally occurring fungi in grains
(mycotoxins).




Food Pathogen
Testing




Pathogen
specific testing is an increasingly important part of microbiology testing
performed in the global food industry. The worldwide market for pathogen tests
and media is estimated to be between $850 million and $1 billion according to
independent studies and the Company’s own market research. According to several
independent studies, the market for pathogen tests grew at an average rate of 7%
in 2007 and this growth rate is expected to continue for the next several years.
Growth in pathogen testing is driven primarily by regulatory changes, customer
testing trends, industry consolidation, and globalization of the world’s food
supply.


4




Since
2001, the Company has invested in the development and market introduction of
products for the detection of pathogenic microorganisms in food. In 2002, the
Company introduced its first test method for the pathogen E. coli O157 (including H7).
The RapidChek® E. coli O157:H7 test strips
and proprietary media system have received ongoing market acceptance in the
United States. In 2005, the Company was notified that its RapidChek® E. coli O157:H7 assay had
been selected as the assay method of choice for the National School Lunch
Program for screening raw and frozen beef for the organism. The National School
Lunch Program is a federally-assisted meal program that operates in over 97,000
public and non-profit private schools and residential childcare institutions.
The USDA is responsible for determining that the meat produced for the National
School Lunch Program is safe. In addition, the RapidChek® test for
detection of E. coli
O157:H7 was selected by the Food Safety Inspection Service (“FSIS”), the public
health agency in the USDA, as an approved methodology for screening of the
organism in raw beef samples. The FSIS section of the USDA conducted a rigorous
evaluation of rapid methods that are currently on the market for screening
pathogens, including polymerase chain reaction, and automated/manual
immunoassays and benchmarked kit performance against the current USDA
traditional cultural method. The RapidChek® E. coli O157:H7 method was
evaluated and determined to be the “best in class” against the other
immunological methods tested. RapidChek® has been
included in the USDA Microbiological Laboratory Guidelines as one of only two
immunoassays that is recognized for use in screening raw beef for E. coli O157 (including H7).
The Company believes that the acceptance of its method by the agencies
regulating food safety has increased sales as producers seek to use methods that
have been evaluated by the regulatory agencies. The RapidChek® E. coli O157:H7 test system
has also received international recognition with regulatory approvals in Canada
(Canadian Food Inspection Agency) and Australia (Australian Quarantine and
Inspection Service).




In
June 2004, the Company launched its test for detection of Listeria. This test system
received AOAC Research Institute (“AOAC”, “AOAC-RI”) approval for both food and
environmental samples, as opposed to several competitive methods on the market
that have AOAC approval for food samples only. As a result of new regulations
enacted by the USDA in 2003, environmental samples account for approximately 80%
of all Listeria
testing. The Listeria
test incorporates the use of a proprietary enrichment procedure that provides
results in 40 hours, which is 8-12 hours faster than most other methods on the
market. In addition, the proprietary enrichment system does not require a
transfer step, providing significant labor savings compared to other methods on
the market. As with all pathogen systems, food companies require internal
evaluations prior to adoption. In these evaluations, the Company’s Listeria test system
demonstrated superior performance and improvements in efficiency and
productivity compared to most competitive methods on the market. As a result of
improvements in performance and cost-in-use, the Company has had the Listeria product adopted by a
number of very large food processors. When larger food companies adopt a
particular method, the method generally gains credibility in the
marketplace.




In
August 2006, the Company launched its new RapidChek® SELECTTM
Salmonella test with
AOAC-RI approval at the International Association of Food Protection Meeting in
Calgary, Canada. This novel test is based on a patent pending phage technology
combined with SDI’s next generation lateral flow technology and has
revolutionized the Salmonella testing arena. The
RapidChek® SELECT TM
test was developed to meet some of the challenges faced in Salmonella testing, including
high false positive and negative rates, which can be particularly prevalent in
high burden samples. The patent claims technology that increases both the
specificity and sensitivity of rapid pathogen tests. In September 2006, the
RapidChek® SELECT TM
Salmonella test was the
first lateral flow test approved for the National Poultry Improvement Plan, and
will provide an attractive alternative to current methods used such as labor
intensive cultural methodologies. The RapidChek®SELECT TM
Salmonella test was
evaluated and adopted by several of the top poultry and beef processors in 2007.
The launch and acceptability of RapidChek® SELECT TM
in the market has also facilitated the increase in sales of the RapidChek® Listeria system, as most
processors prefer to utilize one platform for multiple testing needs. Customers
have cited the use of SELECT TM contributing to improved laboratory efficiencies
and significant savings as compared to what they were previously using to
test.




In
late 2008, the Company decided to discontinue the distribution of the Lumitester
PD-10N and LuciPac W hygiene monitoring system, manufactured by the Kikkoman
Corp., with the objective of enhancing focus on the Company’s core
products.




Agricultural
Testing




Genetically Modified
Crops




Tests
for GM traits are generally used to determine whether the sample tested contains
the protein associated with the genetic modification. Seeds, grain or leaf
tissue are typically tested. The tests may be employed by users desiring to
ensure that seed or grain lots are either GM-free or, in other cases, that they
contain a specified amount of the GM material in order to meet certain GM
requirements. Among the commodities typically tested with the Company’s products
are corn, soybeans, rice and cotton. The Company estimates that the worldwide
demand for protein based testing of genetically modified crops is $15 million
per year. To address this market, the Company maintains a small U.S. sales force
and distribution in the five principal countries that, in addition to the United
States, are responsible for 96% of the GM crop area.


5




The
Company has developed a simple “one-step” test that is used at the point of
testing to determine if an individual plant contains the targeted genetic trait.
Commercial seed producers use these products to ensure the quality of their
products. This type of test also can be used in crops for enforcement purposes
to expose unlicensed application of the genetic technology.




Acceptance
of GM crops has increased and as the development of new traits has risen, some
countries have adopted regulations on biotech crops. In 2004, the European Union
(“EU”) adopted regulations regarding labeling and traceability of GM food and
feed with enforcement beginning in April 2004. The regulatory tolerance for
EU-authorized GM traits is 0.9%, and 0.5% for unauthorized GM traits that have
already received a favorable risk assessment from various U.S. regulatory
agencies. Traceability systems must be in place and must demonstrate that any
traces of GM traits are adventitious and are technically avoidable. The Company
no longer believes that the impact of regulations will result in stricter
testing of grain and grain exports from countries growing GM crops, or increases
in testing to meet these new regulations. Conversely, widespread acceptance of
GM crops is generally reducing the practice of grain testing as GM traits are
increasingly ubiquitous in the environment.




The
Company believes that it continues to be well positioned to provide the
analytical tools to allow food companies to purchase such premium products with
confidence, due to its existing relationships with large agricultural
biotechnology companies and the current success of its technology, particularly
in the area of GM traits.




Water
Quality




The
Company’s water quality product line includes industrial bio-detection kits for
water and soil contaminants such as pesticides, explosives, petroleum related
products and polychlorinated biphenyls (PCBs); Microtox®toxicity
tests used in a wide array of market segments; and products for detecting
polymers and corrosion in water. In addition to use by water utilities and
related government agencies, the product line is used in many industrial
manufacturing segments, environmental remediation, research and ecological
studies. The global market for analytical testing associated with the water and
environmental industries is estimated at $1.4 billion based on a compilation of
market research studies. The overall growth rate in developed markets is
estimated at 2-3%, while the growth rate in developing markets, primarily Asia,
is estimated at 7-9%. The biggest driver for growth is government regulations
associated with water quality and environmental protection.




Toxicity
Testing




In
2001, the Company acquired AZUR Environmental Limited to add the Microtox® product
line to its portfolio. Microtox®is a
unique rapid acute toxicity test that detects a broad range of toxins and
chemical agents. The Microtox® brand is
the global reference standard for rapid acute toxicity testing. Microtox®makes
toxicity analysis simple and easy to perform and results can be generated in as
little as 30 minutes. The Company also markets a portable version of the
Microtox®
technology known as Deltatox®. Many
water utilities and emergency response teams are using Deltatox®
technology as part of their emergency response programs. Microtox® has been
widely accepted by the wastewater treatment industry where managing and
controlling costs by accurately assessing the mechanical, operational and
chemical performance of these facilities is critical. Microtox® delivers
value by helping to improve operating efficiency and by helping facilities stay
in compliance with their discharge permits.




In
February 2006, the Company announced that its Microtox® bioassay
technology was awarded the Designation and Certification as an “Approved Product
for Homeland Security” by the Department of Homeland Security. In December 2007,
the Company was awarded a Federal Supply Schedule GSA contract. The contract
further expands the Company’s reach into federal, state and local agencies, in
addition to making it easier for these agencies to do business with the
Company.




Environmental
Contamination Detection Products




The
entrance of pesticides into the water supply is a result of agricultural and
residential runoff. In areas of substantial agricultural activity, drinking
water is tested for pesticides to protect supplies and to comply with federal
and state regulations. The Company’s pesticide test kits are used in situations
where field testing, or the testing of one specific pesticide gives the test kit
much greater utility than a lab-based analyzer. Users include federal agencies
such as the U.S. Geological Survey and USDA, state environmental and health
departments, water utilities and environmental engineering companies. The
Company also sells immunoassay products in the environmental market. The Company
offers three different test formats, each with performance characteristics that
make them well suited for a particular customer application. All of the
Company’s environmental test kits are capable of analyzing multiple samples in
parallel. The Company is currently marketing kits for a variety of contaminant
classes and has been able to expand its product offerings through distribution
agreements to accommodate new technologies.


6


Sales
and Marketing Strategy




The
Company markets and sells products in the life science, food safety, and water
quality product categories through a U.S. direct sales force, Internet presence
and a network of over 50 distributors in Canada, Mexico, Latin America, Europe
and Asia and through the Company’s corporate partners. The Company also has a
European office and sales operation near London, England. The Company evaluates
various sales and service models that can contribute to the profitable growth of
business. Identifying the most effective channels to market will allow the
Company to better allocate resources to both new and existing growth
opportunities.




In
the United States, the primary sales channel is through a direct sales force
comprised of geographically based field sales professionals, key segment
managers, and inside sales associates. The sales force is augmented by customer
service and project management organizations, and applied technical marketing
specialists which assure that all elements of the customer’s buying experience
meet and exceed their performance expectations.




On
the basis of its strengthening market position, the Company continues to develop
channels to market and accelerate predictability and sustainability of revenues.
The Company is investing in its direct sales force through the addition of new
sales representatives and focused sales and technical training. The Company
continually measures sales performance and maintains discipline in the balance
between the addition of new sales resources and ongoing efforts to continually
improve sales efficiency and effectiveness of existing resources.




The
Company is also focusing on its network of quality channel partners. In 2006,
the Company added its first distributor for its custom antibody offering. The
Company is working to add additional channel partners for both its custom and
catalog offerings nationally and internationally.




In
2005, the Company signed an exclusive distribution agreement with DuPont
Qualicon for the representation of the Company’s immunoassays for food pathogen
detection. In 2007, the Company moved to a non-exclusive distribution agreement
with DuPont Qualicon and began to add new distribution partners for this product
line. The Company expanded its international distribution network for food
safety pathogen products, adding and training a total of 15 independent
distributors to sell the RapidChek® product
line in high growth markets globally, including Southeast Asia, Europe and Latin
America. The Company also took a much more aggressive role in marketing these
methods. It is anticipated that the additional distributors and international
expansions of promotion/sales of the products will increase revenues as they
gain acceptability.




Competition




Many
of the Company’s potential competitors are large companies with substantially
greater financial and other resources than the Company. To the extent that any
such companies enter into one or more of the Company’s markets, the Company’s
operations could be materially adversely affected. The Company anticipates
increased competition as potential competitors perceive that the Company’s
products have become commercially proven, or if the Company cannot maintain
competitive differentiation.




In
the Ag/GMO market, the Company competes with several small, privately held
companies (Agdia, Envirologix) that market very similar, if not identical
products.




In
food pathogen testing, the Company is among the more recent entrants to the
market and faces a broad base of competition. The worldwide market for pathogen
tests is estimated to be between $850 million and $1 billion annually and as
such has drawn many competitive products. The Company’s RapidChek® E. coliO157:H7, Salmonellaand Listeriatests compete
globally with numerous competitive rapid testing systems. Instrument-based tests
are offered by bioMerieux SA and DuPont Qualicon among others. Competitive strip
based tests are offered by Neogen Corp., BioControl Systems, Inc. and others. In
addition, traditional lab culture methods offer indirect competition. The
Company hopes to gain market share from competitive methods and with new users
due to key product advantages such as speed of result, ease-of-use, accuracy and
by providing overall cost savings.




The
Company believes there are no meaningful direct competitors for the Company’s
Microtox® product
line in the United States. In Europe and other parts of the world, the Company
competes against Checklight, Ltd., an Israeli-based company, and one other
instrument-based test method produced by Hach Lange, an affiliate of The Danaher
Corporation, which has greater technical and marketing resources than the
Company. The Company believes its products have a number of competitive
advantages including the comprehensive screening for general toxicity and
competes effectively on superior features and functions.


7




With
respect to the environmental contaminant test products, the Company currently
receives the greatest competition from fixed site environmental laboratories and
several small privately held companies. Traditional analytical methods for
environmental contamination are often utilized for confirmation and closure of
environmental sites. The Company believes it has detection products which are
easy to use and which provide greater value in use than competitive
offerings.




In
the antibody product category, the competitive landscape is rapidly changing as
the Company continues to shift its emphasis to earlier activities in drug and
biomarker discovery. The Company will increasingly compete with technology
companies that offer products and services for the discovery and advancement of
novel antibodies. The Company believes that its proprietary GATTM platform
coupled with its expertise in assay development provides differentiated access
to the high value application markets it is targeting.




The
Company also competes in its traditional antibody markets with the internal
capabilities of some of the Company’s large pharmaceutical, research and
diagnostics customers. These customers often have significantly greater revenues
than the Company. Generally these customers produce some products internally and
purchase similar products from the Company.




Competitors
in the market as third party providers of custom, large scale antibody reagent
production include Covance (public), Harlan (private), Lampire (private) and
Scantibodies (private). Additionally, there are a number of smaller companies
that offer competing products. In the custom research reagent market, the
Company has identified 49 companies offering some form of traditional antibody
production from customer-provided antigens. The Company believes that the scale
of its operations and the breadth of its product lines, among other things, are
significant competitive advantages against both large and small competitors. In
the catalog antibody space, there are over 130 companies competing for this
$1.35 billion market.




Markets
and Products




The
Company sells products in the food safety, water quality and antibody market
categories through its U.S. direct sales force, a network of over 50
distributors in Canada, Mexico, Latin America, Europe and Asia and the Company’s
corporate partners.




Geographic
and Customer Information




The
following table sets forth sales by geographic region:




Year
                                  Ended
      December 31,2008
                                
                                2007
                                
                                2006United
      States
                                
                                $
                                20,744
                                
                                $
                                21,154
                                
                                $
                                19,498Rest
      of the world
                                
                                
                                6,915
                                
                                
                                6,053
                                
                                
                                6,024Total
                                
                                $
                                27,659
                                
                                $
                                27,207
                                
                                $
                                25,522




The
Company’s basis for identifying sales by country is the ship-to location. There
were no individual countries outside of the United States that represented more
than 10% of the total revenues of the Company. There are no significant
long-lived assets located outside the United States.




Regulatory
Approvals




Among
other things, the Company is engaged in the development of antibody and
immunoassay products for use in the medical and human healthcare fields. Its
current products in this market are intended for “research use only.” Tests for
bacterial food pathogens, mycotoxins, genetically engineered traits in plants
and water treatment polymers are currently unregulated. However, agencies such
as the Environmental Protection Agency (“EPA”), the FDA, and the FSIS are
engaged in testing and, together with organizations like the AOAC, maintain
compilations of official methods for use in testing in certain market segments.
Some of these organizations also issue procedures and guidelines for validating
new methods. Although not required, official methods adopted by these agencies
sometimes have the commercial impact of regulations because the industry and the
Company’s customers tend to follow the practices of regulatory
agencies.


8




The
Company believes that the validation and acceptance of its products by
regulatory agencies plays a significant role in market acceptance. EPA SW-846 is
the compendium of test methods published by the EPA’s Office of Solid Waste
listing those analytical methods that have been validated by the EPA for a
stated purpose. The vast majority of the Company’s analytical methods for
environmental soil sample analysts are listed in EPA SW-846. Many federal, state
and local environmental programs often refer to and rely on EPA SW-846 methods
for purposes of remediation and monitoring.




The
environmental legislation and regulations that the Company believes are most
applicable to its current business are the Research Conservation and Recovery
Act (“RCRA”), Comprehensive Environmental Response, Compensation and Liability
Act (“CERCLA”), Toxic Substances Control Act (“TSCA”), Federal Insecticide,
Fungicide and Rodenticide Act (“FIFRA”) and the Pure Food and Drug Act. For
analysis of water and wastewater, the Safe Drinking Water Act, the Clean Water
Act and the National Pollution Discharge Elimination System (“NPDES”) permitting
program acceptance under the Clean Water Act also will be significant to the
Company’s business. As the utility of the Company’s Microtox® products
continues to be widely recognized in drinking water security applications,
regulations and mandates associated with Homeland Security programs may also
have an impact on the Company’s business. Collectively, these programs regulate
the management, disposal and clean-up of hazardous substances and protect the
nation’s ground and surface water and drinking water supplies.




The
Company received ISO 9001:2000 certification in January 2009 for all five of its
facilities from American Systems Registrar, an ANSI-ASQ National Accreditation
Board (“ANAB”) Accredited International Registrar for the ISO 9001 standards.
Recognized and respected worldwide, ISO 9001:2000 standards are put forth by the
International Organization for Standardization (“ISO”). This certification
demonstrates the Company’s commitment to excellence in product and service
quality, and a continued focus on improving the customer
experience.




The
Company has maintained AAALAC (Association for the Assessment and Accreditation
of Laboratory Animal Care) accreditation at its Delaware facility since 1992 and
at its Maine facility since 2000. The Company volunteers to participate in the
AAALAC program in addition to complying with the local, state and federal laws
that regulate animal research. In order to maintain these accreditations, the
Company undergoes regular inspections and reviews. The Company also holds
approval from the USDA, OLAW (Office of Laboratory Animal Welfare), and the NIH,
further validating the stewardship of the Company in proper laboratory animal
care.




Manufacturing




The
Company manufactures test kits for the detection of a wide array of analytes in
five immunoassay formats and one bioluminescence format. The five formats are:
one step lateral flow tests; coated tubes; latex particles; magnetic particles;
and micro-titer plates. The Company manufactures a biological supplement that
enhances the detection of certain analytes and improves overall performance of
certain assay formats. In addition to test kits, the Company supplies ancillary
equipment and supplies including test evaluation instruments, reagents, sample
media, spectrophotometers, pipettes, balances and timers.




The
key critical reagent manufacturing technologies are conjugation chemistries,
antibody formulations, calibrator preparation, lateral flow strip production,
microbiological and immunoassay processes. Reagent production processes include
filling and dispensing liquids, subcomponent and finished goods assembly,
in-process testing, quality control, packaging and shipping. The critical
reagents and production assembly groups produce test kits in the Newark,
Delaware laboratories. Biological materials are primarily developed and produced
in-house; however, some reagents are licensed from third parties or purchased
from commercial sources. A crucial step in the Company’s manufacturing process
is the stabilization of the immunoreagents utilizing proprietary lyophilization
techniques. In general, raw materials used by the Company in its products are
obtainable from multiple sources. The Company purchases instruments and
ancillary equipment from outside vendors. A number of the instruments sold by
the Company were developed to be used exclusively with the Company’s products
and are subject to specific supply agreements. The Company believes that the raw
materials, instruments and equipment used in the manufacture of its products are
sufficiently available for the Company’s current and foreseeable manufacturing
needs.


9




The
Company manufactures its products in accordance with the FDA’s Good
Manufacturing Practices guidelines and has implemented data-driven problem
solving, measurement and statistical process controls to troubleshoot and
continuously improve quality and output performance. Capital investment and
equipment automation have reduced key parameter variation, improved production
efficiencies and lowered manufacturing costs. The Company utilizes planning
tools to control all elements of the supply chain and manufacturing processes,
including raw material procurement, inventory management, capacity planning and
production scheduling, work-in-process tracking, order processing and
fulfillment, shipping and customer invoicing. The Company believes the existing
facilities and equipment are sufficient to support a significantly larger
production demand.




The
Company also supplies a wide array of custom antibody products and services to
the in-vitro diagnostic, academic, pharmaceutical and medical research
industries. Antibodies are developed and produced using animals or cell culture
methods. Laboratories are maintained to prepare immunogens, perform chemical
conjugations, purify antibodies, and perform a range of quality control
procedures. The cell culture laboratories support the development of hybridomas
and manufacture of monoclonal antibodies. The cell culture laboratories also
provide services to enhance the productivity of cell lines, establish Master
Cell Banks, and store cell lines in secure fail-safe cryogenic systems. In 2008,
the Company increased the capacity to perform Hybridoma development projects to
accommodate the increase in demand for these projects. Animal facilities house
specific-pathogen-free animals that are tested routinely to assure they are
maintained under the highest health standards. Current capacity utilization in
antibody production is approximately 70%, and there is additional land and
zoning clearance on the 64-acre site in Windham, Maine to double polyclonal
operations.




In
2005, the Company established a research and manufacturing center in Dallas,
Texas. This facility is designed for gene building and protein chemistry. The
GATTM offering is supported by a robust high throughput operation that is
initiated in Dallas and completed in either Maine or Delaware, depending upon
the end product. A sophisticated electronic operations management system was
established that links the operations seamlessly. Resulting products and
information are managed by the Company’s MRP and LIMS systems.




Research
and Development




The
Company engages in substantial research and development activities (R&D)
involving development of products, services and technology platforms for its two
primary markets, Life Sciences and Industrial BioDetection Kits. In the years
ended December 31, 2008, 2007 and 2006, the Company incurred approximately $3.6
million, $2.9 million, and $2.6 million, respectively, in research and
development expenditures. Research and development on the Company’s proprietary
GATTM product offering, bacteriophage technology, and food safety products
accounted for 83% of the total R&D effort for the year ended December 31,
2008.




The
Company’s primary laboratory facilities located in Newark, Delaware were
designed and built specifically for conducting research and development relating
to antibody and immunoassay technology. These facilities include state-of-the
art, cGMP antibody development and large-scale production facilities. The
Company has assembled a scientific staff with extensive experience in the
development, production and purification of monoclonal and polyclonal
antibodies. The Company also has extensive expertise in the development and
production of reagents from the antibodies it produces, as well as commercial
immunoassays employing those reagents.




In
2008, the Company developed over 1,000 novel antibodies using GATTM, focusing
primarily on cancer protein biomarkers for inclusion in a web-based product
catalog and development of test products for the Life Sciences market.
Consistent with the vision of applying its core technology to the field of
proteomics and biomarker discovery, the Company is developing multiplex
immunoassays employing the novel antibodies developed using the GATTM platform.
In addition, the Company entered into agreements with the University of Delaware
and the Helen F. Graham Cancer Center in October 2008 to use its genomic
antibody platform to discover biomarkers of prostate cancer metastasis and colon
cancer stem cells.




In
the food safety market, the Company completed the development of a new
RapidChek® SELECT TM
product containing its proprietary bacteriophage technology for the detection of
E. coli O157 in food.
The product was successfully validated in the United States by the AOAC and is
currently being validated by Association Française de Normalization in Europe.
The use of bacteriophage to improve the specificity and sensitivity of testing
methods is unique to the Company and the subject of a recently allowed U.S.
patent and pending patent application worldwide.


10




The
Company also has patents pending for the use of bacteriophage to control the
growth of harmful bacteria in large scale industrial fermentation production
processes including corn-to-ethanol production. In August 2008, the Company
tested the bacteriophage technology at pilot scale at the National Corn to
Ethanol Research Center in Edwardsville, Illinois. The trial demonstrated the
efficacy of the phage treatment and the Company is in the process of exploring
commercialization opportunities for the technology.




The
Company’s research and development personnel are experts in many advanced
research disciplines in life sciences including immunology, immunochemistry,
molecular biology, protein chemistry, biochemistry, microbiology, and synthetic
organic chemistry. In addition to the technical expertise resident within the
research and development organization, the Company’s technical manufacturing
organization is expert in large-scale cGMP production, bioprocessing,
purification and quality control of antibodies and reagents. The Company’s core
expertise is in antibody and immunoassay development and it is a major developer
and producer of monoclonal antibodies.




Research
and development activities are focused on developing proprietary technology and
products to expand the Company’s differentiated market position in Life Science
and food safety markets. The Company is a recognized leader in the field of
contract antibody and assay development services primarily for large
pharmaceutical, biotech, diagnostic and chemical companies, and the development
of rapid test kits in the food, water quality and agricultural sectors based on
immunoassay technology. In addition, the Company has extensive expertise,
facilities and equipment relating to the development and manufacture of one-step
lateral flow tests.




The
Company’s research and development organization consists of approximately 11
individuals, eight of whom hold advanced academic degrees. In addition,
approximately one-third of the Company’s employees are involved in technical job
functions.




Proprietary
Technology and Patents




The
Company’s products are based on the use of proprietary reagents, technology and
test systems developed by Company scientists or acquired externally.
Accordingly, the Company has implemented a number of procedures to safeguard the
proprietary nature of its technology. The Company requires its employees and
consultants to execute confidentiality agreements upon the commencement of an
employment or consulting relationship with the Company and all employees are
required to assign to the Company all rights to any inventions made during their
employment or relating to the Company’s activities. Additionally, the Company
seeks to protect its technology and processes through the patent process. The
Company currently holds 26 issued U.S. patents, as well as three U.S. patents
licensed for exclusive use by the Company. One U.S. patent application regarding
the use of bacteriophage as selective agents is pending.




There
can be no assurance that the Company’s patent applications will result in the
issuance of any patent or that any patents issued to the Company would provide
protection that is sufficiently broad to protect the Company’s technology and
products. In addition, the Company cannot be certain that it was the first
creator of inventions covered by pending patent applications or that it was the
first to file patent applications for such inventions. In addition to seeking
patent protection for the Company’s proprietary information, the Company also
relies upon trade secrets, know-how and continuing technical innovation to
maintain competitiveness for its products and services. The Company has
developed a number of proprietary technologies which it has chosen not to
patent, including immunization protocols, DNA and plasmid constructs,
stabilization systems for reagents, chemical syntheses, and strategies relating
to antibody development.


11





U.S.
      Patent
            
            Title5,426,035
            
            Method
      for compensating toxicity test data for the measured toxicity of a
      reference sample5,427,955
            
            Photochemical
      determination of organic compounds (license)5,429,952
            
            Marking
      of products to establish identity and source (license)5,449,611
            
            Polyaromatic
      hydrocarbon (PAH) immunoassay method, its components and a kit for use in
      performing the same5,541,079
            
            Monoclonal
      and polyclonal antibodies and test method for determination of
      organophosphates (license)5,547,877
            
            Methods
      for the rapid detection of toxic halogenated hydrocarbons and kits useful
      in performing the same5,593,850
            
            Monitoring
      of industrial water quality using monoclonal antibodies to
      polymers5,618,681
            
            Polyaromatic
      hydrocarbon (PAH) immunoassay method, its components and a kit for use in
      performing the same5,679,574
            
            Quantitative
      test for oils, crude oil, hydrocarbon, or other contaminants in soil and a
      kit for performing the same5,691,148
            
            A
      petroleum immunoassay method, its components and a kit for performing the
      same5,780,250
            
            Immunoassay
      standards for polyaromatic hydrocarbon detection5,834,222
            
            Polychlorinated
      Biphenyls (PCB) immunoassay method5,858,692
            
            PCB
      immunoassay5,874,216
            
            Indirect
      label assay device for detecting small molecules and method of use
      thereof5,891,657
            
            Immunoassay
      standards for volatile analytes with benzene rings5,919,645
            
            Method
      for the direct determination of the toxicity of particulate
      solids6,096,563
            
            Dual
      particle immunoassay method & kit6,146,903
            
            Method
      for determination of water treatment polymers6,190,922
            
            Substrate
      supported liquid extraction6,376,195
            
            Indirect
      label assay device for detecting small molecules and method of use
      thereof6,420,530
            
            Determination
      method6,524,810
            
            Method
      of making bioluminescent assay reagent based on non-viable E.
      coli6,663,833
            
            Integrated
      Assay Device and Methods of Production and Use6,750,328
            
            Antibodies
      for detection of water treatment polymers6,911,534
            
            Method
      for determination of water treatment polymers7,189,520
            
            Compositions
      and methods for detecting animal byproduct in feed7,214,505
            
            Cell-based
      assay for the detection of toxic analytes7,241,626
            
            Isolation
      and confirmation of analytes from test devicesAllowed
            
            Bacteriophages
      as Selective Agents




Employees




As
of December 31, 2008, the Company employed 166 full time and three part time
employees. The workforce was supplemented by six agency-provided contractors.
All of the Company’s employees have executed agreements with the Company
agreeing not to disclose the Company’s proprietary information and assigning to
the Company all rights to inventions made during their employment. Key personnel
have signed agreements prohibiting them from competing with the Company. None of
the Company’s employees are covered by collective bargaining agreements. The
Company believes that its relations with its employees are good.




Organizational
History




Strategic
Diagnostics Inc. is a Delaware corporation formed in 1990.


12




Item
1A. Risk Factors




The
following is a discussion of certain significant risk factors that could have an
adverse impact on our financial condition, performance and
prospects.




Our
products must gain market acceptance for us to increase revenue.




Any
product that we sell or develop must compete for market acceptance and market
share. An important factor will be the timing of market introduction of
competitive products. Accordingly, the relative speed with which we and
competing companies can develop products, complete any required approval
processes, and supply commercial quantities of the products to the market will
be an important element of market success.




Significant
competitive factors include:


●
              timing
      and scope of regulatory approval;●
              product
      availability;●
              awareness
      and acceptance of our products and their application;●
              channels
      to market;●
              marketing
      and sales capabilities;●
              product
      attributes relative to their cost;●
              price;
      and●
              exclusivity,
      through patent protection or
otherwise.




The
Company may have future capital needs and may not be able to obtain additional
financing on acceptable terms.




As
a result of market conditions, the cost and availability of credit has been and
may continue to be adversely affected by illiquid credit markets. Concern about
the general stability of the markets has led many lenders and institutional
investors to reduce, and in some cases, cease to provide, funding to borrowers.
Our ability to utilize our current credit facility and to secure additional
financing, as necessary, and to satisfy our financial obligations under
indebtedness outstanding from time to time, will depend upon our future
operating performance, which is subject to then prevailing general economic and
credit market conditions, including the availability of credit generally, and
financial, business and other factors, many of which are beyond our control. The
prolonged continuation or worsening of current credit market conditions would
have a material adverse effect on our ability to secure financing on favorable
terms, if at all.




We
may be unable to secure additional financing or financing on favorable terms or
our operating cash flow may be insufficient to satisfy our financial obligations
under indebtedness outstanding from time to time (if any). Furthermore, if
financing is not available when needed, or is not available on favorable terms,
we may be unable to develop new or enhance our existing products or otherwise
take advantage of business opportunities or respond to competitive pressures,
any of which could have a material adverse effect on our business, financial
condition and results of operations.




The
current U.S. and global economic crisis may have a significant adverse effect on
our business.




With
the recent and significant deterioration of economic conditions in the United
States and elsewhere, there has been considerable pressure on demand for the
products of many businesses, and the resulting impact on spending has had and
may continue to have a material adverse effect on the demand for our products.
This decline in demand may have a significant adverse effect on our
business.




13




Our research,
development and commercialization efforts may not succeed or our competitors may
develop and commercialize more effective or successful diagnostic
products.




In
order to remain competitive, we must regularly commit substantial resources to
research and development and the commercialization of new products and/or
antibody services.




The
research and development process generally takes a significant amount of time
from inception to commercial product launch. This process is conducted in
various stages. During each stage there is a substantial risk that we will not
achieve our goals on a timely basis, or at all, and we may have to abandon a
product or technology platform in which we have invested substantial
amounts.




Other
companies have products that compete with our products, and also may develop
effective and commercially successful products. Our competitors may succeed in
developing or commercializing products that are either more effective than ours,
or that they market before we market new products that we may
develop.




There
may be additional competitive products about which we are not aware. If our
competitors are able to reach the commercial market before we are, this could
have a material adverse effect on our ability to reach the commercial market and
sell our products.




Many
of the organizations competing with us have substantially greater capital
resources, larger research and development staffs and facilities, greater
experience in product development and in obtaining regulatory approvals, and
greater manufacturing and marketing capabilities than we do. These organizations
also compete with us to license proprietary technology.




If
we fail to obtain or maintain the regulatory approvals necessary to sell our
products, sales could be negatively impacted.




Generally,
at this time, our test kits do not require pre-market approval by the FDA or any
other regulatory agency. However, agencies such as the EPA, FDA and the FSIS are
engaged in testing environmental samples and, together with the AOAC, maintain
compilations of official methods for use in testing for environmental
contaminants in certain market segments, along with procedures and guidelines
for validating new methods. The failure of these programs to accept the
Company’s products could have an adverse impact on our business. The
environmental legislation and regulations that the Company believes are most
applicable to its current business are RCRA, CERCLA, TSCA, FIFRA and the Pure
Food and Drug Act. For analysis of water and wastewater, the Safe Drinking Water
Act, the Clean Water Act and the NPDES permitting program under the Clean Water
Act also will be significant to the Company’s business. As the utility of the
Company’s Microtox® products
continues to be widely recognized in drinking water security applications,
regulations and mandates associated with Homeland Security programs may also
have an impact on our business.




Although
our products may not be regulated, the industry segments into which products are
sold may be regulated, and demand for our products may be driven by these
regulations or the lack thereof. These regulations vary from country to country.
The regulatory environments in which we compete could change dramatically, which
may require us to incur significant costs in obtaining or maintaining regulatory
approvals. If we do not obtain or maintain regulatory approvals to enable us to
market our products in the United States or elsewhere, or if the approvals are
subject to significant restrictions, the demand for our products may be
negatively impacted.




If
we do not match our product manufacturing capability to customer demand in a
cost-effective manner, our product sales may suffer.




Our
product sales depend upon, among other things, our ability to manufacture our
products in commercial quantities and in a cost-effective manner. To the extent
there is a dramatic increase in demand for our products, we may not be able to
manufacture the products in a quick and cost-effective manner. Our manufacturing
success also depends, in part, on our ability to transition products from
research and development into commercial scale manufacturing. If we are not
successful in this transition, our ability to produce products may
suffer.




Our
business could suffer if we cannot attract, retain and motivate skilled
personnel.




Our
success depends on our continued ability to attract, retain and motivate highly
qualified personnel, including our current executive officers and other key
employees. If such executive officers or other key employees were to leave and
we were unable to obtain adequate replacements, operating results could be
adversely affected. In addition, the Company’s growth depends on its ability to
attract, retain and motivate skilled employees, and on the ability of its
officers and key employees to manage growth successfully.


14




It
is difficult and costly to protect our intellectual property rights, and we
cannot ensure the protection of these rights; we may be sued by others for
infringing their intellectual property rights.




Our
commercial success will depend in part on obtaining patent protection on our
products and successfully defending these patents against third party
challenges. The patent positions of technology driven companies can be highly
uncertain and involve complex legal and factual questions. Accordingly, we
cannot predict the breadth of claims allowed in our patents.




Others
have filed, and in the future are likely to file, patent applications covering
products and technologies that are similar, identical or competitive to ours, or
important to our business. We cannot be certain that any patent application
owned by a third party will not have priority over patent applications filed or
licensed by us, or that we or our licensors will not be involved in interference
proceedings before the United States Patent and Trademark Office.




Although
no third party claims of infringement are outstanding against the Company,
others may hold proprietary rights that will prevent our product candidates from
being marketed unless we can obtain a license to those proprietary rights. Any
patent related legal action against our collaborators or us claiming damages and
seeking to enjoin commercial activities relating to our products and processes
could subject us to potential liability for damages and require us to obtain a
license to continue to manufacture or market the affected products and
processes. We cannot predict whether we would prevail in any of these actions or
that any license required under any of these patents would be made available on
commercially acceptable terms, if at all. If we become involved in litigation,
it could consume substantial managerial and financial resources.




We
rely on trade secrets to protect technology in cases where we believe patent
protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require certain employees and suppliers to enter
into confidentiality agreements, we may not be able to protect adequately our
trade secrets or other proprietary information. If we cannot maintain the
confidentiality of our technology, our ability to receive patent protection or
protect our proprietary information may be imperiled.




If
product liability lawsuits are successfully brought against us, we may incur
substantial liabilities and may have to limit or cease commercialization of our
products.




The
testing and marketing of our products gives rise to an inherent risk of product
liability. If we cannot successfully defend ourselves against product liability
claims, we may incur substantial liabilities or be required to limit or cease
commercialization of our products. We currently carry product liability
insurance at a level we believe is commercially reasonable, although there is no
assurance that it will be adequate to cover claims that may arise. In certain
customer contracts we indemnify third parties for certain product liability
claims related to our products. These indemnification obligations may cause us
to pay significant sums of money for claims that are covered by these
indemnification obligations.




15




If
we do not produce future taxable income, our ability to realize the benefits of
our net operating loss carryforwards could be significantly
reduced.
  As
of December 31, 2008, the Company had U.S. federal net operating loss
carryforwards, including those acquired in the Company’s past acquisitions, of
approximately $15.2 million, which, if not utilized, begin to expire as
follows:




Year
                                            
                                            NOL
                                              (in
                                              thousands)2010
                                            
                                            $
                                            4,4782017
                                            
                                            
                                            7602018
                                            
                                            
                                            1,3272019
                                            
                                            
                                            5502020
                                            
                                            
                                            662021
                                            
                                            
                                            562022
                                            
                                            
                                            2,2682024
                                            
                                            
                                            2,0332025
                                            
                                            
                                            32026
                                            
                                            
                                            12027
                                            
                                            
                                            12028
                                            
                                            
                                            3,638Total
                                            
                                            $
                                            15,181




The
Tax Reform Act of 1986 (the “Act”) limits the annual use of net operating loss
and income tax credit carryforwards (after certain ownership changes, as defined
by the Act). The application of these limits could significantly restrict our
ability to utilize carryforwards. Certain of our total net operating loss
carryforwards from 2001 and prior years are subject to limitations on their
annual use since a cumulative change in ownership of more than 50% has occurred
within a three year period with respect to those net operating loss
carryforwards. The Company is currently evaluating recent changes in ownership.
If it is determined that an ownership change of more than 50% within a three
year period did occur, as determined pursuant to the Internal Revenue Code and
Regulations, substantially all of the net operating loss carryforwards and
income tax credit carryforwards could be subject to annual limitations on usage.
Because U.S. tax laws limit the time period during which these carryforwards may
be applied against future taxable income, we may not be able to take full
advantage of these attributes for federal and state income tax purposes due to
the annual limitation usage.




Based
on the best information available to us today, we may not have sufficient future
taxable income to utilize the net operating loss carryforwards and income tax
credit carryforwards prior to their expiration, and we have established a full
valuation allowance against these net operating loss and income tax credit
carryforwards for financial reporting purposes.




Our
results of operations may fluctuate, which could cause volatility in our stock
price.




Our
results of operations may fluctuate significantly in the future as a result of a
number of factors, many of which are outside of our control. These factors
include, but are not limited to:


●
              unanticipated
      events associated with regulatory changes;●
              general
      economic conditions;●
              acceptance
      of our products;●
              the
      success of products competitive with ours;●
              expenses
      associated with development and protection of intellectual property
      matters;●
              establishing
      or maintaining commercial scale manufacturing
  capabilities;●
              the
      timing of expenses related to commercialization of new
      products;●
              seasonality;
      and●
              the
      timing and success in building our distribution
  channels.


16




The
results of our operations may fluctuate significantly from quarter to quarter
and may not meet expectations of securities analysts and investors. This may
cause our stock price to be volatile.




If
we use hazardous materials in a manner that causes injury or violates laws, we
may be liable for damages.




Our
research and development activities involve the controlled use of potentially
harmful biological materials as well as hazardous materials, chemicals and
various radioactive compounds. We use radioactivity in conducting biological
assays and we use solvents that could be flammable in conducting our research
and development activities. We cannot completely eliminate the risk of
accidental contamination or injury from the use, storage, handling or disposal
of these materials. We do not maintain a separate insurance policy for these
types of risks. In the event of contamination or injury, we could be held liable
for damages that result, and any liability could exceed our resources. We are
subject to federal, state and local laws and regulations governing the use,
storage, handling and disposal of these materials and specified waste products.
The cost of compliance with these laws and regulations could be
significant.




Our
antibody production process utilizes various species of animals that could
contract disease or die, interrupting business operations.




Our
antibody production process utilizes animals to produce antibodies. We cannot
completely eliminate the risks of animals contracting disease or a disaster that
could cause death to valuable production animals. Disease or death on a broad
scale could interrupt business operations as animals are a key part of the
antibody production operation.




The
difficulties of operating in international markets may harm sales of our
products.




Customers outside of the United
States accounted for 25% and 22% of our revenues for the years ended December
31, 2008 and 2007, respectively. The majority of our sales transactions are in
U.S. dollars, however, we received payments in British pounds sterling for
approximately $3.0 million in sales from our foreign
subsidiary.




The
international nature of our business subjects us and our representatives, agents
and distributors to the laws and regulations of the jurisdictions in which they
operate, and in which our products are sold. The types of risks that we face in
international operations include, but are not limited to:


●
              the
      imposition of governmental controls;●
              logistical
      difficulties in managing international operations; and●
              fluctuations
      in foreign currency exchange
rates.




Our
international sales and operations may be limited or disrupted if we cannot
successfully meet the challenges of operating internationally.




Certain
of our shareholders are able to significantly influence proposals for a change
in control or other matters requiring a shareholder vote.




Directly,
or through entities that they control, members of our Board of Directors as of
December 31, 2008 controlled approximately 29% of our common stock. Through
entities that he controls, Steven R. Becker, who joined our Board effective
March 12, 2008, controlled approximately 10.9% of our outstanding common stock
as of December 31, 2008. Due to this concentration of ownership, members of our
Board, acting together or, in some cases, individually, can substantially
influence all matters requiring a stockholder vote, including, without
limitation:


●
              the
      election of directors;●
              the
      amendment of our organizational documents; or●
              the
      approval of a merger, sale of assets, or other major corporate
      transaction.




17




Provisions in
our organizational documents could prevent or frustrate attempts by stockholders
to replace our current management.




Our
certificate of incorporation and our bylaws contain provisions that could make
it more difficult for a third party to acquire us without the consent of our
Board. Our certificate of incorporation provides for a staggered board and
removal of directors only for cause. Accordingly, stockholders may elect only a
portion of our board at any annual meeting, which may have the effect of
delaying or preventing changes in management. In addition, under our certificate
of incorporation, our Board of Directors may issue additional shares of
preferred stock and determine the terms of those shares of stock without any
further action by our stockholders. Our issuance of additional preferred stock
could make it more difficult for a third party to acquire a majority of our
outstanding voting stock and thereby effect a change in the composition of our
Board of Directors. Our bylaws require advance notice of stockholder proposals
and director nominations and permit only our President or a majority of the
Board of Directors to call a special stockholder meeting. These provisions may
have the effect of preventing or hindering attempts by our stockholders to
replace our current management. In addition, our certificate of incorporation
contains provisions that limit our ability to engage in a business combination
with any holder of 15% or more of our capital stock unless, among other
possibilities, the Board of Directors approves the transaction. These provisions
may have the effect of preventing or hindering a change of control of our
company.




Our
stock has generally had low trading volume, and its public trading price has
been volatile.




During
the year ended December 31, 2008, the price of our common stock fluctuated
between $0.71 and $5.42 per share, with an average daily trading volume for the
year of approximately 36,000 shares. The market may experience significant price
and volume fluctuations that are often unrelated to the operating performance of
individual companies.




Our
common stock may be delisted from the NASDAQ Global Market, which could
negatively impact the price of our common stock and our ability to access the
capital markets.




Our
common stock is listed on the NASDAQ Global Market. The listing standards of the
NASDAQ Global Market state, among other things, that a company may be delisted
if the bid price drops below $1.00 for a period of 30 consecutive business days.
This bid price listing standard has recently been suspended until April 2009.
The bid price for our stock has been below $1.00 since November 2008. If we fail
to comply with the listing standards applicable to issuers listed on the NASDAQ
Global Market, including the bid price standard after April 20, 2009, our common
stock may be delisted from the NASDAQ Global Market. The delisting of our common
stock would significantly affect the ability of investors to trade our
securities and would significantly negatively affect the value and liquidity of
our common stock. In addition, the delisting of our common stock could
materially adversely affect our ability to raise capital on terms acceptable to
us or at all. Delisting from the NASDAQ Global Market could also have other
negative results, including the potential loss of confidence by our suppliers,
customers and employees, the loss of institutional investor interest, and fewer
business development opportunities.




Item
1B. Unresolved Staff Comments




None.




Item
2. Properties




The
Company is headquartered in Newark, Delaware, and occupies approximately 29,000
square feet of space under an operating lease expiring in December 2010. The
Company also leases approximately 26,000 square feet of manufacturing and
research space in Newark, Delaware, under an operating lease expiring in
December 2010. The Company owns and occupies approximately 75,000 square feet of
manufacturing, research and animal facility space and approximately 64 acres of
farmland in Windham, Maine. The Company leases approximately 1,900 square feet
of manufacturing and research space in Dallas, Texas under an operating lease
expiring in January 2010. The Company leases regional sales offices near London,
England expiring in June 2011. The Company believes that its equipment and
facilities are adequate for its present purposes.




The
Company’s inactive subsidiary, AZUR Environmental Limited, is the lessee for two
real property leases located in the United Kingdom. In 2001, the landlord of the
two properties gave AZUR Environmental Limited its consent to allow AZUR to
assign the lease and its related obligations to a third party. As inducement to
the landlord to grant the assignment, AZUR was required to guarantee performance
under the original lease terms if the third party fails to perform. Both lease
terms expire in November 2016 and provide for annual principal rent payments of
approximately $300,000 in the aggregate. The Company believes that based on its
assessment of the current financial strength of the third party, no liability is
required to be recorded with regard to the guarantee or lease
obligation.


18


Item
3. Legal Proceedings




The
Company is not a party to any material legal proceedings.




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




No
matters were submitted to a vote of the Company’s stockholders during the fourth
quarter of the fiscal year ended December 31, 2008.


19




PART
II




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




The
Company’s common stock is traded on The NASDAQ Global Market under the symbol
“SDIX.” Set forth below are the quarterly high and low bid prices for the shares
of common stock of the Company as reported by The NASDAQ Global Market without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions:


Common
      Stock
                    Price
      RangeFiscal
      Year Ended
                  
                  High
                  
                  
                  LowDecember
      31, 2008:Fourth
      Quarter
                  
                  $
                  2.45
                  
                  
                  $
                  0.71Third
      Quarter
                  
                  
                  3.70
                  
                  
                  
                  1.62Second
      Quarter
                  
                  
                  4.26
                  
                  
                  
                  3.26First
      Quarter
                  
                  
                  5.42
                  
                  
                  
                  3.48December
      31, 2007:Fourth
      Quarter
                  
                  $
                  6.46
                  
                  
                  $
                  4.72Third
      Quarter
                  
                  
                  5.10
                  
                  
                  
                  3.92Second
      Quarter
                  
                  
                  5.40
                  
                  
                  
                  4.11First
      Quarter
                  
                  
                  5.13
                  
                  
                  
                  3.35




On
March 16, 2009, there were approximately 28,000 holders (356 holders of record)
of the common stock of the Company. The Company has never paid any cash
dividends on its common stock and pursuant to the Company’s financing agreement
with PNC Bank, Delaware, the Company’s commercial bank, no dividends or
distributions may be paid on account of its common stock.




The
following table provides information relating to the Company’s repurchases of
common stock during the fourth quarter of 2008.


Period
            
            Total
      Number
              of
      Shares
              Purchased
            
            Average
              Price
      Paid
              Per
      Share
            
            Total
      Number
              of
      Shares
              Purchased
              as
      Part of
              Publicly
              Announced
              Program
            
            Approximate
              Dollar
      Value
              of
      Shares that
              May
      Yet Be
              Purchased
      Under
              the
      ProgramOctober
      1 - October 31
            
            
            —
            
            
            —
            
            
            —
            
            
            —November
      1 - November 30
            
            
            406,627
            
            
            1.34
            
            
            406,627
            
            
            2,444,877December
      1 - December 31
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            
            406,627
            
            $
            1.34
            
            
            406,627
            
            $
            2,444,877


20


Stock
Performance Graph




The
following line graph compares for the fiscal years ended December 31, 2003
through 2008 (i) the yearly cumulative total shareholder return on the common
stock with (ii) the cumulative total return of the NASDAQ Composite Index and
with (iii) a Peer Group Index consisting of NASDAQ Medical Equipment
Stocks.




COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*


Among
Strategic Diagnostics Inc., The NASDAQ Composite Index


and The
NASDAQ Medical Equipment Index











*$100
invested on 12/31/03 in stock & index-including reinvestment of
dividends.


Fiscal
year ending December 31.




COMPARISON
OF CUMULATIVE TOTAL RETURN




Strategic
Diagnostics Inc., NASDAQ Composite Index and NASDAQ Medical Equipment Peer Group
Indices


12/03
                                                                    
                                                                    
                                                                    
                                                                    12/04
                                                                    
                                                                    
                                                                    
                                                                    12/05
                                                                    
                                                                    
                                                                    
                                                                    12/06
                                                                    
                                                                    
                                                                    
                                                                    12/07
                                                                    
                                                                    
                                                                    
                                                                    12/08Strategic
      Diagnostics Inc.
                                                                    
                                                                    
                                                                    100.00
                                                                    
                                                                    
                                                                    
                                                                    74.47
                                                                    
                                                                    
                                                                    
                                                                    77.45
                                                                    
                                                                    
                                                                    
                                                                    80.43
                                                                    
                                                                    
                                                                    
                                                                    114.47
                                                                    
                                                                    
                                                                    
                                                                    18.94NASDAQ
      Composite
                                                                    
                                                                    
                                                                    100.00
                                                                    
                                                                    
                                                                    
                                                                    110.08
                                                                    
                                                                    
                                                                    
                                                                    112.88
                                                                    
                                                                    
                                                                    
                                                                    126.51
                                                                    
                                                                    
                                                                    
                                                                    138.13
                                                                    
                                                                    
                                                                    
                                                                    80.47NASDAQ
      Medical Equipment
                                                                    
                                                                    
                                                                    100.00
                                                                    
                                                                    
                                                                    
                                                                    120.01
                                                                    
                                                                    
                                                                    
                                                                    136.96
                                                                    
                                                                    
                                                                    
                                                                    142.08
                                                                    
                                                                    
                                                                    
                                                                    181.26
                                                                    
                                                                    
                                                                    
                                                                    99.84


21




Item
6. Selected Financial Data


Year
      Ended December 31,2008
            
            2007
            
            2006
            
            2005
            
            2004(in
      thousands, except share and per share data)Revenues:Total
      revenues
            
            $
            27,659
            
            $
            27,207
            
            $
            25,522
            
            $
            24,845
            
            $
            23,705Operating
      expenses:Manufacturing
            
            
            13,091
            
            
            10,766
            
            
            11,715
            
            
            11,416
            
            
            10,779Research
      and development
            
            
            3,576
            
            
            2,938
            
            
            2,630
            
            
            3,034
            
            
            2,157Selling,
      general and administrative
            
            
            14,425
            
            
            11,990
            
            
            10,555
            
            
            9,722
            
            
            9,211Goodwill
      impairment
            
            
            4,150
            
            
            —
            
            
            —
            
            
            —
            
            
            —(Gain)
      loss on disposal of assets
            
            
            (17
            )
            
            110
            
            
            42
            
            
            —
            
            
            —Total
      operating expenses
            
            
            35,225
            
            
            25,804
            
            
            24,942
            
            
            24,172
            
            
            22,147Operating
      income (loss)
            
            
            (7,566
            )
            
            1,403
            
            
            580
            
            
            673
            
            
            1,558Interest
      income, net
            
            
            157
            
            
            433
            
            
            386
            
            
            207
            
            
            53Income
      (loss) before taxes
            
            
            (7,409
            )
            
            1,836
            
            
            966
            
            
            880
            
            
            1,611Income
      tax expense
            
            
            8,386
            
            
            976
            
            
            282
            
            
            296
            
            
            232Net
      income (loss)
            
            $
            (15,795
            )
            $
            860
            
            $
            684
            
            $
            584
            
            $
            1,379Basic
      net income (loss) per share
            
            $
            (0.78
            )
            $
            0.04
            
            $
            0.03
            
            $
            0.03
            
            $
            0.07Shares
      used in computing basic net income (loss) per share
            
            
            20,312,707
            
            
            20,325,285
            
            
            20,031,833
            
            
            19,741,223
            
            
            19,242,172Diluted
      net income (loss) per share
            
            $
            (0.78
            )
            $
            0.04
            
            $
            0.03
            
            $
            0.03
            
            $
            0.07Shares
      used in computing diluted net income (loss) per share
            
            
            20,312,707
            
            
            20,562,645
            
            
            20,108,688
            
            
            19,868,956
            
            
            19,493,752




December
      31,2008
            
            2007
            
            2006
            
            2005
            
            2004BALANCE
      SHEET DATA:Cash
      and cash equivalents
            
            $
            9,980
            
            $
            12,988
            
            $
            10,892
            
            $
            10,009
            
            $
            8,096Working
      capital
            
            
            14,233
            
            
            19,973
            
            
            16,731
            
            
            15,552
            
            
            13,525Total
      assets
            
            
            25,521
            
            
            41,949
            
            
            37,953
            
            
            36,661
            
            
            34,873Long-term
      debt
            
            
            —
            
            
            1,640
            
            
            351
            
            
            562
            
            
            773Stockholders’
      equity
            
            
            21,248
            
            
            37,128
            
            
            35,262
            
            
            33,778
            
            
            31,766


22




Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations




Forward
Looking Statements




This
annual report contains certain forward-looking statements reflecting the current
expectations of Strategic Diagnostics Inc. and its subsidiaries (the “Company”
or “SDI”). In addition, when used in this annual report, the words “anticipate,”
“enable,” “estimate,” “intend,” “expect,” “believe,” “potential,” “may,” “will,”
“should,” “project” and similar expressions as they relate to the Company are
intended to identify said forward-looking statements. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, which may
cause actual results to differ from those anticipated at this time. Such risks
and uncertainties include, without limitation, changes in demand for products,
delays in product development, delays in market acceptance of new products,
retention of customers, attraction and retention of management and key
employees, adequate supply of raw materials, inability to obtain or delays in
obtaining third party approvals or required government approvals, the ability to
meet increased market demand, competition, protection of intellectual property,
non-infringement of intellectual property, seasonality, the ability to obtain
financing and other factors more fully described in the Company’s public filings
with the U.S. Securities and Exchange Commission.




Overview




SDI
is a biotechnology company with a core mission of developing, commercializing
and marketing innovative and proprietary products, services and solutions that
preserve and enhance the quality of human health and wellness.




The
Company believes that its competitive position has been enhanced through the
combination of talent, technology and resources resulting from the business
development activities it has pursued since its inception. The Company has
achieved meaningful economies of scale for the products it offers through the
utilization of its consolidated facilities in Newark, Delaware for the
manufacture of test kits and antibodies, and its facilities located in Windham,
Maine and Dallas, Texas for the manufacture of antibodies.




The
Company believes that by applying its core competency of creating custom
antibodies to assay development, it produces sophisticated diagnostic testing
and reagent systems that are responsive to customer diagnostic and information
needs. Customers benefit from a quantifiable “return on investment” by reducing
time, labor and/or material costs associated with applications for which the
Company’s products are used. In addition, the Company believes its tests provide
high levels of accuracy, reliability and actionability of essential test results
as compared to alternative products. The Company is focused on sustaining this
competitive advantage by leveraging its expertise in immunology, proteomics,
bio-luminescence and other bio-reactive technologies to continue its successful
customer-focused research and development efforts. The Company believes that an
established product base, quality manufacturing expertise, experienced sales and
marketing organization, established network of distributors, corporate partner
relationships and proven research and development expertise will be critical
elements of its potential future success.




In
2008, the Company continued the transition from a fragmented product offering
and marketing strategy to becoming a focused organization, with proven,
proprietary technologies tied directly to its customers’ needs. The transition
is most evident in the Genomic Antibody TechnologyTM (GATTM) initiative and food
pathogen detection products, where the Company believes significant progress is
being made.




The
Company continues to develop and introduce new methods for the detection of food
pathogens that deliver a strong competitive advantage to its customers. In 2005,
the Company filed a patent for new technology to be used in proprietary
enrichments of its food pathogen testing methods. The
patent covers technology for increasing the specificity and sensitivity of the
Company’s immunoassay test methods. The patent also makes claims for the
application of the technology in large scale bio-production/bio-fermentation
processes, such as those used in the production of amino acids, ethanol, enzymes
and other processes using microbiological production methods.




The
Company continued to develop multiple channels to market worldwide through an
approach that includes direct sales, inside sales, distributors and agents. The
Company increased distribution for its food pathogen products in Europe and Asia
where there is growing demand for the Company’s product line.




23




The
Company believes it is making progress in most of its business efforts. As the
deployment of new initiatives is accelerated, building on the Company’s
leadership position in food pathogens and expanding its strong




The
Company expects the GATTM and food pathogen products to be its primary growth
drivers in the future, and that the Company’s competencies and competitive
positions in these two areas are strong.




Results
of Operations




Year
ended December 31, 2008 versus year ended December 31, 2007




Revenues




Revenues
for the year ended December 31, 2008 increased 2% to $27.7 million, compared to
$27.2 million for 2007. The following table sets out revenues by product
category:


Year
      Ended
                December
      31,
              
              Increase
                (Decrease)
              
              Percent
                Change2008
              
              2007(in
      thousands, except percentages)Antibody
              
              $
              13,821
              
              $
              14,281
              
              $
              (460
              )
              
              (3.2
              %)Food
      safety
              
              
              8,424
              
              
              7,671
              
              
              753
              
              
              9.8
              %Water
      quality
              
              
              5,210
              
              
              5,099
              
              
              111
              
              
              2.2
              %Contract
      revenue
              
              
              204
              
              
              156
              
              
              48
              
              
              30.8
              %Revenues
              
              $
              27,659
              
              $
              27,207
              
              $
              452
              
              
              1.7
              %




Antibody
Products




Antibody
revenues decreased 3% to $13.8 million in the year ended December 31, 2008,
compared to $14.3 million for 2007. Revenues from the Company’s GATTM platform
grew by 155% to $1.4 million. This increase is primarily attributable to
continued adoption by our clients of the Company’s GATTM platform. This increase
was offset by declines in bulk antibody sales of 19% to $3.1 million, custom
monoclonal antibodies of approximately 16% to $2.7 million, and a decline in
custom polyclonal antibodies of  9% to $5.6 million. These decreases are
primarily attributable to decreased orders by customers that had previously
accumulated excess inventories.




Food Safety
Products




For
the year ended December 31, 2008, food safety revenues were $8.4 million,
compared to $7.7 million for 2007, an increase of 10%. Sales of tests for food
pathogens increased 20%, to $5.5 million in 2008, from $4.6 million in 2007, as
the Company continues to see increasing acceptance of its line of products to
detect pathogens in food. Ag/GMO revenues declined 6%, to $2.9 million in 2008
from $3.1 million in 2007, due to a shrinking marketplace for products that
detect genetic traits in grain and seed.




Water Quality
Products




Water
quality products revenue increased by 2% to $5.2 million for the year ended
December 31, 2008, compared to $5.1 million for the year ended December 31,
2007. This increase was primarily the result of increased water quality
equipment sales to China.




Other Areas




Gross
profit, defined as revenue less manufacturing costs, for the year ended December
31, 2008 was $14.6 million, as compared to $16.4 million for 2007. The gross
margin percentage in 2008 was 53%, compared to 60% for the year ended December
31, 2007. This decrease in margin was primarily the result of underutilized
capacity in the antibody product category and increased write-offs of obsolete
inventory in both the food safety (specifically Ag/GMO) and antibody product
categories.




24




For
the year ended December 31, 2008, operating expenses increased 37% to $35.2
million, compared to $25.8 million for 2007. This increase is primarily due to
approximately $4.2 million of expense related to goodwill impairment and an
increase of approximately $2.4 million in selling, general and administrative
costs.




For the year ended December 31, 2008, research and development spending was $3.6
million, compared to $2.9 million for 2007. This increase was primarily due to
increased spending and effort on development of the Company’s proprietary
antibodies, which are produced by the Company’s GATTM platform and are being sold
through the Company’s antibody catalog, and increased spending and effort on
development of the Company’s proprietary phage technology for use in the
production of ethanol.




During
the fourth quarter of 2008, the Company performed the annual goodwill impairment
analysis and recorded a non-cash goodwill impairment charge of $4.2 million.
Refer to Note 3 of the Notes to the Consolidated Financial Statements for
further information.




Selling,
general and administrative expenses were $14.4 million for the year ended
December 31, 2008, compared to $12.0 million for 2007. The 20% increase is
primarily attributable to severance costs for the Company’s former CEO,
recruiting costs associated with management and personnel changes that were
initiated during 2008 and continued expansion of its sales and marketing
efforts.




Interest income,
net




The
Company recorded net interest income of $157,000 during 2008 compared to net
interest income of $433,000 during 2007. This decrease is primarily due to
increased debt and related interest expense on our $2 million term loan executed
in August 2007, and decreased interest rates received on lower levels of
invested cash balances.




Income taxes




The
Company recorded income tax expense of $8.4 million in 2008, which includes a
$10.7 million increase in the valuation allowance recorded against net deferred
tax assets of approximately $12.5 million. The valuation allowance was recorded
primarily due to being in a cumulative three year pre-tax loss position as of
December 31, 2008 and uncertainty in overall economic conditions, which may not
allow the Company to realize the net deferred tax assets prior to their
expiration. These non-cash charges do not impact the Company’s ongoing business
operations. In 2007, the Company recorded income tax expense of $976,000,
representing an effective tax rate of 53%.




Net
Income (loss)




Net
loss for the year ended December 31, 2008 was $15.8 million, or $0.78 per
diluted share, compared to net income of $860,000, or $0.04 per diluted share
for 2007. Diluted shares totaling 20.3 million and 20.6 million were used in the
computations for 2008 and 2007, respectively.




25




Year
ended December 31, 2007 versus year ended December 31, 2006
  Revenues
  Revenues
for the year ended December 31, 2007 increased 7% to $27.2 million, compared to
$25.5 million for 2006. The following table sets out revenues by product
category:




Year
      Ended
                      December
      31,
                    
                    
                    Increase
                      (Decrease)
                    
                    Percent
                      Change2007
                    
                    2006(in
      thousands, except percentages)Antibody
                    
                    $
                    14,281
                    
                    $
                    11,104
                    
                    $
                    3,177
                    
                    
                    28.6
                    %Food
      safety
                    
                    
                    7,671
                    
                    
                    9,215
                    
                    
                    (1,544
                    )
                    
                    -16.8
                    %Water
      quality
                    
                    
                    5,099
                    
                    
                    5,203
                    
                    
                    (104
                    )
                    
                    -2.0
                    %Contract
      revenue
                    
                    
                    156
                    
                    
                    —
                    
                    
                    156
                    
                    
                    100.0
                    %Net
      revenues
                    
                    $
                    27,207
                    
                    $
                    25,522
                    
                    $
                    1,685
                    
                    
                    6.6
                    %




Antibody
Products




Antibody
revenues increased 29% to $14.3 million in the year ended December 31, 2007,
compared to $11.1 million for 2006, as the Company’s GATTM platform continued to
expand.




Food
Safety Products




For
the year ended December 31, 2007, food safety revenues were $7.7 million,
compared to $9.2 million for 2006, a decline of 17%.




Sales
of tests for food pathogens grew 24%, to $4.6 million from $3.7 million, when
comparing the years ended December 31, 2007 and December 31, 2006 as the Company
continued to gain traction with its RapidChek® line of
food pathogen tests.




Ag/GMO
revenues declined 43%, to $3.1 million from $5.4 million, when comparing the
years ended December 31, 2007 and December 31, 2006 due to a shrinking
marketplace.




Water
and Environmental Products




Water
and environmental products revenue declined by 2% to $5.1 million for the year
ended December 31, 2007, compared to $5.2 million for the year ended December
31, 2006.




Other
Areas




Gross
profit, defined as revenue less manufacturing costs, for the year ended December
31, 2007 totaled $16.4 million, as compared to $13.8 million for 2006. The gross
margin percentage in 2007 was 60%, compared to 54% for the year ended December
31, 2006, as the Company increased efficiencies in its manufacturing process and
implemented a change in its sales mix to higher margin products.




For
the year ended December 31, 2007, operating expenses increased 3.5% to $25.8
million, compared to $24.9 million for 2006, as spending increased in support of
the Company’s antibody technology.




For
the year ended December 31, 2007, research and development spending was $2.9
million, compared to $2.6 million for 2006.




Selling,
general and administrative expenses were $12.0 million for the year ended
December 31, 2007, compared to $10.6 million for 2006. This 13% increase is
primarily attributable to marketing efforts to launch the GATTM products and the
antibody catalog, as well as costs associated with regulatory
compliance.




Interest,
net




The
Company recorded net interest income of $433,000 during 2007 compared to net
interest income of $386,000 during 2006. This increase is primarily due to
increased interest rates year over year and an increase in invested cash
balances.


26


Income
taxes




The
Company’s effective tax rate of 53.2% for 2007 reflects the federal statutory
rate of 34.0%, state income taxes net of U.S. federal benefit of 4.4%, increases
in our provision for uncertain tax positions of 10.4%, differences resulting
from our provision to tax return reconciliation of 6.2% and other changes of
4.9%. These increases were offset by research and development credits of 6.7%.
This compares to the 29.2% effective tax rate recorded for 2006. This increase
is primarily due to an increase in the provision for uncertain tax positions of
10.4%, and a decrease in the credit for research and development of
7.9%.




Net
Income




Net
income for the year ended December 31, 2007 was $860,000, or $0.04 per diluted
share, compared to $684,000, or $0.03 per diluted share, for 2006. Diluted
shares totaling 20.6 million and 20.1 million were used in the computations for
2007 and 2006, respectively.




Liquidity
and Capital Resources




Liquidity
is our ability to generate sufficient cash flows from operating activities to
meet the Company’s obligations and commitments, or obtain appropriate financing.
Currently our liquidity needs arise primarily from debt service on indebtedness,
working capital requirements and capital expenditures.




The
following is a summary of selected cash flow information:


Year
      Ended
                                                December
      31,2008
                                              
                                              2007(in
      thousands)Net
      cash provided by (used in) operating activities
                                              
                                              $
                                              (749
                                              )
                                              $
                                              2,302Net
      cash used in investing activities
                                              
                                              
                                              (895
                                              )
                                              
                                              (2,482
                                              )Net
      cash provided by (used in) financing activities
                                              
                                              
                                              (1,082
                                              )
                                              
                                              2,262Effect
      of exchange rate changes on cash
                                              
                                              
                                              (282
                                              )
                                              
                                              14Net
      increase (decrease) in cash and cash equivalents
                                              
                                              $
                                              (3,008
                                              )
                                              $
                                              2,096




Net
cash used in operating activities of $749,000 and net cash provided by operating
activities of $2.3 million for 2008 and 2007, respectively, was primarily the
result of a negative EBITDA for the year ended December 31, 2008 of $2.0 million
and positive EBITDA of $2.6 million for the year ended December 31, 2007. See
“Non-GAAP Financial Measures” below.




Net
cash used in investing activities for 2008 was $895,000 compared to $2.5 million
for 2007. These cash outflows were primarily the result of capital purchases
which totaled $929,000 in 2008 versus $2.5 million in 2007. The capital
expenditures in 2008 were primarily related to the purchase of lab and
manufacturing equipment. The capital expenditures in 2007 were primarily related
to the Company’s expansion in Maine.




Net
cash used in financing activities was $1.1 million for 2008, primarily related
to $593,000 in debt repayments and $555,000 for the purchase of treasury stock.
In 2007, net cash provided by financing activities was $2.3 million, primarily
the result of a $2 million term loan and $537,000 from the exercise of stock
options.




The
Company’s working capital (current assets less current liabilities) decreased
$5.8 million to $14.2 million at December 31, 2008 from $20.0 million at
December 31, 2007, primarily due to the $3.0 million decrease in cash and cash
equivalents in 2008 and the reclassification of outstanding debt balances to
current liabilities. Outstanding debt decreased to $1.7 million at December 31,
2008 from $2.3 million at December 31, 2007 due to scheduled debt
payments.


27




On
May 5, 2000, the Company entered into a financing agreement with a commercial
bank which was amended on October 1, 2008 (the “Credit Agreement”). The Credit
Agreement provides for up to a $5 million revolving line of credit, none of
which was outstanding and all of which was available at December 31, 2008. The
revolving line of credit bears a variable interest rate of between 150 basis
points and 250 basis points over the one month London Interbank Offered Rate
(“LIBOR”) rate depending upon the ratio of the Company’s funded debt to EBITDA.
The Company’s effective rate of interest on this line of credit, taking into
account the variable interest rate and LIBOR, was 2.94% at December 31,
2008.




On
December 13, 2001, the Company received a term loan under the Credit Agreement
to finance the construction of new facilities at its Windham, Maine location.
This agreement provided for up to $1.5 million in financing, $158,000 of which
was outstanding at December 31, 2008, and is repayable over seven years, with
principal payments that began on October 1, 2002. The loan bears a variable
interest rate of 100 basis points less than the current Prime Interest Rate.
Payments are due monthly, with equal amortization of principal payments plus
interest. The Company’s effective rate of interest on this loan at December 31,
2008 was 2.25%.




On
August 21, 2007, the Company received a term loan under the Credit Agreement to
finance the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2 million in financing, $1.5 million of which was
outstanding at December 31, 2008, and is repayable over five years, with
principal payments that began on October 1, 2007. The loan bears a fixed
interest rate of 5.96% with equal amortization of principal payments plus
interest.




Under
the Credit Agreement, the Company is required to meet certain quarterly
financial covenants that include a ratio of EBITDA to current maturities of debt
plus interest and cash paid for taxes greater than 1.50, a ratio of funded debt
to EBITDA not to exceed 3.25 and a requirement of liquid assets (cash and cash
equivalents) to be greater than or equal to $2.5 million at all
times.




The
Company did not meet its financial covenants with respect to its indebtedness at
December 31, 2008 and does not expect that it will be able to meet all of its
financial covenants under the Credit Agreement for the next 12 months. The
Company received a waiver of the financial covenants relating to the above
financing from its commercial bank as of December 31, 2008 and expects it will
continue to receive waivers of the financial covenants until such covenants are
amended.




As
of December 31, 2008, the Company has classified the balance of its long-term
obligations under the Credit Agreement of $1.1 million as current debt in the
consolidated balance sheet as the Company believes it is probable that there
will be a violation of the same covenants within the next 12 months if the
covenant terms are not amended. If the Company is unable to obtain a waiver of
future debt covenant violations, the Company will be unable to draw upon its
line of credit until such violations are cured. As of December 31, 2008, the
Company is not required to repay these long-term debt obligations within 12
months and expects to amend the Credit Agreement before December 31, 2009 to
allow the Company to meet its financial covenants and reclassify these long-term
obligations from current to non-current in the consolidated balance
sheet.




As
of December 31, 2008, the outstanding balance on all of the Company’s commercial
bank debt was $1.7 million. This indebtedness is secured by substantially all of
the Company’s assets.




For
the year ended December 31, 2008, the Company satisfied all of its cash
requirements from cash and cash equivalents on-hand. At December 31, 2008, the
Company had $1.7 million in debt and stockholders’ equity of $21.2
million.




Based
upon its cash on hand, credit facilities, current product sales and the
anticipated sales of new products, the Company believes it has, or has access
to, sufficient resources to meet its operating requirements at least through the
next 12 months.




The
Company’s ability to meet its long-term capital needs will depend on a number of
factors, including compliance with existing and new loan covenants, the success
of its current and future products, the focus and direction of its research and
development program, competitive and technological advances, future
relationships with corporate partners, government regulation, the Company’s
marketing and distribution strategy, its successful sale of additional common
stock and/or the Company successfully locating and obtaining other financing,
and the success of the Company’s plan to make future acquisitions. Accordingly,
no assurance can be given that the Company will be able to meet the long-term
liquidity requirements that may arise from these inherent and similar
uncertainties.


28




Non-GAAP
Financial Measures




The
Company presents an Earnings Before Interest, Taxes, Depreciation and
Amortization (“EBITDA”) measure as the Company believes this provides investors
and the Company’s management with additional information to measure the
Company’s liquidity. EBITDA measures are not a measure of performance under
GAAP, and therefore, should not be considered in isolation or as a substitute
for net income or cash flows from operations. Additionally, the Company’s EBITDA
calculations may differ from the EBITDA calculations for other
companies.




The
calculation of the Company’s EBITDA measure (as discussed above), and the
reconciliation of the Company’s EBITDA measure to net cash provided by operating
activities for the years ended December 31, 2008 and 2007, respectively, is as
follows (amounts in thousands):


Year
      Ended December 31,2008
                                                    
                                                    
                                                    2007(in
      thousands)Net
      cash provided by (used in) operating activities
                                                    
                                                    $
                                                    (749
                                                    )
                                                    
                                                    $
                                                    2,302Changes
      in assets and liabilities:Receivables
                                                    
                                                    
                                                    (11
                                                    )
                                                    
                                                    
                                                    432Inventories
                                                    
                                                    
                                                    (314
                                                    )
                                                    
                                                    
                                                    1,026Other
      current assets
                                                    
                                                    
                                                    13
                                                    
                                                    
                                                    
                                                    29Other
      assets
                                                    
                                                    
                                                    100
                                                    
                                                    
                                                    
                                                    14Accounts
      payable
                                                    
                                                    
                                                    (122
                                                    )
                                                    
                                                    
                                                    (32
                                                    )Accrued
      expenses
                                                    
                                                    
                                                    (1
                                                    )
                                                    
                                                    
                                                    (411
                                                    )Deferred
      revenue
                                                    
                                                    
                                                    (59
                                                    )
                                                    
                                                    
                                                    128Other
      non-current liabilities
                                                    
                                                    
                                                    130
                                                    
                                                    
                                                    
                                                    (130
                                                    )Net
      change in deferred income tax
                                                    
                                                    
                                                    (8,566
                                                    )
                                                    
                                                    
                                                    (769
                                                    )Income
      tax provision
                                                    
                                                    
                                                    8,386
                                                    
                                                    
                                                    
                                                    976Gain
      (loss) on disposal of fixed assets
                                                    
                                                    
                                                    17
                                                    
                                                    
                                                    
                                                    (93
                                                    )Stock
      compensation expense
                                                    
                                                    
                                                    (682
                                                    )
                                                    
                                                    
                                                    (430
                                                    )Interest
      income, net
                                                    
                                                    
                                                    (157
                                                    )
                                                    
                                                    
                                                    (433
                                                    )EBITDA
                                                    
                                                    $
                                                    (2,015
                                                    )
                                                    
                                                    $
                                                    2,609




Off-Balance
Sheet Arrangements




As
of December 31, 2008, the Company did not have any off-balance sheet
arrangements as defined in Item 304(a) (4) (ii) of Regulation
S-K.


29




Contractual
Obligations




The
Company is committed to making cash payments in the future on two types of
contracts: its long-term indebtedness and leases. The Company has no off-balance
sheet debt or other such unrecorded obligations. Below is a schedule of the
future payments that the Company was obligated to make based on agreements in
place as of December 31, 2008.


Payments
      Due by Year2009
                                                        
                                                        
                                                        2010
                                                        
                                                        
                                                        2011
                                                        
                                                        
                                                        2012
                                                        
                                                        
                                                        2013
                                                        
                                                        
                                                        2014
      and
                                                          Beyond
                                                        
                                                        
                                                        Total(in
      thousands)Long-term
      debt (1)
                                                        
                                                        $
                                                        558
                                                        
                                                        
                                                        400
                                                        
                                                        
                                                        400
                                                        
                                                        
                                                        300
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        1,658Operating
      leases (2)
                                                        
                                                        $
                                                        1,096
                                                        
                                                        
                                                        1,077
                                                        
                                                        
                                                        320
                                                        
                                                        
                                                        310
                                                        
                                                        
                                                        280
                                                        
                                                        
                                                        817
                                                        
                                                        
                                                        3,900Total
      contractualcash
      obligations
                                                        
                                                        $
                                                        1,654
                                                        
                                                        
                                                        1,477
                                                        
                                                        
                                                        720
                                                        
                                                        
                                                        610
                                                        
                                                        
                                                        280
                                                        
                                                        
                                                        817
                                                        
                                                        
                                                        5,558




(1)
              See
      discussion in Note 5 of the Notes to the Consolidated Financial Statements
      for additional information on long-term debt.(2)
              See
      discussion of operating leases in Note 9 of the Notes to the Consolidated
      Financial Statements.




Critical
Accounting Policies




The
Company’s accounting policies are described in Note 1 of the Notes to the
Consolidated Financial Statements. The Consolidated Financial Statements are
prepared in conformity with U.S. generally accepted accounting principles, which
require the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the year. On an on-going basis, the Company
evaluates its estimates, including those related to bad debts, inventories,
deferred taxes, long-lived assets and stock-based compensation. The Company
bases its estimates on historical experience and on various other assumptions
that the Company believes are reasonable under the circumstances. The results
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from those estimates. The Company considers the following policies
to be most critical in understanding the judgments that are involved in
preparing the Consolidated Financial Statements and the uncertainties that could
impact the consolidated results of operations, financial condition and cash
flows.




Valuation
of Accounts Receivable – Accounts receivable as of December 31, 2008 and
December 31, 2007, were net of an allowance for doubtful accounts of $70,000 and
$82,000, respectively. The recorded allowance is continually evaluated based on
current market conditions, an analysis of customer-specific facts and
circumstances, and the size and composition of the overall portfolio. The
current state of the economy could cause longer sales cycles resulting in
increased risk that outstanding balances could become uncollectible. If
receivables are in dispute with the customer or otherwise deemed uncollectible,
the corresponding amounts are written off and are charged against the
allowance.




Valuation
of Inventories – Inventories are valued at the lower of cost or
market.




For
inventories that consist primarily of test kit components, bulk antibody serum
and antibody products, cost is determined using the first in, first out method.
Realization of inventories is dependent upon the successful marketing of our
products. Judgments are made regarding the carrying value of inventory based on
current market conditions. Market conditions may change depending upon
competitive product introductions and customer demand. If market conditions
change or if the introduction of new products by the Company impacts the market
for previously released products, the Company may be required to write-down the
cost of its inventory.


30




For
inventories that consist of costs associated with the production of custom
antibodies, cost is determined using the specific identification method.
Realization of such inventories is dependent upon the successful completion of a
project in accordance with customer specifications. Losses on projects in
progress are recorded in the period such losses become likely and
estimable.




Deferred
Taxes– In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
period in which those temporary differences become deductible. In making their
assessment, management considers positive evidence, negative evidence, and
possible tax planning strategies that could be implemented. Management also
considers the future reversal of existing taxable temporary differences, recent
earnings history, history of or potential for tax attributes such as net
operating losses to expire and the ability to project future taxable income. The
Company’s history of cumulative pre-tax losses over the most recent three year
period, including 2008, is a significant piece of negative evidence that is
difficult to overcome. In light of this negative evidence, coupled with the
current economic conditions, management has concluded that it is more likely
than not that the Company will not realize the benefits of these tax deductible
differences and has established a full valuation allowance offsetting its U.S.
federal and state net deferred tax assets at December 31, 2008.




At
December 31, 2008, the Company had approximately $4.4 million of net operating
loss carryforwards for tax purposes, which have no expiration and which
correspond to a $1.24 million deferred tax asset, related to operations in the
United Kingdom (“UK”). Management considered positive and negative indicators in
concluding that a substantial valuation allowance of approximately $1.17 million
was necessary for the foreign deferred tax assets of $1.24 million. The positive
indicators include the contribution to income before taxes by the foreign
operations in the UK for 2008, 2007 and 2006, and the expected income before
taxes in the UK for 2009 and 2010. The negative indicators include a history of
substantial net operating losses in the UK, the lack of income before taxes
until 2004 and limitations with regard to estimating income in the UK beyond
2010 resulting from a year-to-year evaluation of the future need for a UK
subsidiary.




As
of December 31, 2008, the Company had U.S. federal net operating loss
carryforwards, of $15.2 million, including those of acquired companies, which
begin to expire as follows:


NOL(inYear
                                                
                                                thousands)2010
                                                
                                                $
                                                4,4782017
                                                
                                                
                                                7602018
                                                
                                                
                                                1,3272019
                                                
                                                
                                                5502020
                                                
                                                
                                                662021
                                                
                                                
                                                562022
                                                
                                                
                                                2,2682024
                                                
                                                
                                                2,0332025
                                                
                                                
                                                32026
                                                
                                                
                                                12027
                                                
                                                
                                                12028
                                                
                                                
                                                3,638Total
                                                
                                                $
                                                15,181


31




Revenue
Recognition — Revenues composed of sales of immunoassay-based test kits
and certain antibodies and immunochemical reagents are recognized upon the
shipment of the product and transfer of title or when related services are
provided. Revenues associated with such products or services are recognized when
persuasive evidence of an order exists, shipment of product has occurred or
services have been provided, the price is fixed or determinable and,
collectability is reasonably assured. Management is required to make judgments
based on actual experience about whether or not collectability is reasonably
assured.




The
Company enters into contracts related to the production of custom antibodies,
which provide for the performance of defined tasks for a fixed price, with
delivery of the product upon completion of production. The standard time to
complete a project is typically longer than 30 days but less than 12 months and
effort is expended over the life of the project. Revenues related to sales of
custom antibody projects are recognized when a project’s specifications have
been met and/or the related materials have been shipped.




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




Valuation of Goodwill and Long-Lived
Assets— Long-lived assets, such as property and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment 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 an asset to its estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Goodwill and intangible assets not subject to
amortization are tested annually for impairment, and are tested for impairment
more frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds an asset’s fair value.




The
Company reported goodwill of $4.2 million at December 31, 2007. The Company
tests goodwill annually in a two-step approach. The first step is the comparison
of the carrying value of the Company, including goodwill, to the fair value of
the Company at the testing date. If the carrying amount exceeds the fair value
of the Company, a second test is performed to measure the amount of an
impairment charge, if any. To measure the amount of any impairment charge, the
Company determines the implied fair value of goodwill in the same manner as if
the Company were being acquired in a business combination.




In
the fourth quarter of 2008, the Company recorded an impairment charge of
approximately $4.2 million to write-off goodwill and other intangible assets.
For additional information, refer to Note 3 of the Notes to the Consolidated
Financial Statements.




Stock–Based Compensation—
the Company accounts for stock-based compensation in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share–Based
Payment” (“SFAS 123(R)”). SFAS 123(R) requires the Company to measure all
employee stock–based compensation awards using a fair value method and recognize
such expense in our consolidated financial statements. In addition, SFAS 123(R)
requires additional accounting related to the income tax effects and additional
disclosure regarding the cash flow effects resulting from stock–based payment
arrangements.




The
grant date fair value of the awards is recognized as compensation expense over
the vesting period of the awards and is included in SG&A expenses. SFAS
123(R) requires management to make estimates and assumptions to determine the
grant date fair value of stock options, including the expected term of stock
options and the volatility of our stock price in the future. In addition,
assumptions related to expected future forfeitures and performance-based vesting
features all impact expense recognition. These assumptions have an impact on the
valuation assigned to equity awards and the associated recognition of
expense.




New
Accounting Standards and Disclosures




In
November 2007, the Emerging Issues Task Force (“EITF”) of the Financial
Accounting Standards Board (“FASB”) reached a consensus on Issue No. 07-1,
Accounting for Collaborative Arrangements (“EITF No. 07-1”). EITF No. 07-1
defines a collaborative arrangement as a contractual arrangement in which the
parties are: (1) active participants to the arrangement; and (2) exposed to
significant risks and rewards that depend upon the commercial success of the
endeavor. The issue also addresses the appropriate income statement presentation
for activities and payments between the participants in a collaborative
arrangement as well as for costs incurred and revenue generated from
transactions with third parties. EITF No. 07-1 is effective for the Company for
the reporting period beginning January 1, 2009. The Company does not expect the
adoption of EITF No. 07-1 to have a significant impact on its consolidated
financial statements.


32




In
December 2007, the FASB issued SFAS No. 141(Revised), Business Combinations
(“SFAS No. 141(R)”), which replaces SFAS No. 141, Business Combinations, and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquired at the acquisition date,
measured at their fair values as of that date, with limited exceptions. This
statement also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquired, at the full amounts of their fair
values. SFAS No. 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or to confirm the guidance in
that literature to that provided in this statement. This statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. SFAS No. 141(R)’s impact on accounting for business
combinations is dependent upon future acquisitions the Company may
make.




In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of
the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under SFAS No. 142,
“Goodwill and Other Intangible Assets.” This new guidance applies prospectively
to intangible assets that are acquired individually or with a group of other
assets in business combinations and asset acquisitions. FSP 142-3 is effective
for financial statements issued for fiscal years and interim periods beginning
after December 15, 2008. FSP 142-3’s impact on the Company is dependent upon
future acquisitions the Company may make.


33




Item
7A. Quantitative and Qualitative Disclosures About Market Risk




The
Company has limited exposure to changing interest rates, and is currently not
engaged in hedging activities. Interest on approximately $158,000 of outstanding
indebtedness is at a variable rate of 100 basis points less than the current
prime rate. At the Company’s current level of indebtedness, each 1% change in
the variable interest rate will have an effect of $1,600 on the Company’s annual
interest expense charges.




The
Company conducts operations in the United Kingdom. The consolidated financial
statements of the Company are denominated in U.S. dollars and changes in
exchange rates between foreign countries and the U.S. dollar will affect the
translation of financial results of foreign subsidiaries into U.S. dollars for
purposes of recording the Company’s consolidated financial results.
Historically, the effects of translation have not been material to the
consolidated financial results.




Item
8. Financial Statements and Supplementary Data




The
following consolidated financial statements and supplemental quarterly financial
data of the Company and its subsidiary are included as part of this Form
10-K:


PageManagement’s
      Report on Internal Control over Financial Reporting
                
                41Report
      of Independent Registered Public Accounting Firm
                
                42Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                
                43Consolidated
      Statements of Operations for each of the years in the three-year period
      ended December 31, 2008
                
                44Consolidated
      Statements of Stockholders’ Equity and Comprehensive Income (Loss) for
      each of the years in the three-year period ended December 31,
      2008
                
                45Consolidated
      Statements of Cash Flows for each of the years in the three-year period
      ended December 31, 2008
                
                46Notes
      to Consolidated Financial Statements
                
                47




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




None.




Item
9A. Controls and Procedures




(a)
Evaluation of Disclosure Controls and Procedures




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Act of 1934, as
amended, as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of December 31, 2008, were
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed or submitted under the
Securities Exchange Act of 1934, as amended, is (i) recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and (ii) accumulated and communicated to our management, including our
principal executive and financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.




(b)
Change in Internal Control over Financial Reporting




No
change in our internal control over financial reporting occurred during the
quarter ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.


34




Management’s Report on
Internal Control over Financial Reporting




The
report of management on our internal control over financial reporting is set
forth in Item 8 of this report and is incorporated herein by
reference.




Item
9B. Other Information




None.


35




PART
III




Item
10. Directors, Executive Officers and Corporate Governance




The
applicable information set forth in the Company’s Definitive Proxy Statement is
incorporated herein by reference.




Identification
of Executive Officers and Certain Significant Employees




The
executive officers of the Company, their positions with the Company, their ages
and a brief biography for each are as follows:


Name
                    
                    
                    Age
                    
                    
                    PositionFrancis
      M. DiNuzzo
                    
                    53
                    
                    President
      and Chief Executive OfficerJames
      W. Stave
                    
                    54
                    
                    VP
      – Research and Development and Chief Science OfficerStanley
      Fronczkowski
                    
                    57
                    
                    VP
      – Finance, Chief Financial Officer and Corporate
      Secretary




Francis
M. DiNuzzohas served as President and Chief Executive Officer since
October 13, 2008. Mr. DiNuzzo joined the Company in February 2008 as Executive
Vice President – Marketing and Chief Commercial Officer, and on June 6, 2008, he
was appointed interim President and Chief Executive Officer. Prior to joining
SDI, Mr. DiNuzzo spent 26 years at Agilent Technologies / Hewlett Packard. He
began his career in research and development in 1981 and advanced through a
series of functional management roles over the next 18 years. In 1999, Mr.
DiNuzzo became General Manager of Agilent’s Chemical Solutions Business Unit
where he had global responsibility for analytical equipment, consumables and
service products serving the chemical, environmental, food and forensics
markets. In 2001, Mr. DiNuzzo became General Manager of the Consumable and
Services Business Unit, with global responsibility for all consumables and
services across all Life Science and Chemical Analysis markets. In 2004, Mr.
DiNuzzo became Vice President and General Manager of the Integrated Biology
Solutions unit, a role where he formed a biotechnology business focused on
Genomics, Proteomics and BioInformatics. Mr. DiNuzzo holds B.S and M.S. degrees
in Engineering with a minor in Business Administration from the University of
New Hampshire.




James
W. Stavejoined the Company in March 1991 as a research group leader.
Subsequently, Dr. Stave was promoted to director of Research and Development. In
October 1993, Dr. Stave was promoted to Vice President—Research and Development
and Chief Technical Officer. Dr. Stave was elected Chief Science Officer in
2006. Prior to joining SDI, Dr. Stave worked for DuPont, Molecular Genetics,
Inc. and the U.S. Department of Agriculture. Dr. Stave received his Ph.D. in
Microbiology from the University of Maryland and his B.S. in Biology from
Michigan Technological University.




Stanley
Fronczkowskijoined the Company in January 2007 as Vice President –
Finance, Chief Financial Officer and Corporate Secretary. Prior to joining SDI,
Mr. Fronczkowski spent 29 years with Keystone Foods. He began his career with
Keystone in 1978, rising to the position Vice President, International Finance
in 1988, and over the next 10 years, supported Keystone’s growth across multiple
companies on four continents. In 1998, Mr. Fronczkowski became COO for Keystone
Europe, Middle East and Africa with full responsibility for the operating
results of this business group. Following Keystone’s reorganization to Strategic
Business Units in Europe and North America, Mr. Fronczkowski assumed his most
recent assignment as Keystone’s Vice President for Finance, Asia-Pacific. Mr.
Fronczkowski is a graduate of the State University of New York at Cortland with
a B.S. in Political Science, the University of Delaware with a B.S. in
Accounting, and Widener University with a M.S. in Finance and
Taxation.


36




Item
11. Executive Compensation




The
applicable information set forth in the Company’s Definitive Proxy Statement is
incorporated herein by reference.




Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters




The
applicable information set forth in the Company’s Definitive Proxy Statement is
incorporated herein by reference.




Equity
Compensation




The
table below presents certain information as of December 31, 2008 concerning
securities issuable in connection with equity compensation plans that have been
approved by the Company’s stockholders and that have not been approved by the
Company’s stockholders.


Plan
      Category
                          
                          Number
      of
                            securities
      to be
                            issued
      upon
                            exercise
      of
                            outstanding
      options,
                            warrants
      and rights
                            (a)
                          
                          Weighted-average
                            exercise
      price of
                            outstanding
      options,
                            warrants
      and rights
                            (b)
                          
                          Number
      of securities
                            remaining
      available for
                            issuance
      under equity
                            compensation
      plans
                            (excluding
      securities
                            reflected
      in column (a))
                            (c)Equity
      compensation plan approved by security holders
                          
                          
                          1,419,972
                          
                          $
                          3.28
                          
                          
                          40,312Equity
      compensation not approved by security holders
                          
                          
                          300,000
                          
                          $
                          4.00
                          
                          
                          —Total
                          
                          
                          1,719,972
                          
                          $
                          3.41
                          
                          
                          40,312




The
300,000 shares underlying options granted under equity compensation not approved
by security holders were granted in connection with the Company’s hiring, on
September 2, 2003, of its former President and Chief Executive Officer, Matthew
H. Knight. The grant to Mr. Knight is a ten year non-qualified stock option
grant at an exercise price of $4.00 per share, the closing market price on
September 2, 2003.




Item
13. Certain Relationships and Related Transactions, and Director
Independence




The
applicable information set forth in the Company’s Definitive Proxy Statement is
incorporated herein by reference.




Item
14. Principal Accountant Fees and Services




The
applicable information set forth in the Company’s Definitive Proxy Statement is
incorporated herein by reference.


37




PART
IV




Item
15. Exhibits and Financial Statement Schedules




1.
Financial Statements




(a) See
the Consolidated Financial Statements which begin on page 43 of this
Report




2.
Financial Statement Schedules




Financial
statement schedules are omitted because they are either not required or not
applicable or the required information is reflected in the financial statements
or notes thereto.




3.
Exhibits


Exhibit
                      Number
                    
                    Description
                    
                    Reference2.1
                    
                    Agreement
      and Plan of Merger among the Company, AZUR Acquisition Corp. and AZUR
      Environmental dated May 4, 2001
                    
                    (1)3.1
                    
                    Fourth
      Amended and Restated Certificate of Incorporation of the
      Company
                    
                    (2)3.2
                    
                    Amended
      and Restated Bylaws of the Company
                    
                    (2)4.1
                    
                    Reference
      is made to Exhibits 3.1 and 3.24.2
                    
                    Forms
      of Warrants to Purchase Common Stock of the Company
                    
                    (2)10.1
                    
                    Stock
      Purchase Agreement among the Company and its outside directors and certain
      of their affiliates dated August 16, 2002
                    
                    (12)10.2
                    
                    Demand
      Registration Rights Agreement among the Company and its outside directors
      and certain of their affiliates dated August 16, 2002
                    
                    (12)10.3
                    
                    EnSys
      Environmental Products, Inc. 1993 Stock Incentive Plan*
                    
                    (3)10.4
                    
                    Amended
      and Restated EnSys Environmental Products, Inc. 1995 Stock Incentive
      Plan*
                    
                    (4)10.5
                    
                    EnSys
      Environmental Products, Inc. 401(k) Plan Adoption
Agreement
                    
                    (3)10.11
                    
                    Agreement
      and Plan of Merger by and between EnSys and Strategic Diagnostics Inc.
      dated as of October 11, 1996
                    
                    (2)10.18
                    
                    Industrial
      Lease dated October 26, 1993, by and between Tober & Agnew Properties,
      Inc. and Strategic Diagnostics Inc.
                    
                    (6)10.21
                    
                    Lease
      agreement dated October 29, 1997 by and between Pencader Courtyard, L.P.
      and Strategic Diagnostics Inc.
                    
                    (7)10.22
                    
                    1998
      Employee Stock Purchase Plan
                    
                    (11)10.23
                    
                    2000
      Stock Incentive Plan*
                    
                    (18)


38





10.27
                      
                      Loan
      Agreement between the Company and PNC Bank, Delaware, dated May 5,
      2000
                      
                      (10)10.28
                      
                      Line
      of Credit Note between the Company and PNC Bank, Delaware, dated May 5,
      2000
                      
                      (10)10.29
                      
                      Term
      Note between the Company and PNC Bank, Delaware, dated May 5,
      2000
                      
                      (10)10.30
                      
                      Employment
      Agreement dated September 2, 2003, by and between Matthew H. Knight and
      the Company*
                      
                      (13)10.31
                      
                      Nonqualified
      Stock Option Agreement dated September 2, 2003, by and between Matthew H.
      Knight and the Company*
                      
                      (13)10.32
                      
                      Restricted
      Stock Grant Agreement dated September 2, 2003, by and between Matthew H.
      Knight and the Company*
                      
                      (13)10.33
                      
                      Employment
      Agreement dated January 1, 1997 by and between James W. Stave and the
      Company*
                      
                      (14)10.34
                      
                      Exclusive
      Distribution and Supply Agreement, dated as of May 4, 2005, by and between
      the Registrant and the DuPont Qualicon division of E.I. du Pont de
      Nemours
                      
                      (15)
      (16)10.35
                      
                      Strategic
      Diagnostics Inc. Change of Control Severance Agreement*
                      
                      (17)10.36
                      
                      Agreement,
      dated as of March 12, 2008, by and among the Company and Steven R. Becker,
      BC Advisors, LLC, SRB Management, L.P. and Richard van den
      Broek
                      
                      (19)10.37
                      
                      Separation
      Agreement, dated as of June 6, 2008, between Strategic Diagnostics Inc.
      and Matthew H. Knight
                      
                      (20)10.38
                      
                      Employment
      Agreement, dated as of October 13, 2008, between Strategic Diagnostics
      Inc. and Francis M. DiNuzzo*
                      
                      (21)10.39
                      
                      Separation
      Agreement, dated as of December 9, 2008, between Strategic Diagnostics
      Inc. and Stanley Fronczkowski
                      
                      (22)21.1
                      
                      Subsidiaries
      of the Company23.1
                      
                      Consent
      of KPMG LLP, Independent Registered Public Accounting
Firm31.1
                      
                      Certifications
      of the Chief Executive Officer of Strategic Diagnostics Inc. required by
      Rule 13a-14(a) under the Securities Exchange Act of 193431.2
                      
                      Certifications
      of the Chief Financial Officer of Strategic Diagnostics Inc. required by
      Rule 13a-14(a) under the Securities Exchange Act of 193432.1
                      
                      Certification
      of Francis M. DiNuzzo pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of Sarbanes-Oxley Act of 200232.2
                      
                      Certification
      of Stanley Fronczkowski pursuant to 18 U.S.C. Section  1350, as
      adopted pursuant to Section 906 of Sarbanes-Oxley Act
      of  2002


39










(1)
            Incorporated
      by reference to the designated exhibit of the Company’s 10-Q for the
      fiscal quarter ended September 30, 2001.(2)
            Incorporated
      by reference to the designated exhibit of the EnSys Registration Statement
      on Form S-4 (No. 333-17505) filed on December 9, 1996.(3)
            Incorporated
      by reference to the designated exhibit of the EnSys Registration Statement
      on Form S-1 (No. 33-68440) filed on September 3, 1993.(4)
            Incorporated
      by reference to Appendix F to the Joint Proxy Statement/Prospectus
      contained in the EnSys Registration Statement on Form S-4 (No. 333-17505)
      filed on December 9, 1996.(5)
            Incorporated
      by reference to the designated exhibit of the EnSys Form 10-K for the
      fiscal year ended December 31, 1994.(6)
            Incorporated
      by reference to the designated exhibit of the EnSys Form 10-Q for the
      fiscal quarter ended March 31, 1996.(7)
            Incorporated
      by reference to the designated exhibit of the Company’s Form 10-K for the
      fiscal year ended December 31, 1996.(8)
            Incorporated
      by reference to the designated exhibit of the Company’s Form 10-K for the
      fiscal year ended December 31, 1997.(9)
            Incorporated
      by reference to the identically numbered exhibit contained in the
      Company’s Form 8-K filed on May 26, 1999.(10)
            Incorporated
      by reference to the identically numbered exhibit contained in the
      Company’s Form 8-K filed on March 15, 1999.(11)
            Incorporated
      by reference to the designated exhibit of the Company’s Registration
      Statement on Form S-8 (No. 333- 68107) filed on November 30,
      1998.(12)
            Incorporated
      by reference to the designated exhibit of the Company’s 10-Q for the
      fiscal quarter ended September 30, 2002.(13)
            Incorporated
      by reference to the designated exhibit of the Company’s Form 10-Q for the
      fiscal quarter ended September 30, 2003.(14)
            Incorporated
      by reference to the designated exhibit of the Company’s Form 10-K for the
      fiscal year ended December 31, 2004.(15)
            Confidential
      treatment has been requested as to certain portions of this exhibit
      pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as
      amended.(16)
            Incorporated
      by reference to the designated exhibit of the Company’s Form 10-Q for the
      fiscal quarter ended June 30, 2005, as amended.(17)
            Incorporated
      by reference to the designated exhibit of the Company’s Form 10-Q for the
      fiscal quarter ended September 30, 2005.(18)
            Incorporated
      by reference to Appendix A of the Company’s Definitive Proxy Statement
      filed with the Securities and Exchange Commission on March 24,
      2004.(19)
            Incorporated
      by reference to Exhibit 99.1 of the Company’s Form 8-K filed March 18,
      2008.(20)
            Incorporated
      by reference to Exhibit 99.1 of the Company’s Form 8-K filed June 6,
      2008.(21)
            Incorporated
      by reference to Exhibit 99.1 of the Company’s Form 8-K filed October 16,
      2008.(22)
            Incorporated
      by reference to Exhibit 99.1 of the Company’s Form 8-K filed December 9,
      2008.*
            Management
      contract or compensatory plan.


40




MANAGEMENT’S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our system of internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
company’s assets that could have a material effect on the financial
statements.




Management
performed an assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2008 based upon criteria in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). Based on this assessment,
management determined that the company’s internal control over financial
reporting was effective as of December 31, 2008, based on the criteria in
Internal Control-Integrated Framework issued by COSO.




This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in this annual
report.




This
report shall not be deemed “filed” for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the liability of that
section. Further, this report shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.


/s/
      Francis M. DiNuzzo
                
                
                /s/
      Stanley FronczkowskiFrancis
      M. DiNuzzo
                
                Stanley
      FronczkowskiPresident
      and Chief Executive Officer
                
                Vice
      President – Finance and ChiefFinancial
      Officer




Dated:
March 31, 2009





41




REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders


Strategic
Diagnostics Inc.:




We
have audited the accompanying consolidated balance sheets of Strategic
Diagnostics Inc. and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 2008. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements 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. 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 audits provide a
reasonable basis for our opinion.




In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Strategic
Diagnostics Inc. and subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008 in conformity with U.S. generally
accepted accounting principles.




/s/
KPMG LLP




Philadelphia,
Pennsylvania


March 31,
2009





42




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED
BALANCE SHEETS


(in
thousands, except share and per share data)


December
      31,
                  
                  December
      31,2008
                  
                  2007ASSETSCurrent
      Assets :Cash
      and cash equivalents
                  
                  $
                  9,980
                  
                  $
                  12,988Receivables,
      net
                  
                  
                  4,099
                  
                  
                  4,110Inventories
                  
                  
                  3,890
                  
                  
                  4,204Deferred
      tax asset
                  
                  
                  3
                  
                  
                  1,201Other
      current assets
                  
                  
                  534
                  
                  
                  521Total
      current assets
                  
                  
                  18,506
                  
                  
                  23,024Property
      and equipment, net
                  
                  
                  5,275
                  
                  
                  5,481Other
      assets
                  
                  
                  107
                  
                  
                  7Deferred
      tax asset
                  
                  
                  71
                  
                  
                  7,389Goodwill
                  
                  
                  —
                  
                  
                  4,201Intangible
      assets, net
                  
                  
                  1,562
                  
                  
                  1,847Total
      assets
                  
                  $
                  25,521
                  
                  $
                  41,949LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities :Current
      portion of long-term debt
                  
                  $
                  1,658
                  
                  $
                  611Accounts
      payable
                  
                  
                  691
                  
                  
                  569Accrued
      expenses
                  
                  
                  1,860
                  
                  
                  1,866Deferred
      revenue
                  
                  
                  64
                  
                  
                  5Total
      current liabilities
                  
                  
                  4,273
                  
                  
                  3,051Long-term
      debt
                  
                  
                  —
                  
                  
                  1,640Other
      non-current liabilities
                  
                  
                  —
                  
                  
                  130Total
      non-current liabilities
                  
                  
                  —
                  
                  
                  1,770Commitments
      and Contingencies (Note 9)Stockholders’
      Equity:Preferred
      stock, $.01 par value, 20,920,648 shares authorized, no shares issued or
      outstanding
                  
                  
                  —
                  
                  
                  —Common
      stock, $.01 par value, 35,000,000 shares authorized, 20,680,522 and
      20,410,540 issued at December 31, 2008 and December 31, 2007,
      respectively
                  
                  
                  206
                  
                  
                  205Additional
      paid-in capital
                  
                  
                  40,345
                  
                  
                  39,594Treasury
      stock, 406,627 and 0 common shares at cost at December 31, 2008 and
      December 31, 2007, respectively
                  
                  
                  (555
                  )
                  
                  —Accumulated
      deficit
                  
                  
                  (18,625
                  )
                  
                  (2,830
                  )Cumulative
      translation adjustments
                  
                  
                  (123
                  )
                  
                  159Total
      stockholders’ equity
                  
                  
                  21,248
                  
                  
                  37,128Total
      liabilities and stockholders’ equity
                  
                  $
                  25,521
                  
                  $
                  41,949




The
accompanying notes are an integral part of these statements





43





STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF OPERATIONS


(in
thousands, except share and per share data)


Year
      Ended December 31,2008
                  
                  2007
                  
                  2006Revenues
                  
                  $
                  27,659
                  
                  $
                  27,207
                  
                  $
                  25,522Operating
      expenses:Manufacturing
                  
                  
                  13,091
                  
                  
                  10,766
                  
                  
                  11,715Research
      and development
                  
                  
                  3,576
                  
                  
                  2,938
                  
                  
                  2,630Selling,
      general and administrative
                  
                  
                  14,425
                  
                  
                  11,990
                  
                  
                  10,555Goodwill
      impairment
                  
                  
                  4,150
                  
                  
                  —
                  
                  
                  —(Gain)
      loss on disposal of assets
                  
                  
                  (17
                  )
                  
                  110
                  
                  
                  42Total
      operating expenses
                  
                  
                  35,225
                  
                  
                  25,804
                  
                  
                  24,942Operating
      income (loss)
                  
                  
                  (7,566
                  )
                  
                  1,403
                  
                  
                  580Interest
      income, net
                  
                  
                  157
                  
                  
                  433
                  
                  
                  386Income
      (loss) before taxes
                  
                  
                  (7,409
                  )
                  
                  1,836
                  
                  
                  966Income
      tax expense
                  
                  
                  8,386
                  
                  
                  976
                  
                  
                  282Net
      income (loss)
                  
                  $
                  (15,795
                  )
                  $
                  860
                  
                  $
                  684Basic
      net income (loss) per share
                  
                  $
                  (0.78
                  )
                  $
                  0.04
                  
                  $
                  0.03Shares
      used in computing basic net income (loss) per share
                  
                  
                  20,312,707
                  
                  
                  20,325,285
                  
                  
                  20,031,833Diluted
      net income (loss) per share
                  
                  $
                  (0.78
                  )
                  $
                  0.04
                  
                  $
                  0.03Shares
      used in computing diluted net income (loss) per share
                  
                  
                  20,312,707
                  
                  
                  20,562,645
                  
                  
                  20,108,688




The
accompanying notes are an integral part of these statements.





44




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


AND
COMPREHENSIVE INCOME (LOSS)


(in
thousands)


Preferred
              Stock
            
            Common
              Stock
            
            Additional
              Paid-In
              Capital
            
            Treasury
              Stock
            
            Accumulated
              Deficit
            
            Deferred
              Compensation
            
            Cumulative
              Translation
              Adjustments
            
            TotalBalance
      January 1, 2006
            
            $
            —
            
            $
            200
            
            $
            38,249
            
            $
            —
            
            $
            (4,374
            )
            $
            (313
            )
            $
            16
            
            $
            33,778Comprehensive
      income:Net
      income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            684
            
            
            —
            
            
            —
            
            
            684Currency
      translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            129
            
            
            129Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            813Exercises
      of stock options
            
            
            —
            
            
            2
            
            
            387
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            389Employee
      stock purchase plan
            
            
            —
            
            
            —
            
            
            30
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            30Implementation
      of SFAS 123R
            
            
            —
            
            
            —
            
            
            (313
            )
            
            —
            
            
            —
            
            
            313
            
            
            —
            
            
            —Deferred
      compensation amortization
            
            
            —
            
            
            —
            
            
            273
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            273Tax
      benefit of restricted stock awards
            
            
            —
            
            
            —
            
            
            (21
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (21
            )Balance
      December 31, 2006
            
            
            —
            
            
            202
            
            
            38,605
            
            
            —
            
            
            (3,690
            )
            
            —
            
            
            145
            
            
            35,262Comprehensive
      income:Net
      income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            860
            
            
            —
            
            
            —
            
            
            860Currency
      translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            14
            
            
            14Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            874Exercises
      of stock options
            
            
            —
            
            
            3
            
            
            534
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            537Employee
      stock purchase plan
            
            
            —
            
            
            —
            
            
            33
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            33Stock-based
      compensation
            
            
            —
            
            
            —
            
            
            422
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            422Balance
      December 31, 2007
            
            
            —
            
            
            205
            
            
            39,594
            
            
            —
            
            
            (2,830
            )
            
            —
            
            
            159
            
            
            37,128Comprehensive
      loss:Net
      loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (15,795
            )
            
            —
            
            
            —
            
            
            (15,795
            )Currency
      translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (282
            )
            
            (282
            )Total
      comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (16,077
            )Company
      share buyback
            
            
            —
            
            
            —
            
            
            —
            
            
            (555
            )
            
            —
            
            
            —
            
            
            —
            
            
            (555
            )Employee
      stock purchase plan
            
            
            —
            
            
            1
            
            
            69
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            70Stock-based
      compensation
            
            
            —
            
            
            —
            
            
            682
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            682Balance
      December 31, 2008
            
            $
            —
            
            $
            206
            
            $
            40,345
            
            $
            (555
            )
            $
            (18,625
            )
            $
            —
            
            $
            (123
            )
            $
            21,248




The
accompanying notes are an integral part of these statements.





45





STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)


Year
      Ended December 31,2008
              
              2007
              
              2006Cash
      Flows from Operating Activities :Net
      income (loss)
              
              $
              (15,795
              )
              $
              860
              
              $
              684Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities :Goodwill
      impairment charge
              
              
              4,150
              
              
              —
              
              
              —Depreciation,
      amortization and other intangibles impairment
              
              
              1,401
              
              
              1,206
              
              
              1,027Stock-based
      compensation expense
              
              
              682
              
              
              430
              
              
              277Deferred
      income taxes
              
              
              8,566
              
              
              769
              
              
              124(Gain)
      loss on disposal of fixed assets
              
              
              (17
              )
              
              93
              
              
              42(Increase)
      decrease in :Receivables
              
              
              11
              
              
              (432
              )
              
              (436
              )Inventories
              
              
              314
              
              
              (1,026
              )
              
              34Other
      current assets
              
              
              (13
              )
              
              (29
              )
              
              (130
              )Other
      assets
              
              
              (100
              )
              
              (14
              )
              
              26Increase
      (decrease) in :Accounts
      payable
              
              
              122
              
              
              32
              
              
              77Accrued
      expenses
              
              
              1
              
              
              411
              
              
              16Deferred
      revenue
              
              
              59
              
              
              (128
              )
              
              (74
              )Other
      non-current liabilities
              
              
              (130
              )
              
              130
              
              
              —Net
      cash provided by (used in) operating activities
              
              
              (749
              )
              
              2,302
              
              
              1,667Cash
      Flows from Investing Activities :Purchase
      of property and equipment
              
              
              (929
              )
              
              (2,484
              )
              
              (1,023
              )Purchase
      of patent license
              
              
              —
              
              
              —
              
              
              (117
              )Proceeds
      from sale / disposal of assets
              
              
              34
              
              
              2
              
              
              29Net
      cash used in investing activities
              
              
              (895
              )
              
              (2,482
              )
              
              (1,111
              )Cash
      Flows from Financing Activities :Proceeds
      from exercise of stock options
              
              
              —
              
              
              537
              
              
              389Proceeds
      from employee stock purchase plan
              
              
              66
              
              
              36
              
              
              20Proceeds
      from issuance of long and short term debt
              
              
              —
              
              
              2,000
              
              
              —Purchase
      of treasury stock
              
              
              (555
              )
              
              —
              
              
              —Repayments
      on financing obligations
              
              
              (593
              )
              
              (311
              )
              
              (211
              )Net
      cash provided by (used in) financing activities
              
              
              (1,082
              )
              
              2,262
              
              
              198Effect
      of exchange rate changes on cash
              
              
              (282
              )
              
              14
              
              
              129Net
      increase (decrease) in cash and cash equivalents
              
              
              (3,008
              )
              
              2,096
              
              
              883Cash
      and Cash Equivalents, Beginning of Year
              
              
              12,988
              
              
              10,892
              
              
              10,009Cash
      and Cash Equivalents, End of Year
              
              $
              9,980
              
              $
              12,988
              
              $
              10,892Supplemental
      Cash Flow Disclosure :Cash
      paid (received) for taxes and tax refunds
              
              $
              11
              
              $
              233
              
              $
              (13
              )Cash
      paid for interest
              
              
              119
              
              
              69
              
              
              48




The
accompanying notes are an integral part of these statements





46







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CERTAIN BALANCE SHEET
INFORMATION




Business




Strategic
Diagnostics Inc. and its subsidiaries (the “Company”) develops, manufactures and
markets antibody products and analytical test kits for a broad range of food,
water, agricultural, industrial, environmental and scientific
applications.




The
current economic downturn, including disruptions in the capital and credit
markets, may continue indefinitely and intensify, and could adversely affect our
results of operations, cash flows and financial condition or those of our
customers and suppliers. These circumstances could adversely affect our access
to liquidity needed to conduct or expand our business or conduct acquisitions or
make other discretionary investments. These circumstances could adversely affect
our ability to draw on existing credit facilities, which depend on the ability
of the bank that is a party to that facility to meet its funding commitments to
us. A bank may not be able to meet its funding commitments if it experiences
shortages of capital and liquidity. These circumstances may also adversely
impact the capital needs of our customers and suppliers, which, in turn, could
adversely affect their ability to purchase our products or supply us with
necessary equipment and raw materials. This could adversely affect our results
of operations, cash flows and financial condition. A weakening business climate
could cause longer sales cycles and slower growth, and could expose us to
increased business or credit risk in dealing with customers or suppliers
adversely affected by economic conditions. Our ability to collect accounts
receivable may be delayed or precluded if our customers are unable to pay their
obligations.




Basis of
Presentation




The
historical financial statements presented herein include the consolidated
financial statements of Strategic Diagnostics Inc. and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.




Accounts
Receivable




As
of December 31, 2008 and 2007, the allowance for doubtful accounts was $70 and
$82, respectively. If receivables are in dispute with the customer or otherwise
deemed uncollectible, the Company’s policy is to charge these write-offs against
the allowance. The Company continually reviews the realizability of its
receivables and charges current period earnings for the amount deemed
unrealizable. At December 31, 2008 and 2007, net accounts receivable were $4,099
and $4,110, respectively.




A
summary of the activity in the allowance for doubtful accounts for the years
ended December 31, 2008, 2007 and 2006 is as follows:


2008
                              
                              
                              2007
                              
                              
                              
                              2006Balance,
      January 1
                              
                              $
                              82
                              
                              
                              $
                              134
                              
                              
                              $
                              117Additions
      (reductions) to allowance fordoubtful
      accounts charged (credited) tocosts
      and expenses
                              
                              
                              70
                              
                              
                              
                              (49
                              )
                              
                              
                              108Deductions-written
      off as uncollectible
                              
                              
                              (82
                              )
                              
                              
                              (3
                              )
                              
                              
                              (91
                              )Balance,
      December 31
                              
                              $
                              70
                              
                              
                              $
                              82
                              
                              
                              $
                              134




Inventories




The
Company’s inventories are valued at the lower of cost or market.





47







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




For
inventories that consist primarily of test kit components, bulk antibody serum
and antibody products, cost is determined using the first in, first out
method.




For
inventories that consist of costs associated with the production of custom
antibodies, cost is determined using the specific identification method.
Realization of such inventories is dependent upon the successful completion of a
project in accordance with customer specifications. Losses on projects in
progress are recorded in the period such losses become likely.





48







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




At
December 31, inventories consisted of the following:


2008
                      
                      
                      2007Raw
      materials
                      
                      $
                      1,216
                      
                      
                      $
                      1,354Work
      in progress
                      
                      
                      946
                      
                      
                      
                      903Finished
      goods
                      
                      
                      1,728
                      
                      
                      
                      1,947Inventories
                      
                      $
                      3,890
                      
                      
                      $
                      4,204




Property
and Equipment




Property
and equipment are stated at cost. Depreciation and amortization are computed
using the straight-line method over the estimated useful lives (generally three
to five years) of the assets. Leasehold improvements are depreciated over the
shorter of the lease term or the estimated useful life.




Impairment
of Goodwill and Long-Lived Assets




Long-lived
assets, such as property and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment 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 an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized in the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Goodwill and intangible assets not subject to
amortization are tested annually for impairment, and are tested for impairment
more frequently if events and circumstances indicate that the asset might be
impaired. An impairment loss is recognized to the extent that the carrying
amount exceeds the asset’s fair value.




The
Company tests its goodwill annually in a two-step approach. The first step is
the comparison of the carrying value of the Company, including goodwill, to the
fair value of the Company at the testing date. If the carrying amount exceeds
the fair value of the Company, a second test is performed to measure the amount
of an impairment charge, if any. To measure the amount of any impairment charge,
the Company determines the implied fair value of goodwill in the same manner as
if the Company were being acquired in a business combination. See Note 3 for
additional information.




Revenue
Recognition




Revenues
composed of sales of immunoassay-based test kits and certain antibodies and
immunochemical reagents are recognized upon the shipment of the product and
transfer of title, or when related services are provided. Revenues associated
with such products or services are recognized when persuasive evidence of an
order exists, shipment of product has occurred or services have been provided,
the price is fixed or determinable and, collectability is reasonably assured.
Management is required to make judgments based on actual experience about
whether or not collectability is reasonably assured.




The
Company enters into contracts related to the production of custom antibodies,
which provide for the performance of defined tasks for a fixed price, with
delivery of the product upon completion of production. The standard time to
complete a project is typically longer than 30 days but less than 12 months and
effort is expended over the life of the project. Revenues related to sales of
custom antibody projects are recognized when a project’s specifications have
been met and/or the related materials have been shipped.




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





49







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




Stock-Based
Compensation




The
Company follows Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”), which requires
that compensation costs related to employee share-based payment transactions are
measured in the financial statements at fair value on the date of grant and are
recognized over the vesting period of the award.




Research and
Development




Research
and development costs are charged to expense as incurred.




Accounting for Income
Taxes




Deferred
income tax assets and liabilities are determined based on the differences
between the financial statement and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in the period that such
changes are enacted.




Effective
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB
Statement 109 (“FIN 48”), which clarifies the accounting for income tax
positions. FIN 48 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. Under FIN 48, the Company recognizes in
its financial statements the impact of a tax position if that position is more
likely than not of being sustained on audit, based on the technical merits of
the position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure. The
Company includes interest and penalties related to unrecognized tax benefits as
a component of income tax expense. See Note 11 for further
information.




Basic and Diluted Income (Loss) per
Share




Basic
earnings (loss) per share (EPS) are computed by dividing net income or loss
available for common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS is similar to basic EPS,
except that the dilutive effect of converting or exercising all potentially
dilutive securities is also included in the denominator. The Company’s
calculation of diluted EPS includes the dilutive effect of exercising stock
options into common shares and the inclusion of unvested restricted stock units.
Basic loss per share excludes potentially dilutive securities. For the years
2008, 2007 and 2006, conversion of stock options and unvested restricted shares
totaling 1,601,228, 19,250 and 954,895 into common share equivalents were
excluded from this calculation because they were anti-dilutive.




Listed
below are the basic and diluted share calculations for the years ended December
31, 2008, 2007 and 2006:


2008
                                          
                                          2007
                                          
                                          2006Weighted
      average common shares outstanding
                                          20,312,707
                                          
                                          20,325,285
                                          
                                          20,031,833Shares
      used in computing basic net income (loss) per share
                                          20,312,707
                                          
                                          20,325,285
                                          
                                          20,031,833Dilutive
      effect of stock options and unvested restricted stock
units
                                          —
                                          
                                          237,360
                                          
                                          76,855Shares
      used in computing diluted net income (loss) per share
                                          20,312,707
                                          
                                          20,562,645
                                          
                                          20,108,688





50







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




Treasury
Stock




Shares
of common stock repurchased by the Company are recorded at cost as treasury
stock in the stockholders’ equity section of the consolidated balance sheet, and
as a use of cash in the financing activities section of the consolidated
statement of cash flows.




Foreign
Currency Translation




The
functional currency for the Company’s United Kingdom branch operation is the
British pound. Assets and liabilities related to this foreign operation are
translated at the current exchange rates at the end of each period. The
resulting translation adjustments are accumulated as a separate component of
stockholders’ equity. Revenues and expenses are translated at average exchange
rates in effect during the period with foreign currency transaction gains and
losses, if any, included in results of operations.




Comprehensive Income
(Loss)




Comprehensive
income (loss) is comprised of net income (loss) and currency translation
adjustments and is presented in the consolidated statements of stockholders’
equity.




Use of Estimates




The
preparation of the consolidated financial statements requires the management of
the Company to make a number of estimates and assumptions relating to the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period. These estimates
include those made in connection with assessing the valuation of accounts
receivable, inventories, deferred tax assets, goodwill and long lived assets.
Actual results could differ from those estimates.




Statements
of Cash Flows




The
Company considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents.




New
Accounting Pronouncements




In
November 2007, the Emerging Issues Task Force (“EITF”) of the Financial
Accounting Standards Board (“FASB”) reached a consensus on Issue No. 07-1,
Accounting for Collaborative Arrangements (“EITF No. 07-1”). EITF No. 07-1
defines a collaborative arrangement as a contractual arrangement in which the
parties are: (1) active participants to the arrangement; and (2) exposed to
significant risks and rewards that depend upon the commercial success of the
endeavor. The issue also addresses the appropriate income statement presentation
for activities and payments between the participants in a collaborative
arrangement as well as for costs incurred and revenue generated from
transactions with third parties. EITF No. 07-1 is effective for the Company for
the reporting period beginning January 1, 2009. The Company is in the process of
evaluating the impact of the adoption of EITF No. 07-1 on its consolidated
financial statements.




51







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




In
December 2007, the FASB issued SFAS No. No. 141(Revised), Business Combinations
(“SFAS No. 141(R)”), which replaces SFAS No. 141, Business Combinations, and
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquired at the acquisition date,
measured at their fair values as of that date, with limited exceptions. This
statement also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquired, at the full amounts of their fair
values. SFAS No. 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or to confirm the guidance in
that literature to that




In
April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of
the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors
an entity should consider in developing renewal or extension assumptions used in
determining the useful life of recognized intangible assets under SFAS No. 142,
“Goodwill and Other Intangible Assets.” This new guidance applies prospectively
to intangible assets that are acquired individually or with a group of other
assets in business combinations and asset acquisitions. FSP 142-3 is effective
for financial statements issued for fiscal years and interim periods beginning
after December 15, 2008. FSP 142-3’s impact on the Company is dependent upon
future acquisitions the Company may make.




2.
PROPERTY AND EQUIPMENT




As
of December 31, property and equipment consisted of the following:


2008
                    
                    
                    2007Equipment
                    
                    $
                    6,256
                    
                    
                    $
                    5,615Building
      improvements
                    
                    
                    4,088
                    
                    
                    
                    4,088Furniture
      and fixtures
                    
                    
                    175
                    
                    
                    
                    113Land
                    
                    
                    1,380
                    
                    
                    
                    1,380Leasehold
      improvements
                    
                    
                    904
                    
                    
                    
                    771Total
      property and equipment
                    
                    
                    12,803
                    
                    
                    
                    11,967Less
      - accumulated depreciation and amortization
                    
                    
                    (7,528
                    )
                    
                    
                    (6,486
                    )Net
      property and equipment
                    
                    $
                    5,275
                    
                    
                    $
                    5,481




Depreciation
expense was $1,114, $966 and $793 in 2008, 2007 and 2006,
respectively.





52







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




3.
INTANGIBLE ASSETS




As
of December 31, intangible assets consisted of the following:


2008
                                  
                                  2007Goodwill
                                  
                                  $
                                  —
                                  
                                  $
                                  4,2012008
                                  
                                  2007
                                  
                                  LivesIntangible
      assets
                                  
                                  $
                                  3,085
                                  
                                  $
                                  3,134
                                  
                                  3-20Less
      - accumulated amortization
                                  
                                  
                                  (1,523
                                  )
                                  
                                  (1,287
                                  )Net
      intangible assets
                                  
                                  $
                                  1,562
                                  
                                  $
                                  1,847




The
Company’s goodwill principally relates to the 1999 acquisitions of HTI
BioProducts, Inc. and Atlantic Antibodies, whose products are a component of the
antibody product group, and the 2001 acquisition of Azur Environmental, whose
products are a component of the water quality products group. The reduction in
goodwill in 2008 is due to the utilization of foreign tax benefits from the 2001
acquisition of Azur Environmental.




The
Company tests its goodwill annually in a two-step approach. The first step is
the comparison of the carrying value of the Company, including goodwill, to the
fair value of the Company at the testing date. If the carrying amount exceeds
the fair value of the Company, a second test is performed to measure the amount
of an impairment charge, if any. To measure the amount of any impairment charge,
the Company determines the implied fair value of goodwill in the same manner as
if the Company were being acquired in a business combination.




Prior
to performing the second step in the goodwill impairment analysis, the Company
assessed long-lived assets for impairment in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Such long-lived
assets included tangible and intangible assets. The Company concluded that
approximately $50 of intangible assets were impaired during
2008.




In
the fourth quarter of 2008, as economic conditions continued to decline, the
Company experienced a sustained and significant decline in its stock price. As a
result of this decline, the Company’s market capitalization was significantly
below the book value of the Company’s stockholders’ equity at December 31, 2008.
The Company performed the second test and the resulting fair value of goodwill
was zero. Accordingly, the Company recorded a charge of $4,150 to writeoff the
entire balance of goodwill during the year ended December 31,
2008.




The
remaining intangible assets principally relate to intellectual and property
rights acquired from Molecular Circuitry Inc. (“MCI”). The technology acquired
from MCI primarily relates to proprietary growth media used by the Company in
conjunction with the Company’s E. coliand Salmonellatest kits, and
also technology used in the Company’s ruminant feed test kit. The Company
launched sales of these products during the year ended December 31, 2003 and
expects a continued revenue stream from the sale of these products.




A
director of the company was a majority shareholder of MCI and MCI and will
continue to receive royalties from the Company until July of 2012. Royalties
paid to MCI in 2008, 2007 and 2006 were $166, $172 and $210,
respectively.





53







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




Amortization
of these intangible assets is on a straight line basis over their useful lives
and was $237, $240 and $234 in 2008, 2007 and 2006, respectively. The following
table is a schedule of the expected amortization expense in each of the next
five years:


Year
                  
                  Amount2009
                  
                  $
                  1272010
                  
                  
                  1142011
                  
                  
                  1142012
                  
                  
                  1142013
                  
                  
                  114




4.
ACCRUED EXPENSES




As
of December 31, accrued expenses consisted of the following:


2008
                    
                    
                    2007Royalties
                    
                    $
                    143
                    
                    
                    $
                    138Compensation
                    
                    
                    1,245
                    
                    
                    
                    1,241Professional
      fees
                    
                    
                    303
                    
                    
                    
                    210Purchases
                    
                    
                    169
                    
                    
                    
                    277Total
      accrued expenses
                    
                    $
                    1,860
                    
                    
                    $
                    1,866




5.
LONG-TERM DEBT




On
May 5, 2000, the Company entered into a financing agreement with a commercial
bank which was amended on October 1, 2008 (the “Credit Agreement”). The Credit
Agreement provides for up to a $5,000 revolving line of credit, none of which
was outstanding and all of which was available at December 31, 2008. The
revolving line of credit bears a variable interest rate of between 150 basis
points and 250 basis points over the one month LIBOR rate depending upon the
ratio of the Company’s funded debt to EBITDA. The Company’s effective rate of
interest on this line of credit, taking into account the variable interest rate
and LIBOR, was approximately 2.94% at December 31, 2008.




On
December 13, 2001, the Company received a term loan under the Credit Agreement
to finance the construction of new facilities at its Windham, Maine location.
This agreement provided for up to $1,500 in financing, $158 of which was
outstanding at December 31, 2008, and is repayable over seven years, with
principal payments that began on October 1, 2002. The loan bears a variable
interest rate of 100 basis points less than the current Prime Interest Rate.
Payments are due monthly, with equal amortization of principal payments plus
interest. The Company’s effective rate of interest on this loan at December
31, 2008 was 2.25%.




On
August 21, 2007, the Company received a term loan under the Credit Agreement to
finance the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2,000 in financing, $1,500 of which was
outstanding at December 31, 2008, and is repayable over five years, with
principal payments that began on October 1, 2007. The loan bears a fixed
interest rate of 5.96% with equal amortization of principal payments plus
interest.




Under
the Credit Agreement, the Company is required to meet certain quarterly
financial covenants that include a ratio of EBITDA to current maturities of debt
plus interest and cash paid for taxes greater than 1.50, a ratio of funded debt
to EBITDA not to exceed 3.25 and a requirement of liquid assets (cash and cash
equivalents) to be greater than or equal to $2.5 million at all
times.





54







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




The
Company did not meet its financial covenants with respect to its indebtedness at
December 31, 2008 and does not expect that it will be able to meet all of its
financial covenants under the Credit Agreement for the next 12 months. The
Company received a waiver of the financial covenants relating to the above
financing from its commercial bank as of December 31, 2008 and expects it will
receive waivers of the financial covenants until such covenants are
amended.




As
of December 31, 2008, the Company has classified the balance of its long-term
obligations under the Credit Agreement of $1,100 as current debt in the
consolidated balance sheet as the Company believes it is probable that there
will be a violation of the same covenants within the next 12 months if the
covenant terms are not amended. If the Company is unable to obtain a waiver of
future debt covenant violations, the Company will be unable to draw upon its
line of credit until such violations are cured. As of December 31, 2008, the
Company is not required to repay these long-term debt obligations within 12
months and expects to amend the Credit Agreement before December 31, 2009 to
allow the Company to meet its financial covenants and reclassify these long-term
obligations from current to non-current in the consolidated balance
sheet.




As
of December 31, 2008, the outstanding balance on all of the Company’s commercial
bank debt was $1,658. This indebtedness is secured by substantially all of the
Company’s assets.




The
following table is a schedule of the principal payments required under the
Company’s long-term indebtedness:


2009
              
              $
              5582010
              
              
              4002011
              
              
              4002012
              
              
              300Total
      debt
              
              $
              1,658




Interest
expense was $117, $78 and $48 in 2008, 2007 and 2006, respectively.




6.
SHARE-BASED
COMPENSATION




Under
various plans, executives, key employees and outside directors receive awards of
options to purchase common stock. The Company has a stock option plan (the “2000
Plan”) which authorizes the granting of incentive and nonqualified stock options
and restricted stock units. Incentive stock options are granted at not less than
100% of fair market value at the date of grant (110% for stockholders owning
more than 10% of the Company’s common stock). Nonqualified stock options are
granted at not less than 85% of fair market value at the date of grant. A
maximum of 4,000,000 shares of common stock are issuable under the 2000 Plan.
Certain additional options have been granted outside the 2000 Plan. These
options generally follow the provisions of the 2000 Plan. The Company issues new
shares to satisfy option exercises and the vesting of restricted stock
units.




The
Company also has an Employee Stock Purchase Plan (the “ESPP”). The ESPP allows
eligible full-time employees to purchase shares of common stock at 90 percent of
the lower of the fair market value of a share of common stock on the first or
last day of the quarter. Eligible employees are provided the opportunity to
acquire Company common stock during each quarter. No more than 661,157 shares of
common stock may be issued under the ESPP. Such stock may be unissued shares or
treasury shares of the Company or may be outstanding shares purchased in the
open market or otherwise on behalf of the ESPP. Under SFAS 123R, the Company’s
ESPP is compensatory. Therefore, the Company is required to recognize
compensation expense related to the discount from market value of shares sold
under the ESPP.





55







STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




On
December 27, 2005, the Board of Directors of the Company approved the
accelerated vesting, effective as of December 31, 2005, of all unvested stock
options granted to employees and non-employee directors from 2002 through 2005
under the 2000 Plan, as well as options granted to the Company’s Chief Executive
Officer under his original employment agreement. The acceleration of vesting of
these options reduced non-cash compensation expense that would have been
recorded in the Company’s statements of operations in 2006, 2007 and 2008, in
anticipation of the adoption of SFAS 123(R) in January 2006. The Board’s
decision to accelerate the vesting was based on such factors as: 48% of the
options were “out of the money”; the options generally vested over the next
three years; to reduce compensation expense that would be recorded in future
periods following the adoption of SFAS 123R; and, the Company decided to rely,
to a substantial degree, on restricted stock as opposed to options in future
incentive compensation awards.




As
a result of the acceleration, options to purchase approximately 381,000 shares
of the Company’s common stock (which represented 23% of the Company’s
outstanding stock options) became exercisable on December 31, 2005. The
accelerated options ranged in exercise price from $2.51 to $4.12 per share and
the weighted average exercise price of the accelerated options was $3.41 per
share. Of the 381,000 shares that became exercisable, approximately 199,000 of
these shares were “in the money” as of December 27, 2005, meaning that the
exercise price was at or below the price of the Company’s common stock on that
date. The weighted average exercise price of the “in the money” shares on that
date was $3.02. The options subject to acceleration included options to purchase
approximately 222,000 shares held in the aggregate by executive officers and
approximately 48,000 shares held in the aggregate by non-employee directors of
the Company. Of these 270,000 shares, approximately 147,000 were “in the money”
as of December 27, 2005. The grant date fair value of the unvested portion of
accelerated options at December 31, 2005 totaled $975,000 and would have been
recognized as compensation expense in accordance with SFAS 123(R) in future
years as follows: $682,000 in 2006, $228,000 in 2007 and $65,000 in
2008.




Share-based
compensation expense recorded in 2008, 2007 and 2006 is summarized as
follows:


2008
                          
                          2007
                          
                          2006Stock
      options
                          
                          $
                          384
                          
                          $
                          249
                          
                          $
                          76Employee
      stock purchase plan
                          
                          
                          7
                          
                          
                          8
                          
                          
                          2Restricted
      stock units
                          
                          
                          291
                          
                          
                          173
                          
                          
                          199Total
      share-based compensation expense
                          
                          $
                          682
                          
                          $
                          430
                          
                          $
                          277




The
deferred income tax benefit related to share-based compensation expense for the
year ended December 31, 2008 was $0 due to the full valuation allowance recorded
against deferred tax assets in 2008 (see Note 11). The deferred income tax
benefit for the year ended December 31, 2007 was $120. Share-based compensation
expense is a component of selling, general and administrative expense, and is
recorded as a non-cash expense in the operating activities section of the
consolidated statement of cash flows.




56




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)






Number
                of
      Shares
              
              Price
      Range
              
              Weighted
                Average
      Remaining
                Contractual
      term
              
              Aggregate
                Instrinsic
                ValueBalance,
      January 1, 2006
              
              
              1,660,500
              
              $
              1.88
              
              -
              
              $
              6.94Granted
              
              
              100,895
              
              $
              3.80
              
              -
              
              $
              4.00Cancelled
      / forefeited
              
              
              (109,666
              )
              $
              2.51
              
              -
              
              $
              4.08Exercised
              
              
              (182,000
              )
              $
              1.88
              
              -
              
              $
              2.65Balance,
      December 31, 2006
              
              
              1,469,729
              
              $
              1.88
              
              -
              
              $
              6.94Granted
              
              
              180,575
              
              $
              3.46
              
              -
              
              $
              4.65Cancelled
      / forfeited
              
              
              (224,284
              )
              $
              2.50
              
              -
              
              $
              6.94Exercised
              
              
              (174,400
              )
              $
              1.88
              
              -
              
              $
              4.20Balance,
      December 31, 2007
              
              
              1,251,620
              
              $
              1.88
              
              -
              
              $
              6.94Granted
              
              
              574,420
              
              $
              1.50
              
              -
              
              $
              4.60Cancelled
      / forfeited
              
              
              (106,068
              )
              $
              3.05
              
              -
              
              $
              5.50Balance,
      December 31, 2008
              
              
              1,719,972
              
              $
              1.50
              
              -
              
              $
              6.94
              
              
              6.1
      years
              
              $
              —Vested
      and excercisable at December 31, 2008
              
              
              1,152,616
              
              $
              1.50
              
              -
              
              $
              6.94
              
              
              4.5
      years
              
              $
              —Expected
      to vest as of December 31, 2008
              
              
              1,650,214
              
              $
              1.50
              
              -
              
              $
              6.94
              
              
              6.0
      years
              
              $
              —




As
of December 31, 2008, options covering 1,152,616 shares were exercisable with a
weighted average exercise price of $3.75 per share, and 40,312 shares were
available for future grant under the 2000 Plan.




As
of December 31, 2008 there was $452 of unrecognized compensation expense related
to non-vested stock options that is expected to be recognized over a weighted
average period of 2.9 years.




The
total aggregate intrinsic value of options exercised during the years ended
December 31, 2008, 2007 and 2006 was $0, $257 and $272 respectively. Cash
received from the exercises during the years ended December 31, 2008, 2007 and
2006 was $0, $537 and $389 and are included within the financing activity
section of the consolidated statements of cash flows.




The
weighted average fair value at the date of grant for options granted during
2008, 2007 and 2006 is estimated at $1.39, $2.55 and $2.50 per share,
respectively, using the Black-Scholes pricing model. The assumptions used in the
Black-Scholes model are as follows: dividend yield of 0%, expected volatility of
49% in 2008, 59% in 2007 and 69% in 2006, risk-free interest rate of 3.20% in
2008, 4.25% in 2007 and 4.57% in 2006, and an expected option life of 6 years in
2008, 5.5 years in 2007, and 6 years in 2006. The expected option life was
computed using the sum of the average vesting period and the contractual life of
the option and dividing by 2, for all periods presented.





57




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




The
following table provides additional information about the Company’s stock
options outstanding at December 31, 2008:


Options
      Outstanding
            
            Options
      ExercisableWeighted
      Average
            
            Number
      of
              Shares
            
            Wtd.
      Average
              Exercise
              PriceRange
      of
              Exercise
      Prices
            
            Number
      of
              Shares
            
            Remaining
              Contractual
      Life
            
            Exercise
              Price$
            1.50
            
            -
            
            $
            2.88
            
            
            458,400
            
            
            7.2
            
            Years
            
            $
            1.93
            
            
            155,700
            
            $
            2.74$
            3.05
            
            -
            
            $
            3.57
            
            
            286,400
            
            
            5.5
            
            Years
            
            $
            3.34
            
            
            246,400
            
            $
            3.32$
            3.69
            
            -
            
            $
            6.94
            
            
            975,172
            
            
            5.8
            
            Years
            
            $
            4.13
            
            
            750,516
            
            $
            4.10$
            1.50
            
            -
            
            $
            6.94
            
            
            1,719,972
            
            
            6.1
            
            Years
            
            $
            3.41
            
            
            1,152,616
            
            $
            3.75




The
Company grants restricted stock units (RSU) which is the right to receive
shares. The fair value of RSU’s is based on the market price for the stock at
the date of grant. RSU’s generally vest over periods of two to five
years.




The
following table summarizes the changes in non-vested restricted stock units for
the three year period ending December 31, 2008:


Shares
              
              Weighted
      Average
                Grant
      Date
                Fair
      Value
              
              Aggregate
                Intrinsic
      ValueNon-vested
      RSU’s at January 1, 2006
              
              
              109,010
              
              $
              3.55Granted
              
              
              53,535
              
              $
              3.87Vested
              
              
              (51,989
              )
              $
              3.92Cancelled
      / forfeited
              
              
              (25,334
              )
              $
              3.06Non-vested
      RSU’s at December 31, 2006
              
              
              85,222
              
              $
              3.71Granted
              
              
              70,193
              
              $
              4.61Vested
              
              
              (43,549
              )
              $
              3.54Cancelled
      / forfeited
              
              
              (15,750
              )
              $
              4.00Non-vested
      RSU’s at December 31, 2007
              
              
              96,116
              
              $
              4.36Granted
              
              
              266,619
              
              $
              1.99Vested
              
              
              (52,117
              )
              $
              4.02Cancelled
      / forfeited
              
              
              (14,212
              )
              $
              4.71Non-vested
      RSU’s at December 31, 2008
              
              
              296,406
              
              $
              2.28
              
              $
              264Expected
      to vest at December 31, 2008
              
              
              277,194
              
              $
              2.17
              
              $
              247




The
Company recorded compensation expense of $291, $173 and $199 for the years ended
December 31, 2008, 2007 and 2006, for RSU’s. This expense is a component of
selling, general and administrative expenses, and is recorded as a non-cash
expense in the operating activities section of the consolidated statement of
cash flows. As of December 31, 2008, 277,194 of the above non-vested RSU’s are
expected to vest and there is approximately $461 of unrecognized compensation
expense related to non-vested RSU’s that are expected to vest over a weighted
average of 1.9 years.





58





STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




7.
STOCKHOLDERS’ EQUITY




On
October 20, 2008, the Company announced that its Board of Directors had approved
a program to repurchase up to $3.0 million of the Company’s outstanding common
shares from time to time over the next 12 months, depending on market
conditions, share price and other factors.




During
the fourth quarter of 2008, the Company repurchased 406,627 common shares at a
weighted average price of $1.34 per share. The total cost of the share
repurchase including applicable broker fees was approximately $555.




8.
SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION




SFAS
No. 131, Disclosure about Segments of an Enterprise and Related Information
(“SFAS 131”) requires that companies report separately in the financial
statements certain financial and descriptive information about operating
segments profit or loss, certain specific revenue and expense items and segment
assets. Additionally, companies are required to report information about the
revenue derived from their products and service groups, about geographic areas
in which the company earns revenue and holds assets, and about major
customers.




The
Company develops and manufactures antibodies in its life sciences division. Such
antibodies are incorporated into test kits manufactured by the Company’s
industrial BioDetection services division for the detection of a wide variety of
substances related to food safety and water quality. In addition, antibodies
from the life sciences division are sold to medical diagnostic and
pharmaceutical companies and research institutions. The Company does not provide
segment disclosures as discrete financial information is not prepared for the
Life Sciences or BioDetection division for review by the Company’s Chief
Operating Decision Maker.




Geographic:




The
following table sets forth revenues by geographic region:


Year
      Ended December 31,2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006United
      States
                                    
                                    $
                                    20,744
                                    
                                    
                                    $
                                    21,154
                                    
                                    
                                    $
                                    19,498Rest
      of the world
                                    
                                    
                                    6,915
                                    
                                    
                                    
                                    6,053
                                    
                                    
                                    
                                    6,024Total
                                    
                                    $
                                    27,659
                                    
                                    
                                    $
                                    27,207
                                    
                                    
                                    $
                                    25,522




The
Company’s basis for identifying sales by country is the ship-to location. There
were no individual countries outside of the United States that represented more
than 10% of the total revenues of the Company. There are no significant
long-lived assets located outside the United States.





59




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




Products
and Services:




The
following table sets out revenues by product category.


Year
      Ended December 31,2008
                
                2007
                
                2006Life
      science
                
                $
                13,821
                
                $
                14,281
                
                $
                11,104Food
      safety
                
                
                8,424
                
                
                7,671
                
                
                9,215Water
      quality
                
                
                5,210
                
                
                5,099
                
                
                5,203Contract
      revenue
                
                
                204
                
                
                156
                
                
                —Revenues
                
                $
                27,659
                
                $
                27,207
                
                $
                25,522




9.
COMMITMENTS AND CONTINGENCIES




The
Company leases its office and manufacturing facilities and other equipment under
operating leases. Rent expense for the years ended December 31, 2008, 2007 and
2006, was $991, $843 and $738, respectively. Future commitments under
non-cancelable leases at December 31, 2008 are as follows:


2009
                  
                  $
                  1,0962010
                  
                  
                  1,0772011
                  
                  
                  3202012
                  
                  
                  3102013
                  
                  
                  2802014
      and thereafter
                  
                  
                  817$
                  3,900




The
Company’s subsidiary, AZUR Environmental Limited, is the lessee for two real
property leases located in the United Kingdom. In 2001, the landlord of the two
properties gave AZUR Environmental Limited its consent to allow AZUR to assign
the lease and its related obligations to a third party. As inducement to the
landlord to grant the assignment, AZUR was required to guarantee performance
under the original lease terms if the third party fails to perform. Both lease
terms expire in November 2016 and provide for annual principal rent payments of
approximately $300 per year in the aggregate and these amounts have been
included in the table above.




The
Company is subject to various claims arising in the ordinary course of business.
Although the ultimate outcome of these matters is presently not determinable,
management does not believe that the outcome of these matters will have a
material adverse effect on the Company’s financial position or results of
operations.




10.
RETIREMENT SAVINGS PLAN




The
Company maintains a retirement savings plan qualified under Section 401(k) of
the Internal Revenue Code. The plan allows for eligible employees to contribute
a portion of their gross wages to the plan. The Company matches employees’
contributions on a 100% basis up to 1% of gross wages and on a 50% basis up to
the next 5% of gross wages. In 2008, 2007 and 2006, the Company recognized
expense of $242, $172 and $153, respectively, associated with this
plan.





60




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




11.
INCOME TAXES




The
components of income (loss) before tax expense as of December 31 are as
follows:


2008
                                
                                
                                2007
                                
                                
                                2006United
      States
                                
                                $
                                (7,587
                                )
                                
                                $
                                1,673
                                
                                
                                $
                                790Rest
      of the world
                                
                                
                                178
                                
                                
                                
                                163
                                
                                
                                
                                176Total
                                
                                $
                                (7,409
                                )
                                
                                $
                                1,836
                                
                                
                                $
                                966




The
income tax expense (benefit) consists of the following:


2008
                
                
                2007
                
                
                2006Federal
                current
                
                $
                (20
                )
                
                $
                95
                
                
                $
                56deferred
                
                
                7,249
                
                
                
                710
                
                
                
                827,229
                
                
                
                805
                
                
                
                138State
                current
                
                
                (135
                )
                
                
                63
                
                
                
                90deferred
                
                
                1,242
                
                
                
                59
                
                
                
                11,107
                
                
                
                122
                
                
                
                91Foreign
                current
                
                
                —
                
                
                
                —
                
                
                
                —deferred
                
                
                50
                
                
                
                49
                
                
                
                5350
                
                
                
                49
                
                
                
                53Total
                
                
                $
                8,386
                
                
                $
                976
                
                
                $
                282




The
following table summarizes the significant differences between the U.S. Federal
statutory rate and the Company’s effective tax rate for financial statement
purposes:


2008
                              
                              2007
                              
                              2006Statutory
      tax rate
                              
                              
                              34.0
                              %
                              34.0
                              %
                              34.0
                              %State
      taxes, net of Federal benefit
                              
                              
                              (9.9
                              )
                              4.4
                              
                              6.2Valuation
      allowance, federal
                              
                              
                              (135.8
                              )
                              —
                              
                              —Goodwill
      impairment
                              
                              
                              (2.5
                              )
                              —
                              
                              —Provision
      for uncertain tax positions
                              
                              
                              —
                              
                              10.4
                              
                              —Additional
      tax for reconciliation to return
                              
                              
                              —
                              
                              6.2
                              
                              0.3Research
      and development credits
                              
                              
                              1.6
                              
                              (6.7
                              )
                              (14.6
                              )Other,
      net
                              
                              
                              (0.6
                              )
                              4.9
                              
                              3.3Total
                              
                              
                              (113.2
                              %)
                              53.2
                              %
                              29.2
                              %




61




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)






2008
                        
                        2007Net
      operating loss carryforwards
                        
                        $
                        6,875
                        
                        $
                        6,104Credit
      carryforwards
                        
                        
                        1,048
                        
                        
                        967Amortization
      and depreciation
                        
                        
                        4,033
                        
                        
                        2,921Deferred
      compensation
                        
                        
                        188
                        
                        
                        61Non-deductible
      reserves
                        
                        
                        69
                        
                        
                        95Inventory
      costs not currently deductible
                        
                        
                        299
                        
                        
                        200Total
      deferred tax assets
                        
                        
                        12,512
                        
                        
                        10,348Valuation
      allowance
                        
                        
                        (12,438
                        )
                        
                        (1,758
                        )Net
      deferred tax assets
                        
                        $
                        74
                        
                        $
                        8,590




For
the year ended December 31, 2008, the Company recorded income tax expense of
$8,386, which included a $10,680 increase in the valuation allowance recorded
against deferred tax assets of $12,512. The increase in the valuation allowance
is primarily due to the full valuation allowance recorded against U.S. federal
and state deferred tax assets.




SFAS
No. 109, Accounting for Income Taxes (“SFAS No. 109”) requires a company to
evaluate its deferred tax assets on a regular basis to determine if a valuation
allowance against the net deferred tax assets is required. Pursuant to SFAS No.
109, a cumulative pre-tax loss in recent years is significant negative evidence
that is difficult to overcome in considering whether deferred tax assets are
more likely than not realizable. The Company has evaluated the possibility of
potential tax planning strategies and determined that none currently exist that
Company would conclude are prudent and feasible. The Company has concluded,
based upon the evaluation of all available evidence, that it is more likely than
not that the U.S. federal and state net deferred tax assets will not be realized
and has recorded a full valuation allowance on its U.S. federal and state net
deferred tax assets, as of December 31, 2008.




At
December 31, 2008, the Company had approximately $4,435 of net operating loss
carryforwards for tax purposes which have no expiration related to operations in
the United Kingdom (“UK”). Management considered positive and negative
indicators, as well as potential tax planning strategies, and has concluded that
a substantial valuation allowance of approximately $1,168 was necessary for the
foreign deferred tax assets of approximately $1,242. The positive indicators
include the contribution to income before taxes by the foreign operations in the
UK for 2008 and 2007, and the forecasted income before taxes in the UK for 2009
and 2010. The negative indicators include a history of substantial net operating
losses in the UK, the lack of income before taxes prior to 2004, limited income
before taxes in the recent years and limitations with regard to estimating
income in the UK beyond 2010 resulting from a year-to-year evaluation of the
future need for a UK subsidiary.





62




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




At
December 31, 2008, the Company had U.S. federal net operating loss carryforwards
of $15,181, including those of acquired companies, which will expire as
follows:


Year
                        
                        Amount
      of
                          NOL2010
                        
                        $
                        4,4782017
                        
                        
                        7602018
                        
                        
                        1,3272019
                        
                        
                        5502020
                        
                        
                        662021
                        
                        
                        562022
                        
                        
                        2,2682024
                        
                        
                        2,0332025
                        
                        
                        32026
                        
                        
                        12027
                        
                        
                        12028
                        
                        
                        3,638Total
                        
                        $
                        15,181




The
Tax Reform Act of 1986 (the “Act”) limits the annual use of net operating loss
and income tax credit carryforwards (after certain ownership changes, as defined
by the Act). The application of these limits could significantly restrict the
Company’s ability to utilize these carryforwards. Certain of the Company’s total
net operating loss carryforwards from 2001 and prior years are subject to
limitations on their annual use since a cumulative change in ownership of more
than 50% has occurred within a three year period with respect to those net
operating loss carryforwards. The Company continues to evaluate recent
changes in ownership. If it is determined that an ownership change of more than
50% within a three year period did occur, as determined pursuant to the Internal
Revenue Code and Regulations, substantially all the net operating loss
carryforwards and income tax credit carryforwards could be subject to annual
limitations on usage. Because U.S. tax laws limit the time period during which
these carryforwards may be applied against future taxable income, the Company
may not be able to take full advantage of these attributes for federal and state
income tax purposes due to the annual limitation usage.




The
Company has federal research and experimentation credit carryforwards of $762 as
of December 31, 2008, which are set to expire in years 2019 through 2028. In
accordance with Internal Revenue Code §168(k)(4)) the Company intends to elect
out of bonus depreciation on the filing of their 2008 federal income tax return
which will result in a federal tax refund related to certain of the research and
experimentation credits. Accordingly, the credits were reduced in the current
year by $32. The Company also has federal alternative minimum tax credit
carryforwards of $132 which have indefinite lives.




The
Company adopted FIN 48 as of January 1, 2007 and there was no material effect on
the consolidated financial statements. As a result, there was no cumulative
effect related to adopting FIN 48. Upon adoption the Company had $362 of
unrecognized tax benefits. During the year ended December 31, 2007, the
Company’s unrecognized tax benefits increased by $218 to $580. During the year
ended December 31, 2008 the Company’s unrecognized tax benefits decreased by $93
to $487.





63




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




The
following table summarizes changes in unrecognized tax benefits during the years
ended December 31:


2008
                          
                          2007January
      1
                          
                          $
                          580
                          
                          $
                          362Increases
      from positions taken in prior periods
                          
                          
                          —
                          
                          
                          128Decreases
      from positions taken in prior periods
                          
                          
                          (130
                          )
                          
                          —Increases
      from positions taken in current period
                          
                          
                          37
                          
                          
                          92Decreases
      from unrecognized tax benefits relating to settlementswith
      taxing authorities
                          
                          
                          —
                          
                          
                          (2
                          )December
      31
                          
                          $
                          487
                          
                          $
                          580




The
unrecognized tax benefits at December 31, 2008 of $487, if recognized in a
period where there was not a full valuation allowance, would affect the
effective tax rate.




The
Company is subject to U.S. federal and UK income tax, as well as income taxes of
multiple state jurisdictions.




The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense. The Company had no payments or accruals of interest or
penalties that were required to be recognized for unrecognized tax benefits
during the years ended December 31, 2008 and 2007, due to the available net
operating loss carryforwards. Additionally there was no interest or penalties
required to be recognized in the statement of operations during the years ended
December 31, 2008 and 2007.




For
federal purposes, post-1992 tax years remain open to examination as a result of
earlier net operating losses being utilized in recent years. For state purposes,
the statute of limitations remains open in a similar manner for states that have
generated net operating losses. The Company does not expect that the total
amount of unrecognized tax benefits related to positions taken in prior periods
will change significantly during the next 12 months.





64




STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




DECEMBER
31, 2008


(in
thousands, except share and per share data)




12.
QUARTERLY FINANCIAL DATA (unaudited)


Three
      Months Ended,March
      31
              
              
              June
      30
              
              
              September
      30
              
              
              December
      31(In
      thousands except per share data)2008Revenues
              
              $
              7,155
              
              
              $
              6,584
              
              
              $
              6,892
              
              
              $
              7,028Gross
      profit (1)
              
              
              4,033
              
              
              
              3,400
              
              
              
              3,337
              
              
              
              3,798Net
      loss
              
              
              (12
              )
              
              
              (1,081
              )
              
              
              (2,218
              )
              
              
              (12,484
              )Basic
      loss per share
              
              
              —
              
              
              
              (0.05
              )
              
              
              (0.11
              )
              
              
              (0.62
              )Diluted
      loss per share
              
              
              —
              
              
              
              (0.05
              )
              
              
              (0.11
              )
              
              
              (0.62
              )2007Revenues
              
              $
              6,647
              
              
              $
              6,725
              
              
              $
              6,564
              
              
              $
              7,271Gross
      profit (1)
              
              
              4,070
              
              
              
              4,078
              
              
              
              3,897
              
              
              
              4,396Net
      income
              
              
              490
              
              
              
              204
              
              
              
              —
              
              
              
              166Basic
      earnings per share
              
              
              0.02
              
              
              
              0.01
              
              
              
              —
              
              
              
              0.01Diluted
      earnings per share
              
              
              0.02
              
              
              
              0.01
              
              
              
              —
              
              
              
              0.01




(1) Gross
profit is revenues less manufacturing expenses.





65





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.


STRATEGIC
      DIAGNOSTICS INC.Date:
            March
      31, 2009
            /s/
      Francis M. DiNuzzoFrancis
      M. DiNuzzoPresident,
      Chief Executive Officer and
Director




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.


Date:
            March
      31, 2009
            /s/
      Grover C. WrennGrover
      C. WrennChairman
      of the Board of DirectorsDate:
            March
      31, 2009
            /s/
      Francis M. DiNuzzoFrancis
      M. DiNuzzoPresident,
      Chief Executive Officer and Director(Principal
      Executive Officer)Date:
            March
      31, 2009
            /s/
      Stanley FronczkowskiStanley
      FronczkowskiVice
      President – Finance and Chief Financial Officer(Principal
      Financial and Accounting Officer)Date:
            March
      31, 2009
            /s/
      Steven BeckerSteven
      BeckerDirectorDate:
            March
      31, 2009
            /s/
      Morton CollinsMorton
      CollinsDirectorDate:
            March
      31, 2009
            /s/
      Geoffrey DavisGeoffrey
      DavisDirectorDate:
            March
      31, 2009
            /s/
      Herbert LotmanHerbert
      LotmanDirectorDate:
            March
      31, 2009
            /s/
      Clifford L. SpiroClifford
      L. SpiroDirectorDate:
            March
      31, 2009
            /s/
      Richard van den BroekRichard
      van den BroekDirectorDate:
            March
      31, 2009
            /s/
      Stephen L. WaechterStephen
      L. WaechterDirector




66