UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
  FORM
10-K
  ANNUAL
REPORT
 PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
 SECURITIES
EXCHANGE ACT OF 1934
  
  (Mark
One)
  x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For
the Fiscal Year Ended December 31, 2007
  
 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
  Securities
registered pursuant to Section 12(g) of the Act:
 Common
Stock, $.01 Par Value
 (Title of
class)
  
  Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act.           Yes o No 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 smaller reporting company)
  Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act.         Yes o No x
  The
aggregate market value of the common stock held by non-affiliates of the
Registrant was $70,504,684, calculated by using the number of shares outstanding
and the closing price of the common stock on June 29, 2007 (the last business
day of the Registrant’s most recently completed second fiscal
quarter).
  As of
March 20, 2008 there were 20,483,061 shares outstanding of the Registrant’s
common stock, par value $.01 per share.
  DOCUMENTS
INCORPORATED BY REFERENCE
  Portions
of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed
no later than April 29, 2008 with the Securities and Exchange Commission
relative to the Company’s 2008 Annual Meeting of Stockholders are incorporated
by reference into Part III of this Report.
 
 
 PART
      I
              1ITEM
      1.
              BUSINESS
              1Overview
              1Genomic
      AntibodyTM Technology
              3Immunoassay
      Technology
              4Bacteriophage
      Technology
              5Bioluminescence
      Technology
              6Sales
      and Marketing Strategy
              12Competition
              12Markets
      and Products
              13Regulatory
      Approvals
              14Manufacturing
              15Research
      and Development
              16Proprietary
      Technology and Patents
              17Employees
              19ITEM
      1A.
              RISK
      FACTORS
              19ITEM
      1B.
              UNRESOLVED
      STAFF COMMENTS
              23ITEM
      2.
              PROPERTIES
              24ITEM
      3.
              LEGAL
      PROCEEDINGS
              24ITEM
      4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
              24PART
      II
              25ITEM
      5.
              MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
      ISSUER PURCHASES OF EQUITY SECURITIES
              25Stock
      Performance Graph
              26ITEM
      6
              SELECTED
      FINANCIAL DATA
              27ITEM
      7.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              28Forward-Looking
      Statements
              28Overview
              28Results
      of Operations
              30Year
      ended December 31, 2007 versus year ended December 31,
      2006
              30Year
      ended December 31, 2006 versus year ended December 31,
      2005
              31Liquidity
      and Capital Resources
              34Off
      Balance Sheet Arrangements
              37Contractual
      Obligations
              37Critical
      Accounting Policies
              37ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              42ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
              42ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
              42ITEM
      9A.
              CONTROLS
      AND PROCEDURES
              42ITEM
      9B.
              OTHER
      INFORMATION
              43PART
      III
              44ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
              44ITEM
      11.
              EXECUTIVE
      COMPENSATION
              45ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
              45ITEM
      13.
              CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
              45ITEM
      14.
              PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
              46PART
      IV
              46ITEM
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
              46
  
  PART
I
  Item
1. Business
  Overview
 
 Strategic
Diagnostics Inc. ("SDI" or the "Company") is an antibody technology company
with a core mission of developing, commercializing and marketing innovative and
proprietary biotechnology that preserves and enhances the quality of human
health.
 
 SDI’s
bio-services division supplies critical reagents used in the diagnosis of
disease.  The Company’s new Genomic Antibody TechnologyTM is gaining
wide adoption in proteomic research, and drug/biomarker discovery among
academic, biotech, in-vitro diagnostic and large pharmaceutical
customers.
 
 SDI’s
industrial immunoassays represent state of the art technology for rapid, cost
effective detection of food and water contaminants.  SDI’s
RapidChek® kits are
experiencing fast growing adoption for the detection of pathogens such as E. coli, Salmonella and Listeria in the processing
and manufacturing of food and beverages.
 
 SDI
technology is also finding new applications in strategic emerging markets such
as renewable fuel, where the application of its patent pending phage technology
is being developed to increase corn-to-ethanol profits through improvments in
plant efficiency that generate higher yields at a lower operational
cost.
  By
applying its core competencies of creating proprietary antibodies and assay
development, the Company has produced unique, sophisticated testing and reagent
systems that are responsive to customer diagnostic and information
needs.
  Beginning
in the fourth quarter of 2004, the Company undertook a deliberate shift in its
activities to address the rapidly emerging opportunities for proteomics. The
analysis of the expression, localizations, functions, and interactions of
proteins is one of the most rapidly growing areas of the life sciences
industry.  SDI’s proprietary antibody technology has growing
acceptance as a game-changing innovation for drug research, development,
in-vitro diagnostics, and bio-marker discovery.  In addition to
supporting customer based initiatives, SDI continues to build its own, high
throughput discovery platforms and will pursue its own bio-marker
candidates.
  SDI is
customer focused.  The Company’s goals are to consistently deliver
more value to our customers and reduce the costs and risks of doing
business.  SDI sales professionals focus on delivering a quantifiable
“return on investment” to their customers 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 profitable growth by
leveraging its expertise in immunology, proteomics, bio-luminescence and other
bio-reactive 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 unique 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 Dallas, Texas and Windham, Maine for the manufacture of
antibodies.
  The
Company currently meets its customers’ needs and generates revenues through two
divisions, bio-services and industrial bio-detection services, which are
described as follows:
  Bio-Services
  SDI is a
leader in providing a wide array of products and services, including custom
antibodies, catalog antibodies, bulk antibodies and associated bio-processing
services, SDI is an outsourcing partner for production of monoclonal
and polyclonal antibodies embedded in commercialized products offered by leading
diagnostic and pharmaceutical companies. SDI serves the research,
bio-technology, human diagnostic, animal diagnostic and pharmaceutical
industries.  SDI’s many customers benefit from the Company’s
proficiency and expertise in four areas:
  1
  ·
              The
      Company is fully integrated from antigen design, through large scale
      production and bio-processing.  Current Good Manufacturing
      Practices-certified (cGMP) facilities employ sophisticated production
      processes to reduce costs and deliver high quality.·
              SDI
      employs the scientific expertise required to anticipate, prevent and solve
      the most complex customer challenges.·
              Modern
      information technology and customer support systems allow SDI’s OEM
      customers to gain better production and product information, often better
      than they were able to generate in their own
facilities.·
              SDI
      continues to be the market’s innovation leader with the introduction of
      its Genomic Antibody TechnologyTM
platform.
  The use
of antibodies is a proven methodology used in research and diagnostics, and is
of particular importance in proteomics, a rapidly growing segment of the Life
Sciences market which involves the large-scale study of proteins, particularly
as they relate to human conditions such as, among others, cancer, cardiovascular
disease and neurological disorders.
  Industrial
Bio-Detection Tests
  SDI’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, that can compromise human or
environmental safety, and/or financially impact efficiencies of production
processes. Many of SDI’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 forhigh efficiency
      testing for the identification of pathogens and toxins in food, water and
      the manufacturing environment.  Systems for the rapid assessment
      of cleanliness and sanitation in food production and food service
      facilities.·
              Water Utilities:Drinking water tests for chemical toxins, metals, and pathogens.
      Pollution control tests for 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.·
              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.
  In
addition to this annual report on Form 10-K, the Company files periodic and
current reports, proxy statements and other information with the SEC. The
Company will provide these documents, free of charge, if interested parties
request copies by sending a letter to the Company’s Investor Relations
Department at the address set forth on the cover of this report. The Company can
also be contacted through its Internet home page, www.sdix.com.Interested
parties may also read and copy any document the Company files with the SEC at
the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.
Please call the SEC at (800) SEC-0330 for further information about the public
reference facilities. These documents also may be accessed through the SEC’s
electronic data gathering, analysis and retrieval system (“EDGAR”) via
electronic means, including the SEC’s home page on the Internet, www.sec.gov.
 
 The
Company has adopted a Code of Ethics, within the meaning of applicable SEC
rules, applicable to its Chief Executive Officer, Chief Financial Officer,
Controller other corporate officers and directors. The Code of Ethics is
available on the Company’s internet home page and is further available, free of
charge, by sending a written request to the Company’s Investor Relations
Department. If the Company makes any amendments to this Code (other than
technical, administrative, or other non-substantive amendments), or waives
(explicitly or implicitly) any provision of the Code of Ethics to the benefit of
our Chief Executive Officer, Chief Financial Officer, Controller other corporate
officers or directors, it intends to disclose the nature of the amendment or
waiver, its effective date and to whom it applies in the investor relations
portion of the website, or in a report on Form 8-K that filed with the
SEC.
  2
 Genomic
AntibodyTM Technology
 
 Innovation
is a key element of SDI’s strategy for establishing and maintaining sustainable,
competitive differentiation in our key markets.  In 2006, SDI
introduced its initial commercial offering based on a new, proprietary platform
for antibody generation called Genomic Antibody TechnologyTM
(GAT).  Based on the technical success of its first product, the
Company introduced more commercially attractive products in May
2007.  The new Genomic Antibody TechnologyTM products and services
utilize proprietary, technically sophisticated methods to produce high value
antibody reagents.
  GAT was
developed to take advantage of SDI’s leading capabilites for high volume
production of unique antibodies and the growing need for high quality reagents
in biomarker and drug discovery.  Antibodies are essential research
and discovery tools and have a growing role in the diagnosis and treatment of
disease.  The demand for high quality antibodies is growing, and it is
estimated that today, a commercially available antibody exists to less than 10%
of the human proteome.  Furthermore, the historical production of high
quality antibodies has not changed in more than 20 years and is generally
characterized as time consuming, complex and of low efficacy; particularly with
deficiencies in sensitivity and specificity.
  In
contrast, SDI’s new GAT is characterized by a high throughput production process
that is robust, reproducible, high performance and low
cost.  Numerous propretary innovations produce a quality antibody
product that is allowing SDI to pursue new revenues through a leadership
position in providing the research, biomarker discovery and therapeutic
development community with next generation antibody tools.  The
Company is also pursuing its own proteomic research. SDI’s application of
powerful proprietary computer algorithms gives the GAT system a genome-wide
perspective of proteins across medically important systems and
organisms.
  Advances
in biomedical science are focused on bringing clarity to the complexity of
biological systems and the mechanisms of disease.  Over the past 20
years, science has moved through a rational progression of genetic sequencing
and analysis, profiling the behavior of genes and their expression patterns, and
understanding the implications of human genetic diversity governing these
processes.  Ultimately, however, all disease occurs within the
proteome or the realm of protein activity and subsequent
interaction.  The intricacies within the sequence-structure-function
relationship between DNA and protein are the key to understanding and
elucidating the next advances in human health.  Protein presence,
absence, or modification is the ultimate reporter of diagnostic, prognostic, and
analytic information.
 
 The scope
and scale of modern protein research demands new technologies to increase
productivity and precision.  Throughout proteomic research, the
antibody remains a widely used tool to understand the dynamics of
proteins.  Antibodies are used in numerous platforms and assays each
designed to measure the profile of the targeted protein.  However,
lack of pertinent antibody content is currently acknowledged as a significant
impediment to breakthroughs in the discovery and development of new biomarkers
and bio-therapeutic agents.
 
 At the
heart of the GAT system is its ability to take a gene or protein sequence and
produce a recombinant protein inside the host animal, thereby activating an
immune response to the encoded protein. This allows the production of antibodies
generated against the protein’s native structure, rather than traditional
methods that must first produce an artificial protein or immunogen which is then
used as a vaccine to produce an antibody. Among the many advantages of the GAT
is its ability to enable the development of reagents against traditionally
difficult cellular targets, such as highly conserved and transmembrane proteins.
The system is highly efficient and scaleable, allowing the generation of custom
libraries consisting of hundreds of antibodies for use in the drug discovery,
diagnostic, and research markets.
 
 In both
internal research projects and collaboration with academic and commercial
customers, GAT has produced reagents that have consistently demonstrated
superior performance in the recognition and targeting of native protein targets
in experimental models and clinical samples as compared to reagents made with
traditional methods.  SDI’s collaboration with MD Anderson Cancer
Center has shown significant utility of GAT derived antibodies in the search for
breast cancer biomarkers.  The Human Protein Atlas has accepted many
of SDI’s GAT antibodies as reference reagents in their extensive tissue staining
initiative. Many other collaborations are underway to demonstrate performance of
SDI's GAT antibodies across a number of biomedical endeavors.
  3
  In 2007
the performance, clear financial benefit and dependability of this system have
been validated by hundreds of customers across all biomedical
markets.  SDI is currently utilizing this platform to generate a
significant number of these innovative reagents as products sold under the SEQer
brand via SDI’s web-based catalog.
 
 SDI’s
SEQer oncology-focused portfolio is comprised of antibody tools that target
proteins associated with cancer pathogenesis and progression.  The
antibodies in the SEQer portfolio succeed in delivering usable data with more
proteins and in more applications than traditional reagents; better antibodies
for better results.  Too often with traditional antibody development,
the inability to structurally replicate the design of the synthetic antigen
defeats the underlying goals of antibody production.  In contrast,
SEQer antibodies are unmatched in target specificity and
reactivity.  This performance is grounded in the core performance
advantages of Genomic Antibody TechnologyTM. The
portfolio continues to grow in content scope with over 100 new products
commercialized per month; far faster then any other antibody product provider.
Moreover, SDI's high throughout processes for GAT permit easy scale-up of
production to high levels as demand grows.
  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.
  The
technology was first developed more than 40 years ago and is a cornerstone of
laboratory diagnostic testing in the medical industry.  Therapeutic
drug monitoring, drugs of abuse testing, hormone tests, infectious disease
testing (e.g., AIDS and hepatitis) and pregnancy testing are all based on
immunoassay and employ antibodies as critical reagents.  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 expert in the development
of antibodies and immunoassays in all fields of use including medical
diagnostics and human healthcare.  Recent activities by Company
scientists have been focused on developing multiplexed immunoassay tests
employing the Company’s Genomic Antibodies for commercial sale and biomarker
discovery in the field of proteomics, especially cancer.
  In
addition, the Company has taken this same technology that has developed in the
medical diagnostics arena and applied it to a variety of industrial and
agricultural applications. As with medical applications, immunoassay technology
has demonstrated its value in these markets by virtue of its ability to yield
reliable, accurate, cost-effective and timely results in a manner previously
unavailable.
  The major
attributes of immunoassay technology can be summarized as follows:
  Sensitivity:
              Immunoassays
      can measure extremely low concentrations of many different types of
      substances, including proteins and drugs (e.g., picograms per mL, or parts
      per trillion; i.e., one-ten millionth of one gram in a liter of
      liquid).Specificity:
              Immunoassays
      can measure one specific substance in a highly complex sample, such as
      blood or  tissue biopsy, dispensing with, or reducing the need
      for sample preparation.Speed:
              Total
      time to obtain a test result ranges from one minute to several hours as
      compared to several days to several weeks with many competing laboratory
      testing methods.Cost:
              The
      price-per-test for immunoassays ranges from $1 to $50, industry wide; the
      price-per-test for similar laboratory testing can range from $5 to
      $1,000.Precision
      and Accuracy:
              Immunoassays
      are highly quantitative analytical methods used routinely for making life
      and death decisions in the field of human healthcare.Flexibility:
              Immunoassays
      can be developed in a wide variety of test formats including;
      laboratory-based tests, disposable, single-use units (home pregnancy
      test), and large automated instruments. Many individual immunoassays can
      be multiplexed together for analysis of many proteins or analytes in a
      single sample.  They can be designed for use by non-technical
      persons on-site under a variety of field conditions for testing of diverse
      sample types.
  4
  Immunoassay
technology relies on the specific binding characteristics of antibodies.
Antibodies are proteins made by cells within the bodies of animals as part of
the immune system response to invasion by foreign substances such as foreign
proteins, bacteria and viruses. The attributes of antibodies that are useful in
diagnostic tests are that they physically bind only to the substance that
elicited their production and that the binding is very strong. This
characteristic of specific binding (specificity) makes antibodies useful tools
for detecting substances in complex samples such as blood serum and plasma,
tissue biopsies, urine, saliva, cerebral spinal fluid and other human samples,
plant tissue, soil and water.  Strong binding enables detection of
substances at very low concentrations
(sensitivity).   Immunoassay technology has advanced to the point
that antibodies can be made to a wide variety of substances including proteins,
microorganisms, drugs, hormones, polymers, environmental pollutants and other
chemicals.
  Once an
antibody reagent that has the desired performance characteristics (sensitivity
and specificity) has been identified, it can be incorporated into a test format
that is appropriate for the intended application. In the human clinical
diagnostic market, antibodies are employed as reagents on large, automated
instruments that can analyze hundreds of samples per hour. In contrast,
antibodies also can be packaged into single use, disposable formats such as home
pregnancy tests. Immunoassays can be designed to be highly quantitative or yield
a simple yes/no result. The type of test format chosen for any given application
depends on the needs of the customer or application, and may include factors
such as ease-of-use, cost-per-test and number of samples to be tested. The
Company’s expertise with multiple immunoassay formats, coupled with a thorough
understanding of the needs of a market 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.  This same
expertise is core to the Company’s ongoing proteomics research and discovery
initiatives.
  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.  The specificity of phage is so high that a given phage will
only infect certain types of bacteria.  A specific type of
bacteriophage (lytic) can be used to reduce contaminating bacteria in many
processes.  Lytic phage is introduced to a cell, kills the targeted
bacteria and in the process replicated to create additional phage viruses that
can seek out and kill additional bacteria.  Subsequent rounds of
replication result in an exponential increase in the number of infectious phage
and a very rapid and dramatic decline in contaminating bacteria.
  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. 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 has 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.  In
these processes, a production organism, such as yeast in the case of ethanol
production, is used to convert sugar derived feedstocks such as ground corn into
ethanol.  Normal soil bacteria contaminating the corn also thrive in
these conditions, compete for nutrients, and reduce process efficiency and
yield.  Traditionally, antibiotics were used to control harmful
bacteria. They can, however, have a negative effect on the production
organism.  The Company believes that the use of bacteriophage is a
significant improvement over use of antibiotics and will have an impact on yield
and cost associated with the production of ethanol from
feedstocks.  SDI’s scientists are actively engaged in the development
of specific bacteriophage reagents together with industry-leading producers of
ethanol products.
  The
Company is also applying its bacteriophage technology in its test kit products
for the detection of bacterial food pathogens, including its Salmonella SELECT product,
and an E. coli SELECT
product that is currently in development.  When present, pathogenic
bacteria often occur in very low numbers in food in comparison to a much greater
number of non-pathogenic bacteria.  In such instances, the
non-pathogenic bacteria can “out-compete” the pathogenic bacteria, rendering the
pathogens undetectable by the analytical method and giving rise to falsely
negative results.  In other cases, the analytical method may
“crossreact” with non-pathogenic bacteria giving rise to false positive
results.  The Company has filed patent applications claiming the use
of bacteriophage to control competing and crossreacting bacteria, thereby
reducing false positive and negative results and improving analytical test
performance.
  5
  Bioluminescence
Technology
  The
company’s Microtox® and Deltatox® tests use certain strains 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.
  Toxicity
testing using the Company’s bioluminescence technology is based on exposing the
luminescent bacteria to a test sample and determining light output as a measure
of toxicity.  The products employing the technology are used primarily
for testing water and are largely viewed as a “gold standard” in the
industry.  SDI’s solutions include the instrumentation, reagents and
software necessary to employ testing.  The Company has developed and
sells proprietary software 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.
  The major
attributes of the Company’s bioluminescence bacteria toxicity technology can be
summarized as follows:
  Sensitivity:
              Response
      of the system correlates with traditional live animal and microorganism
      toxicity tests, bioassay procedures, tissue culture tests and other
      chemical and enzymatic assays.Standardized:
              Standardized
      reagents and test procedures make test-to-test and lab-to-lab comparisons
      possible.Speed:
              Samples
      can be tested in 30 minutes.Cost:
              Cost
      per test is significantly lower than traditional laboratory toxicity
      testing methods.Accuracy:
              Provides
      a reproducible, quantitative measure of toxicity or
      bioreactivity.Flexibility:
              Bioassay
      organisms are handled as a chemical reagent. Response is monitored
      instrumentally and presented as digital output or graphical data. No
      special operator skills are
required.
 
 Antibody
Products & Services
 
 The
Company, develops, manufactures and markets a broad range of monoclonal and
polyclonal antibody products and services. SDI is the preferred antibody
supplier to a number of leading pharmaceutical companies and supplies all major
manufacturers of in-vitro diagnostics.  SDI is the production partner
for numerous catalog antibody providers, peptide/protein antibody providers and
a large number of academic and government investigators.  Specific
expertise includes hybridoma development, cell culture techniques, large-scale
ascites and antisera production, large-scale antibody purification, chemical
modification of immunogens and antibodies, characterization of antibodies and a
complete array of related services. The Company also manufactures a line of
human-serum-based calibrators that are assayed for many serum protein markers
for which the Company manufactures and markets the corresponding antisera
products.
 
 These
products are sold to a wide range of customers including pharmaceutical,
biotechnology and diagnostic companies, and major biomedical research centers in
the United States, European Union and Pacific Rim. The Company believes it is
one of the largest independent custom antibody service providers in the world.
The Company has many significant commercial antibody supply agreements with
major clients in each market segment. The proprietary nature of the subjects of
these agreements precludes public disclosure. Such agreements are typically
limited to only a portion of the customers’ needs for such services, and the
Company believes there is significant upside potential to expand supply services
within customer organizations, as well as add new customers for the products and
services provided. The Company believes the size of the custom antibody service
market is approximately $150 million on an annual basis, and it is highly
fragmented. The Company expects to garner more business from companies that
currently employ in-house production sources through its continuously improving
quality manufacturing methods.
  6
  The human
genome project carried out over the past 15 years has been a major driving
factor in the emergence of the study of proteomics. With a new knowledge of
genomes (human and other species), the biomedical research community is
exploring many new proteins, their functions and the clues they reveal about
human and animal health. The study of gene and protein functionality often
requires the use of antibodies, which naturally bind to proteins. The Company
believes that proteomics research, and products developed out of the proteomics
effort, offer the Company an attractive opportunity to explore new initiatives
to build revenues in the antibody product group around
proteomics.  Antibodies are used by customers as tools on the path to
discovery as well as the key component in some products.
 
 Service
and expertise are the foundation to our competitive advantage, and there are
four distinct capabilities that are the basis of differentiation between SDI and
its competitors:
 
 ·
              SDI
      maintains large, state of the art, and fully accredited production
      facilities.  Production
      activities within these facilities are process centeredfor maximum
      efficiency. All of these attributes, stemming from over 20 years of OEM
      antibody production experience assure that our clients achieve the highest
      quality and value.·
              The
      SDI technical community has hundreds of years of combined experience in
      all aspects of antigen design, immunology, protein chemistry, microbiology
      and immunology.  The capabilities of our scientific community
      allow collaboration with our clients to produce reagents that work in the
      final desired assay formats.·
              SDI
      clients gain full access to allinformation
      pertaining to the progress of their projects through the Company’s
      proprietary STAR (Schedule Tracking & Antibody Reporting) web
      site.·
              SDI
      is one of the most innovative antibody technology companies as evidenced
      in our advanced antibody production and formulation
      technologies.
 
 Strategic
Diagnostics is the largest custom antibody provider in the United States with
over 75,000 animals dedicated to antibody production.  Facilities are
accredited by AAALAC, the highest standard in laboratory animal
care.  SDI is licensed by the USDA and registered with the NIH Office
of Laboratory Animal Welfare.
  Food
Safety
  The
Company’s food safety product line includes enrichment media and rapid tests to
detect food pathogens, including E. coliO157:H7, Listeriaand Salmonella. The Company has
also acquired rights to exclusive US distribution of a hand held hygiene
monitoring system. The Company is a leader in tests for targeted traits in
genetically engineered plants, tests to detect Genetically Modified (GM) traits
in food ingredients and food fractions, tests to detect naturally occurring
fungi in grains (mycotoxins) and tests for and products to detect prohibited
animal proteins in animal feed (ruminant feed testing).
  Food
Pathogen Testing
  Pathogen
specific testing is an increasingly important part of microbiology testing
performed in the global food industry. The world-wide market for rapid method
pathogen tests is estimated to be between $200 and $300 million according to
independent studies and the Company’s own market research. The market for
proprietary enrichment media is estimated to be between $50 and $100 million.
According to several independent studies, the market for pathogen tests grew at
an average rate of 6% in 2007 and this growth rate is expected for the next
three years. However, market research also suggests that annual growth has
slowed in this segment. Growth in pathogen testing is driven primarily by
regulatory changes, customer testing trends, industry consolidation, and
globalization of the world’s food supply.
  7
  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:H7. This product
has 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 United States Department of Agriculture (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) 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 (PCR), 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 (MLG) as one of only two immunoassays that
is recognized for use for screening raw beef for E. coli O157:H7. The Company
believes that the acceptance of its method by the agencies regulating Food
Safety will increase 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 both
Canada (CFIA) and Australia (AQIS).
  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, 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, it usually gains credibility in the marketplace.
  In August
2006, the Company launched its new RapidChek SELECT Salmonella test with AOAC-RI
approval at the International Association of Food Protection Meeting (IAFP) 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 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 Salmonella test was the first
lateral flow test approved for the National Poultry Improvement Plan (NPIP), and
will provide an attractive alternative to current methods used such as labor
intensive cultural methodologies.  The Salmonella SELECT test was
evaluated and adopted by several of the top poultry and beef processors in
2007.   The launch and acceptability of RapidChek SELECT 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 contributing to
improved laboratory efficiencies and significant savings as compared to what
they were previously using to test.  This same patent also makes
important claims for composition and methodology associated with the enrichment
and control of production organisms in large scale industrial bio-processing
applications. The Company intends to develop these applications for licensing
purposes during early 2008.
  In July
2007, the Company acquired exclusive U.S. distribution rights for the
Lumitester® PD-10N/LuciPacTM W system from Kikkoman.   The
Lumitester/LuciPac test system is a unique patented platform with a proprietary
enzyme recycling technology that enables detection of both AMP and
ATP.  It offers advantages over other hygiene monitoring systems in
the marketplace, which due to the source, and unstable nature of ATP, may not
give a true indication of cleaning efficiencies.  AMP is a stable
molecule, present in high quantities in biofilms and gives users a more precise,
reproducible indication of both cleaning and sanitation
effectiveness.  Rapid ATP tests are widely accepted in the food and
beverage industry as a practical way to ascertain only the sanitation or hygiene
status of food production lines and surfaces.  It is estimated that
about 12 million tests are conducted annually in the U.S., with an average
growth rate of approximately 5% per year.  This offering allows the
Company to extend its complete risk management solution to the food
industry.
  8
  Agricultural
Testing
  Genetically
Modified (“GM”) 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 $12
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 U.S., are responsible for 96% of the GM crop area.
  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
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.
However, 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 genetically modified traits are increasingly
ubiquitous in the environment.
  During
2000, a genetic trait used in corn, known as Cry9C, or StarLink®, which
had been approved by the U.S. Environmental Protection Agency (USEPA) only for
non-food uses, was discovered in food products. StarLink® was the
first, and only, genetic trait to have been introduced for animal, but not
human, consumption. The impact was a regulatory response that resulted in the
Company selling more than 2 million Cry9C tests in 2001, making it the Company’s
largest selling product at the time. With the removal of StarLink® corn
from the U.S. grain supply during 2000 and 2001, the Company’s sales of tests to
detect StarLink® corn
diminished significantly over the period from 2002 through 2006.
  Due to
the StarLink® incident
described above there was a moratorium on the introduction of new GM traits.
However, beginning in 2003, new traits did find their way to
market.  The Company has continued to provide new tests in response to
market introductions. In 2005, the Company introduced the first multi-trait corn
test strip that can detect both the Cry1Ab and Cry3Bb insecticidal proteins and
the CP4EPSPS protein for resistance to the herbicide Roundup®.  During
2006, the Company introduced tests for the detection of an unapproved
LibertyLink (“LL”) trait in rice found in the U.S.  The TraitChek LL
Bulk Rice test kit was the first lateral flow test strip certified by the USDA
Grain Inspection, Packers & Stockyards Administration (GIPSA) for the
detection of the LL trait in rice.  In 2007, the Company also
introduced a rapid lateral flow test strip for the detection of aflatoxin in
corn grain. Aflatoxin is a naturally occurring mycotoxin produced by mold fungi
which can be detrimental to humans and fatal to animals when consumed in
feed.  The MycoChek Aflatoxin test strip can be used at grain
elevators as a complementary test to the GMO test strips.
  The
Company has had strong sales efforts in Brazil since 2000. Brazil is a major
agricultural country and the leading exporter of soybeans in the world,
surpassing the U.S. in 2006 with over 25 million tons exported. Brazil has
temporary laws in place making it legal to grow GM crops. Due to the previous GM
ban, countries importing non-GM soy products such as China and those from the
European Union have increased their imports from Brazil. To assure that their
raw commodities are free of GM, testing is done at many grain elevators and
crushing facilities throughout Brazil. Brazil is now the leading customer for
the Company’s GM soybean test for Roundup Ready®
herbicide tolerance.
  9
  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 analytical tests for drinking
water, industrial process water and wastewater analysis, along with toxicity
tests for personal care and household products and eco-toxicological studies.
The product line also includes analytical tests for soil and other waste
matrices for use at environmental remediation projects, hazardous waste
operations, brownfields and other applications.
  Microtox®
  Microtox® is a
unique rapid acute toxicity test that detects a broad range of toxins and
chemical agents in water. Microtox® makes
toxicity analysis simple and easy to perform and results can be generated in as
little as 30 minutes. Microtox® toxicity
testing technology is used in drinking water, wastewater, environmental
remediation, research and industrial applications around the world. With
over 700 peer-reviewed scientific articles and more than 2,300 instruments
sold worldwide, the Company believes that the Microtox® toxicity
test system is the standard for rapid toxicity screening and
analysis.
  The
Company is currently working with drinking water utilities, food and beverage
processors and other customers as they develop and implement monitoring
processes to reduce their risk from contamination of water supplies. In the
U.S., approximately 130 drinking water utilities and food processors are
currently using the Microtox® toxicity
testing technology as part of their early warning or emergency response programs
to detect contamination of their water supplies. The rapid response of the
Microtox® toxicity
assay allows users to rapidly detect—and quickly respond to—any changes in water
quality. It is for this reason that the technology is viewed by many national
and international experts as an effective means for detecting toxins in water
applications.
  The
Company also markets a portable version of the Microtox®
technology known as DeltaTox®.
Departments of Health in a number of states, the largest private water utility
in the country and the United States Environmental Protection Agency (USEPA)
emergency response teams are using DeltaTox®
technology as part of their emergency response programs.
  Microtox®
has been widely accepted by all segments of 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, reduce and prevent
damage and disruption to biological treatment systems, reduce unscheduled
shutdowns and helps facilities stay in compliance with their discharge
permits.
  The
Company believes that, although there are new entrants in this market space, no
other companies have meaningful delivery processes for rapid,
bioluminescence-based, toxicity testing. There are only a few other companies
who market a rapid toxicity test that the Company considers to be competitive
with Microtox®.
  In
February 2006, the Company announced that its Microtox® bioassay
technology was awarded the Designation and Certification as an “Approved Product
for Homeland Security” under the Support Anti-Terrorism by Fostering Effective
Technologies Act of 2002 (the SAFETY Act), by the Department of Homeland
Security, or DHS. The SAFETY Act legislation was designed to encourage the
development and rapid deployment of life-saving anti-terrorism technologies by
providing manufacturers or sellers with limited risk of legal liability. As a
biosensor-based method for the detection of toxic compounds, which include toxic
industrial chemicals and heavy metals, in water and other matrices, the
Microtox® bioassay
technology is ideally suited to meet the anti-terrorism initiative objectives of
DHS.  DHS Safety Act Designation and Certification, means that end
users of Microtox technology have liability protection in the unfortunate event
of an act of terrorism at their facility or operation. The Company believes that
having this DHS Designation and Certification has added significant value to the
Company’s Microtox® offering
by virtue of increasing its customer base and facilitating additional
penetration into the drinking water utility market.
  In
December 2007, the Company was awarded a Federal Supply Schedule GSA contract.
The contract further expands our reach into federal, state and local agencies,
in addition to making it easier for these agencies to do business with the
Company.
  10
  Pesticides
  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 drinking water 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 SDI test kit much greater utility than a lab-based
mechanical analyzer.  Users include water quality researchers,
resource managers, drinking water system operators, federal agencies such as the
U.S. Geological Survey and Department of Agriculture, state environmental and
health departments, drinking water utilities and environmental engineering
companies for surface and groundwater monitoring, drinking water source and
supply management, soil analysis and chemical fate and transport
studies.
  The
Company’s RaPID Assay® test
format for Atrazine has been validated by the USEPA, and is one of only two
immunoassay products validated as showing acceptable performance under the
Environmental Technology Verification Program.
  Environmental
Contaminant Test Products
  The
Company also sells immunoassay products into the environmental market. The
Company offers four different test formats, each with performance
characteristics that make them more or less suited for a particular customer
application.  All of the Company’s environmental test kits are capable
of analyzing multiple samples in parallel.  The Company currently
estimates the market for these products at $50MM worldwide.
  The USEPA
and U.S. Army Corps of Engineers are jointly promoting what they call the “Triad
Approach,” which uses immunoassay and other field analytical systems to increase
the accuracy and reduce costs on environmental projects.  Typical
contaminants of concern at contaminated sites include petroleum and fuel-derived
products, polycyclic aromatic hydrocarbons (PAHs), polychlorinated biphenyls
(PCBs), dioxins, explosives, pesticides, and chlorinated solvents. The Company
is currently marketing test kits for all of these contaminant classes, and has
been able to expand its product offering through distribution agreements to
accommodate new technologies.
  The
environmental testing market is large, and primarily dominated by hundreds of
laboratory companies providing testing services on a regional
basis.  The Company believes the overall market for remediation
products has continued to decline due to lower levels of Federal funding to
support remediation projects in this area, and that the testing market is very
competitive due to under utilized capacity in the laboratory services
sector.
  Other
Assays
  ColitagTM
  In April
2006, the Company began distributing Colitag for E. coli and coliform testing
in drinking water through a distributor agreement with CPI International.
Testing for total coliform by water utilities is regulated by the Safe Drinking
Water Act. Colitag is EPA approved for Total Rule Coliform (TCR) compliance
monitoring, both Presence/Absence and Most Probable Number (MPN)
enumerations.  The inclusion of Colitag in the Company’s portfolio of
products for water utilities better positions the Company to fully meet the
needs of these utilities for reliable testing products that deliver confident
results.
  Toxkit
MicrobiotestsTM
  In
December 2004, the Company began distributing Microbiotests (MBT). Under the
terms of the agreement, the Company now markets MBT’s line of rapid,
maintenance-free bioassays in North America. The agreement continues to position
SDI as the single source solution for rapid, on-site toxicity and environmental
tests. The product line offers customers requiring cultural methods an
alternative to expensive and labor intensive protocols, allowing users to save
both time and money while maintaining quality test results.
  Ruminant
Testing
  In
February 2003, the Company introduced its screening test for the detection of
meat and bone meal in animal feed, which is linked to the transmission of BSE,
commonly known as mad cow disease. Meat and bone meal made from cattle has been
banned for use in cattle feed since 1997 in both Canada and the U.S., but it can
be used legally in feed for poultry, swine and household pets, none of which are
known to contract mad cow disease.
  11
  Since
2003, publicized cases of “mad cow” have been found in countries including the
United States, Canada and Japan.  Although feed testing is the only
definitive means to certify compliance, the current industry practice is to rely
solely on paper certification. The Company is not making a significant sales
effort or investing in additional development given the current regulatory
environment.
  Sales
and Marketing Strategy
  The
Company markets and sells products in the food safety, water quality and life
science antibody market 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 its corporate partners. The Company also has a European
office and sales operation near London, England.
  In the
U.S., 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 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 proprietary position, the Company is focused on
developing channels to market, and accelerating predictability and
sustainability of revenues. SDI is investing in its direct sales force through
both the addition of new sales representatives and increased 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 distributors. In 2006, the
Company added its first distributor for its custom Genomic Antibody TechnologyTM
offering.  The Company is working to add additional distributors for
both its custom and catalog offerings across the European, Asian, and Latin
American markets.
  In 2005,
the Company signed an exclusive distribution agreement with DuPont Qualicon for
the representation of the Company’s immunoassays for food pathogen
detection.  This agreement was predicated on achievement of specific
sales goals that were not met.  The Company has now begun to add new
distribution partners for this product line and will take a much more aggressive
role in marketing these methods.  In 2007, the Company expanded its
international distribution network for food safety pathogen
products.  Outside the U.S., conventional cultural methods have
historically been utilized for pathogen testing, however, currently there is a
paradigm shift towards more rapid assays, as factors such as time to result
become increasingly important in the globalized marketplace. A total of 15
independent distributors were trained last year to sell the RapidChek product
line in high growth markets globally, including Southeast Asia, Europe and Latin
America.  It is anticipated that additional distributors will be
signed by the end of 2008 and international expansions of promotion/sales of the
products will increase revenues as they gain acceptability.
  The
Company has invested in providing additional support to distributors, which
participate in annual global training seminars. The Company evaluates various
sales and service models that can contribute to the profitable growth of
business. In addition, identifying the most effective channels to market will
allow the Company to better allocate resources to both new and existing growth
opportunities.
  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
markets have become commercially proven, or if the Company cannot maintain
competitive differentiation.
  Companies
may be developing additional products for one or more of the Company’s markets
that could be competitive with the Company’s products. In the Ag/GMO market, the
Company competes with several small, privately held companies (Agdia,
Envirologix) that market very similar, if not identical products.
  12
  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 $200 and $300 million annually and as such has drawn
competitive products. The Company’s RapidChek® E. coliO157 including 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
lateral flow 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 an overall lower cost-in-use.
  In
the hygiene monitoring market in the U.S., potential competitors include Charm,
Hygiena, Neogen and Biotrace, and BioControl.  Most have established
market positions in tests for  ATP, and enzyme found in viable cells
and used as a proxy for surface sanitation in food production and food service
applications.  All of these ATP methods are not detergent tolerant
and/or have other technical deficiencies that influence their value in
use.  Therefore, it is anticipated that the lumitester/lucipac system
will quickly establish market share due to its ability to provide a better risk
management tool by detecting AMP, a more stable molecule and an indicator of
both cleanliness and environmental sanitation.
  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., which is an Israeli-based company, and one
other instrument based test method produced by Dr. Bruno Lange GmbH &
CO, 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.
With the addition of the Toxkit Microbiotests, the Company believes that there
is no other company that can provide the complete solution offering of the
Company.
  With
respect to the environmental contaminant test products, the Company currently
receives the greatest competition from fixed site environmental laboratories.
Traditional analytical methods for environmental contamination are often
utilized for confirmation and closure of environmental sites.
  In the
antibody product line, 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 technology for the discovery and advancement of
novel antibodies.  The Company believes that its proprietary GAT
platform coupled with its expertise in assay development, provides unique access
to the high value applications it is targeting.
  The
Company continues to compete in its traditional markets.  Here,
competitors include large pharmaceutical, research and diagnostics
organizations, some which have significantly greater revenues than the Company.
These companies may produce products internally and/or purchase similar products
from SDI. Additionally, there are a number of smaller companies that offer
competing products. The Company believes that the scale of its operations and
the breadth of its product lines, among other things, are significant
competitive advantages.
  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). In the catalog antibody space there are over 130
companies competing for this $800 million dollar market.  In the
custom research reagent market, the Company has identified 49 companies offering
some form of traditional antibody production from customer-provided
antigens.
  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 its corporate
partners. This section describes the Company’s current markets, products and
competition.
  Geographic
and Customer Information
  The
following table sets forth sales by geographic region:
 
 13
  Twelve
      MonthsEnded
      December 31,2007
                
                
                2006
                
                
                2005United
      States
                
                $
                21,154
                
                
                $
                19,498
                
                
                $
                18,368Rest
      of the world
                
                
                6,053
                
                
                
                6,024
                
                
                
                6,477Total
                
                $
                27,207
                
                
                $
                25,522
                
                
                $
                24,845
  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 EPA, the FDA and the FSIS
of the U.S. Department of Agriculture 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 industry and the company’s customers tend to follow the
practice of regulatory agencies.
  The
Company believes that the validation and acceptance of its products by
regulatory agencies, though not required for the use of its products in most
cases, is a significant factor in market acceptance. The EPA and some state
agencies have evaluated certain of the Company’s analytical methods for
environmental sample analysis and accepted their use for certain remediation and
monitoring activities.  EPA SW-846 is the compendium of analytical and
test methods published by the EPA’s Office of Solid Waste (OSW). SW-846 is a
guidance document listing those analytical methods that have been validated by
the EPA for a stated purpose. Some states also recognize the use of SW-846
methods under their hazardous waste programs. SW-846 methods are technically
only applicable to regulatory programs under RCRA, however, other federal, state
and local environmental programs, including CERCLA and TSCA, often refer to and
rely on 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
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 AAALAC (Association for the Assessment and Accreditation of
Laboratory Animal Care) accreditation at its Delaware facility in 2008 and at
its Maine facility in 2006. The Company volunteers to participate in the
AAALAC’s 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 OLAW (Office of Laboratory Animal Welfare) and the National
Institutes of Health, further validating the stewardship of the Company in
proper laboratory animal care.
  14
  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. Kit 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.
  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 within the lateral flow test strip and bioluminescence
bacteria processes have reduced key parameter variation, improved production
efficiencies and lowered manufacturing costs.  The Company utilizes a
formal sales and operations planning process (S&OP) and an integrated
Manufacturing Resource Planning (MRP) tool 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 manufacturing base. Industrial bio-detection services
manufacturing operations are currently running one shift.
  The
Company also supplies a wide array of custom antibody products and services to
the in-vitro diagnostic, academic 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, fragment 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 FDA-compliant Master Cell Banks, and store cell lines in secure
fail-safe cryogenic systems.
  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 expand operations. After outgrowing 2006
capacity levels in 2007, both facilities were expanded.  In late 2006
capacity in the Newark, Delaware animal facility capacity was tripled by better
utilizing existing square footage.  Modifications were made to the
design of the facility and operations were expanded from a five day work week to
a seven day work week.  This capacity was quickly utilized in
2007.  This Delaware facility ran between 70% and 95% of maximum
capacity in 2007.    In October 2007, a new building was
completed at the Windham, Maine facility.  This expansion increased
capacity by one third as capacity was 95+% utilized.  There are no
plans for more expansion in the near future.  Growth is expected in
areas that require less animal capacity.
  Capacity
for bioprocessing services was also expanded in Maine.  Operational
capacity was required to meet service offering growth for phoso-specific
purification.  This specialized purification processed was developed
to meet customer needs and grew rapidly in 2007.
  15
  In 2005,
the Company established a research and manufacturing center in Dallas, Texas.
This facility is designed for gene building and protein chemistry. The Dallas
operation houses the technical elements of the Genomic Antibody TechnologyTM product
offering. The GAT 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.
  In 2007,
the Company established a web channel to market that focused on selling antibody
products developed and produced using GAT.  These SEQer antibodies
form a cancer focused antibody catalog.  The processes and systems to
produce the SEQerantibodies
were established in 2007. Processes for this production system are established
and executed in three operating locations: Dallas, Texas; Windham, Maine; and
Newark, Delaware.  A sophisticated electronic operations management
system was established that links the operations
seamlessly.   Resulting products and information are managed by
the companies MRP system.
  Research
and Development
  The
Company engages in substantial research and development activities (R&D)
involving development of products and services for its target markets. In the
three years ended December 31, 2007, 2006 and 2005, the Company incurred
approximately $2.9 million, $2.6 million, and $3.0 million, respectively, in
research and development expenditures. Research and development on the Company’s
proprietary GAT and bacteriophage technology platforms and Food Safety products
accounted for 82% of the total R&D effort for the year.
  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 2007,
the Company completed the development of the core processes in its Genomic
Antibody TechnologyTM, high
throughput, antibody development technology platform, and undertook the
development of over 1,000 novel SEQer antibodies, focusing primarily on cancer,
for inclusion in a web-based product catalog.  The launch of its GAT
development platform, coupled with its large scale animal facilities,
state-of-the-art purification and reagent production capabilities, extensive
assay development expertise, established commercial manufacturing, and
industry-leading process control has transformed the Company into one of the
world’s premier antibody development, characterization and production
companies.  At the end of the year, consistent with the vision of
applying its core technology to the field of proteomics and biomarker discovery,
the Company purchased a number of large pieces of capital equipment for
development of multiplex immunoassays employing the novel antibodies developed
using the GAT platform.
  In
addition to developing its GAT platform, the Company spent significant effort in
2007 developing its proprietary bacteriophage technology including effort to
extend the use of its SELECT technology in its products for the detection of
E. coli O157 in
food.  The use of bacteriophage to improve the specificity and
sensitivity of testing methods is unique to the Company and the subject of
published U.S. and world-wide patent applications.
  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 ethanol production. In the third quarter of 2006, the
Company announced an agreement with Broin Companies, since renamed Poet, to
develop commercial bacteriophage reagents and protocols for controlling bacteria
contaminating Poet’s proprietary BPX ethanol production
process.  Significant progress was achieved on the program in 2007;
however, Poet opted to discontinue its involvement.  Based on positive
findings and progress establishing control of contaminating organisms, reduction
in lactic acid production and elevated ethanol production in laboratory
simulations of commercial fermentation reactors, the Company has continued to
aggressively develop the technology and is working with industry experts to
advance the technology to pilot scale.
  The
Company’s research and development personnel are experts in many advanced
research disciplines in the 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.
  16
  Research
and development activities are focused on developing proprietary technology and
products to expand the Company’s
manufacturing base and leverage its sales and marketing organizations. The
Company is a recognized leader in the field of contract antibody and assay
development services primarily for large chemical, diagnostic and pharmaceutical
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 16
individuals, nine 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 27 issued U.S.
patents, as well as three U.S. patents licensed for exclusive use by the
Company.  Three U.S. patent applications are pending.
  17
 
 U.S.
      Patent
              
              Title4,999,286
              
              Sulfate
      reducing bacteria determination and control5,426,035
              
              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 same5,658,463
              
              Kits
      and processes for extraction of analytes from solid
    materials5,679,574
              
              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
devices
  The
Company believes that low-cost, easy-to-use, rapid tests have the potential to
be significant products in multiple large markets and, therefore, has licensed
rights to patents relating to immunochromatographic devices. The Company has one
pending U.S. patent application for the detection of animal proteins in animal
feed.  One application deals with the use of bacteriophage as
selective agents and one relates to detection
and control of water treatment polymers.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
stabilization systems for reagents, chemical syntheses for conjugates,
immunogens and analyte analogs, and strategies relating to antibody development.
Regarding the latter, the Company’s extensive expertise has enabled it to
develop antibodies and products that are unique to the industry including
antibodies to human proteins, pathogenic food microorganisms, transgenic plant
proteins, mycotoxins, water treatment polymers and environmental contaminates.
In addition, the Company has developed and continues to develop proprietary
media formulations designed to enrich the selective growth of pathogenic food
microorganisms.
  18
  Employees
  As of
December 31, 2007, the Company employed 156 full time and three part time
employees. The workforce was supplemented by five 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.
  Item
1A. Risk Factors
  The
following is a discussion of certain significant risk factors that could have an
adverse impact 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.
  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.
  19
  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 U.S. Food
and Drug Administration (the “FDA”) or any other regulatory agency. However,
agencies such as the EPA, FDA and the FSIS of the U.S. Department of Agriculture
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 the Company’s business.
  Although
the Company’s products may not be regulated, the industry segments into which
its products are sold may be regulated, and demand for the Company’s 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 maybe 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
the Company were unable to obtain adequate replacements, the Company’s 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.
  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.
  20
 
 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
indemnifications.
  If
we do not produce future taxable income, our ability to realize the benefits of
deferred tax assets could be impaired.
  As
of December 31, 2007, the Company had federal net operating loss carryforwards,
including those acquired in the Company’s past acquisitions, of approximately
$11.9 million, which, if not utilized, begin to expire as follows:
  Year
                
                NOL
                  (in
                  thousands)2010
                
                $
                4,8022017
                
                
                7602018
                
                
                1,3272019
                
                
                5502020
                
                
                662021
                
                
                562022
                
                
                2,2682024
                
                
                2.0322025
                
                
                3Total
                
                $
                11,864
 21
 Based on
the best information available to the Company today, the Company expects to have
sufficient future taxable income to utilize such NOLs prior to the expiration of
the net operating loss carry forwards.
  The Tax
Reform Act of 1986 (the Act) limits the annual use of net operating loss and
research and development 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. Of our total net
operating loss carryforwards, approximately $7.5 million is subject to
limitations, 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. Because United States tax laws limit the time period during which
these carryforwards may be applied against future taxes, we may not be able to
take full advantage of these attributes for Federal income tax purposes if we do
not have future taxable income against which to use the carryforwards before
they expire.
  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;·
              seasonality;·
              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;
      and·
              the
      timing and success in building our distribution
  channels.
  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.
  22
  The
difficulties of operating in international markets may harm sales of our
products.
  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 influence significantly proposals for a change
in control or other matters requiring a shareholder vote.
  Directly,
or through entities that they control, members of our Board as of December 31,
2007 controlled in excess of 13% of our common stock.  Through
entities that he controls, Steven R. Becker, who joined our Board effective
March 12, 2008, controlled approximately 10.6% of our outstanding common
stock.  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.
 
 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 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, 2007, the price of our common stock fluctuated
between $3.35 and $6.46 per share, with an average daily trading volume for the
year of approximately 50,000 shares. The market
may experience significant price and volume fluctuations that are often
unrelated to the operating performance of individual companies.
  Item
1B. Unresolved Staff Comments
  None.
  23
  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 2009. The
Company also leases approximately 26,000 square feet of manufacturing and
research space, in Newark, Delaware, under an operating lease expiring in
December 2009. 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 2009. 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.
  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, 2007.
 
 24
  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, 2007:Fourth
      Quarter
              
              $
              6.46
              
              
              $
              4.72Third
      Quarter
              
              
              5.10
              
              
              
              3.92Second
      Quarter
              
              
              5.40
              
              
              
              4.11First
      Quarter
              
              
              5.13
              
              
              
              3.35December
      31, 2006:Fourth
      Quarter
              
              $
              3.80
              
              
              $
              3.06Third
      Quarter
              
              
              4.20
              
              
              
              2.75Second
      Quarter
              
              
              4.21
              
              
              
              2.35First
      Quarter
              
              
              4.17
              
              
              
              3.04
  On March
20, 2008, there were approximately 30,400 holders (343 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.
  25
 
 Stock
Performance Graph
 
 The following line graph compares for
the fiscal years ended December 31, 2002 through 2007 (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 CUMULATIVE TOTAL RETURN
 
 Strategic
Diagnostics Inc., NASDAQ Composite and NASDAQ Medical Equipment Peer Group
Indices
 12/02
                
                
                
                12/03
                
                
                
                12/04
                
                
                
                12/05
                
                
                
                12/06
                
                
                
                12/07Strategic
      Diagnostics Inc.
                
                
                100.00
                
                
                
                142.38
                
                
                
                106.03
                
                
                
                110.27
                
                
                
                114.51
                
                
                
                162.98NASDAQ
      Composite
                
                
                100.00
                
                
                
                149.34
                
                
                
                161.86
                
                
                
                166.64
                
                
                
                186.18
                
                
                
                205.48NASDAQ
      Medical Equipment
                
                
                100.00
                
                
                
                151.86
                
                
                
                183.56
                
                
                
                210.66
                
                
                
                217.11
                
                
                
                285.07
  26
 Item
6. Selected Financial Data
  Year
      Ended December 31,2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003Revenues:
                
                (in
      thousands, except share and per share data)Total
      revenues
                
                $
                27,207
                
                
                $
                25,522
                
                
                $
                24,845
                
                
                $
                23,705
                
                
                $
                25,809Operating
      expenses:Manufacturing
                
                
                10,766
                
                
                
                11,715
                
                
                
                11,416
                
                
                
                10,779
                
                
                
                14,807Research
      and development
                
                
                2,938
                
                
                
                2,630
                
                
                
                3,034
                
                
                
                2,157
                
                
                
                2,203Selling,
      general and administrative
                
                
                11,990
                
                
                
                10,555
                
                
                
                9,722
                
                
                
                9,211
                
                
                
                10,046Loss
      on disposal of assets
                
                
                110
                
                
                
                42
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      operating expenses
                
                
                25,804
                
                
                
                24,942
                
                
                
                24,172
                
                
                
                22,147
                
                
                
                27,056Operating
      income (loss)
                
                
                1,403
                
                
                
                580
                
                
                
                673
                
                
                
                1,558
                
                
                
                (1,247
                )Interest
      income (expense), net
                
                
                433
                
                
                
                386
                
                
                
                207
                
                
                
                53
                
                
                
                (40
                )Income
      (loss) before taxes
                
                
                1,836
                
                
                
                966
                
                
                
                880
                
                
                
                1,611
                
                
                
                (1,287
                )Income
      tax expense (benefit)
                
                
                976
                
                
                
                282
                
                
                
                296
                
                
                
                232
                
                
                
                (634
                )Net
      income (loss) applicable tocommon
      stockholders
                
                $
                860
                
                
                $
                684
                
                
                $
                584
                
                
                $
                1,379
                
                
                $
                (653
                )Basic
      net income (loss) per shareapplicable
      to common stockholders
                
                $
                0.04
                
                
                $
                0.03
                
                
                $
                0.03
                
                
                $
                0.07
                
                
                $
                (0.03
                )Shares
      used in computing basic net income (loss)per
      share applicable to common stockholders
                
                
                20,325,000
                
                
                
                20,032,000
                
                
                
                19,741,000
                
                
                
                19,242,000
                
                
                
                18,999,000Diluted
      net income (loss) per shareapplicable
      to common stockholders
                
                $
                0.04
                
                
                $
                0.03
                
                
                $
                0.03
                
                
                $
                0.07
                
                
                $
                (0.03
                )Shares
      used in computing diluted net income (loss)per
      share applicable to common stockholders
                
                
                20,563,000
                
                
                
                20,109,000
                
                
                
                19,870,000
                
                
                
                19,495,000
                
                
                
                18,999,000Year
      Ended December 31,2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003BALANCE
      SHEET DATA:Cash
      and cash equivalents
                
                $
                12,988
                
                
                $
                10,892
                
                
                $
                10,009
                
                
                $
                8,096
                
                
                $
                5,158Working
      capital
                
                
                19,973
                
                
                
                16,731
                
                
                
                15,552
                
                
                
                13,525
                
                
                
                11,567Total
      assets
                
                
                41,949
                
                
                
                37,953
                
                
                
                36,661
                
                
                
                34,873
                
                
                
                33,073Long-term
      debt
                
                
                1,640
                
                
                
                351
                
                
                
                562
                
                
                
                773
                
                
                
                983Stockholders'
      equity
                
                
                37,128
                
                
                
                35,262
                
                
                
                33,778
                
                
                
                31,766
                
                
                
                29,876
  27
  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
  The
Company is a leading provider of antibody products and analytical test kits for
a broad range of food, water, agricultural, industrial, environmental and
scientific applications.
  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 unique, sophisticated diagnostic
testing and reagent systems that are responsive to customer diagnostic and
information needs. Customers benefit with quantifiable “return on investment” by
reducing time, labor and/or material costs 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 2007,
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 (GAT) initiative and food pathogen
detection products, where 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.
  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 unique positioning in the emerging area of genomic antibodies, the Company
anticipates that the revenue lost to market changes in its legacy businesses
will be replaced and the Company will develop a stronger, more predictable,
revenue base.
  28
  The
Company expects the Genomic Antibody TechnologyTM and food pathogen products to
be its primary growth drivers in the future, and that the Company’s competencies
and the competitive positions these two areas provide are the strongest in the
Company’s history.
  Corporate
and Growth Initiatives:
  The
following provides an update on the business development activities related to
the Genomic Antibody TechnologyTM initiative and the new Salmonella product in the
food pathogen area, which utilizes a patent-pending enrichment media
technology.
  Genomic Antibody
TechnologyTM: The Company announced an initiative to develop technology
for the high throughput production of genetic antibodies early in 2005, and in
January 2006, opened a new facility for molecular biology and hired two
scientists who had been leading the development of this technology. In January
2006, the Company announced the commercial introduction of the lead product,
mouse polyclonal antibodies. In May 2007, the Company launched GAT in rabbits
and in January 2008, announced it had surpassed one million dollars in project
bookings.
  In
October 2007, the Company announced the launch of a new internet-based catalog
of antibody reagents in support of oncology based research and discovery. These
high quality reagents are manufactured utilizing the Company’s Genomic Antibody
TechnologyTM and will carry the SEQer brand.
  The
antibody product group is strategically important to the growth of the Company,
and to transforming the Company into a biotech company with much greater
opportunities to access the human health market with proteomic tools and
solutions. In November 2007, the Company completed a $2.0 million expansion in
its Windham, Maine facility to support its growth initiatives and increased
polyclonal antibody production capacity by 44%. Additionally, the Company also
announced the expansion of its Molecular Biology Lab in Dallas, Texas and its
facility in Newark, Delaware in response to growth in demand for both GAT and
conventional hybridoma development.
  Food
Safety:The
Company’s test for the detection of Salmonella,launched
commercially in August 2006, has experienced increasing acceptance in the
marketplace. The success of this product has played a substantial role in
driving the Company’s three consecutive quarters of more than 20% year-over-year
growth, which began with the second quarter of 2007.
  One of
the technologies that made the new Salmonella product possible
is the subject of a patent filed by the Company during the fourth quarter of
2005. The patent claims the use of bacteria phage for the growth and detection
of a target bacterium in an environment that is contaminated by competing and
cross-reacting bacteria. This new technology solves the problem of singling out
the harmful pathogen among many other bacteria by creating an optimized
environment for rapid growth of the targeted pathogen while dramatically
suppressing other competing bacteria or bacteria that can interfere with the
fidelity of the test method. This technology is also being utilized by the
Company in the development of an E. coli select product
line.
  In July
2007, the Company announced the expansion of its product line to include hygiene
monitoring, with the exclusive distribution rights to Kikkoman’s Lumitester
PD-10N/LuciPac system from Kikkoman in the U.S. marketplace. This unique,
patented platform with a proprietary enzymatic recycling technology enables
detection of residual biofilm and will allow the Company to address the growing
hygiene market in food protection, food service, quick service restaurants and
personal and health care.
  Other
Initiatives:
  Industrial
Bio-Processing:The Company believes
that the same technology used in its Salmonella product has
application in other bio-processing environments including industrial
bio-processing. There are many large scale industrial processes in which a
manufacturer is attempting to manage the yield of a production organism in an
environment contaminated by a competing bacteria. These processes include
applications such as ethanol and amino acid production, bio-plastics and others.
The Company claims such application in its patent. In 2006, the Company
announced an agreement to develop a commercial application in this technology
with the Poet Company (formerly called Broin), a U.S.-based producer of
ethanol.  This agreement was discontinued by Poet in the fourth
quarter of 2007.  The Company has hired Energetix LLC as its
consultant and is actively pursuing technology scale-up and demonstration in
fully commercial ethanol plants as early as the third quarter of
2008.
  29
  The
Company has a robust new product pipeline with technologies that the Company
believes will provide sustainable differentiation to address larger markets.
Sales and marketing professionals are being hired in anticipation of new product
launches and the opportunities identified. The Company continues to be focused
on key customers and prospects in target markets: food, pharma, in-vitro
diagnostics and biotech. Continuously improving the efficiency of the Company’s
manufacturing and supply chain processes and improving the overall quality of
products and services remains critical to the Company’s success.
  Economic
and Industry-Wide Factors
  ·
              As
      industry continues to look for ways to reduce costs, the Company believes
      there will be a continual shift from testing that requires highly trained
      personnel, expensive equipment and lengthy turnaround times for test
      results, to more rapid, accurate and cost-effective testing which can be
      performed by less highly trained personnel and completed in much shorter
      periods.·
              The
      global market for food pathogen testing continues to increase due to the
      globalization of the food supply, the establishment of harmonized quality
      standards, the consumer’s desire for fresher, more ready-to-eat foods and
      foods from diverse geographies, and increasing regulatory and media
      scrutiny.·
              Currently,
      the research tools portion of the biomarker and drug target discovery
      market is estimated by Business Communication Company to be between $600
      million and $1 billion dollars annually, and is expected to grow at a
      compounded annual rate of more than 15% over the next 10 years to exceed
      $3.5 billion dollars.
  Results
of Operations
  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
      EndedDecember
      31,2007
                
                
                2006
                
                
                2005Antibody
                
                $
                14,281
                
                
                $
                11,104
                
                
                $
                10,725Food
      safety
                
                
                7,671
                
                
                
                9,215
                
                
                
                8,981Water
      quality
                
                
                5,099
                
                
                
                5,203
                
                
                
                5,139Contract
      revenue
                
                
                156
                
                
                
                -
                
                
                
                -Net
      revenues
                
                $
                27,207
                
                
                $
                25,522
                
                
                $
                24,845
  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 GAT platform continued to
expand.
  In 2007,
antibody and food pathogen products together represented 69% of total revenues
compared to 58% in 2006, with revenue increases of $3.2 million and $0.9
million, respectively, when compared to 2006.
  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 16%.
  30
  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, or 11% of revenues, compared to $2.6 million, or 10% of revenues, 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 Genomic Antibody
TechnologyTM 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
interest income of $386,000 during 2006.  This increase is primarily
due to increased interest rates year over year and an increase in cash
balances.
  Income taxes
  The
Company’s annual 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 annual 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.
  Year
ended December 31, 2006 versus year ended December 31, 2005
  Revenues:
Revenues for the year ended December 31, 2006 increased 2.7% to $25.5 million,
compared to $24.8 million for 2005. The following table sets out revenues by
product category:
  31
  Year
      EndedDecember
      31,
                
                
                Increase
                
                
                Percent2006
                
                
                2005
                
                
                (Decrease)
                
                
                Change(in
      thousands, except percentages)Antibody
                
                $
                11,104
                
                
                $
                10,725
                
                
                $
                379
                
                
                
                3.5
                %Food
      safety
                
                $
                9,215
                
                
                $
                8,981
                
                
                $
                234
                
                
                
                2.6
                %Water
      quality
                
                $
                5,203
                
                
                $
                5,139
                
                
                $
                64
                
                
                
                1.2
                %Net
      revenues
                
                $
                25,522
                
                
                $
                24,845
                
                
                $
                677
                
                
                
                2.7
                %
  Antibody
Products
  Antibody
revenues increased 3.5% to $11.1 million in the year ended December 31, 2006,
compared to $10.7 million for 2005.
  The 2006
increase resulted from an increase in demand for monoclonal products and
services, an increase in demand for bulk antibody products and deliveries of
Genomic AntibodyTMprojects.  The “bulk” monoclonal and polyclonal products of the
business have inconsistent order patterns and may produce periodic spikes in
revenue.  Overall, production capacity and utilization of production
capacity increased in 2006.
  Food
Safety Products
  For the
year ended December 31, 2006, food safety revenues were $9.2 million, compared
to $9.0 million for 2005, an increase of 2.6%.
  Sales of
tests for food pathogens grew 14.5%, to $3.7 million from $3.3 million when
comparing the years ended December 31, 2006 and December 31,
2005.  This increase is due primarily to increased sales of the
Company’s tests for Listeria which the Company launched in
mid-2004.
  Since
2001, sales of the Company’s product for the StarLinkTMtrait
have dropped from $5.4 million to approximately $871,000 in 2006 and $748,800 in
2007.
  Water
and Environmental Products
  Water and
environmental products revenue increased 1.2% to $5.2 million for the year ended
December 31, 2006, compared to $5.1 million for 2005.
  Sales of
water and environmental products increased 10% in foreign markets, excluding the
effects of foreign currency translation, for the year ended December 31, 2006
when compared to the year ended December 31, 2005.  This increase was
primarily due to increased sales of water testing equipment and supplies into
China.  The increased sales into foreign markets were partially offset
by a 3.2% decline in sales in the U.S. domestic market from 2005 to
2006.
  Other
Areas
  Gross
profit for the year ended December 31, 2006 totaled $13.8 million, as compared
to $13.4 million for 2005. Gross margins were 54% for both years
presented.
  For the
year ended December 31, 2006, operating expenses increased 3.2% to $24.9
million, compared to $24.2 million for 2005.
  For
the year ended December 31, 2006, research and development spending was $2.6
million, or 10.3% of revenues, compared to $3.0 million, or 12.2% of revenues,
for 2005.  This decrease was primarily the result of approximately
$398,000 in spending during 2005 related to upgrades to the Microtox®
equipment software.
  Selling,
general and administrative expenses were $10.6 million for the year ended
December 31, 2006, compared to $9.7 million for 2005. This increase is primarily
attributable to marketing efforts utilized to launch the Genomic AntibodiesTM product
and the cost of a detailed review of the Company’s business and opportunities
for growth by an outside consulting group.
  32
  Interest, net
  The
Company recorded net interest income of $386,000 during 2006 compared to
interest income of $207,000 during 2005.  This increase is primarily
due to increased interest rates received on invested funds in 2006.
  Income
taxes
  The
Company’s annual effective tax rate of 29.2% for 2006 primarily reflects the
federal statutory rate of 34%, state income taxes net of U.S. Federal benefit of
6.2% and other charges of 3.3%, offset by research and development credits of
14.6%.
  Net
Income
  Net
income for the year ended December 31, 2006 was $684,000, or $0.03 per diluted
share, compared to $584,000, or $0.03 per diluted share, for 2005. Diluted
shares totaling 20.1 million and 19.9 million were used in the computations for
2006 and 2005, respectively.
  33
  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
      EndedDecember
      31,2007
                
                
                2006(in
      thousands)Net
      cash provided by operating activities
                
                $
                2,302
                
                
                $
                1,667Net
      cash used in investing activities
                
                
                (2,482
                )
                
                
                (1,111
                )Net
      cash provided by financing activities
                
                
                2,262
                
                
                
                198Effect
      of exchange rate changes on cash
                
                
                14
                
                
                
                129Net
      increase in cash and cash equivalents
                
                $
                2,096
                
                
                $
                883
  Net cash
provided by operating activities of $2.3 million and $1.7 million for 2007 and
2006, respectively, was primarily the result of earnings before interest, taxes,
depreciation and amortization (EBITDA) for the periods ended December 31, 2007
and 2006 of $2.6 million and $1.6 million, respectively.  See
“Non-GAAP Financial Measures” below.
  Net cash
used in investing activities for 2007 of $2.5 million compares to net cash used
in investing activities of $1.1 million for 2006. These cash outflows were
primarily the result of capital purchases which totaled $2.5 million in 2007
versus $1.0 million in 2006. The capital expenditures in 2007 were primarily
related to the Company’s expansion in Maine. The capital expenditures in 2006
were related to purchases of manufacturing and laboratory
equipment.
  Net cash
provided by financing activities of $2.3 million for 2007 was primarily a result
of additional debt incurred to fund the expansion in the Maine facility. In
2006, net cash provided by financing activities was $0.2 million, consisting
mostly of proceeds from the exercise of stock options.
  The
Company’s working capital (current assets less current liabilities) increased
approximately $3.3 million to $20.0 million at December 31, 2007 from $16.7
million at December 31, 2006, primarily due to the increase of $2.1 million in
cash and cash equivalents generated during 2007. Outstanding debt increased to
$2.3 million at December 31, 2007 from $562,000 at December 31, 2006 due to
additional financing of $2.0 million for the expansion of the Maine facility,
offset by $311,000 of scheduled debt payments.
  On May 5,
2000, the Company entered into a financing agreement with a commercial bank,
which was amended on August 10, 2007.  This agreement provides for up
to a $5 million revolving line of credit, none of which was outstanding and all
of which was available at December 31, 2007.  The revolving line of
credit bears a variable interest rate of between 100 basis points and 225 basis
points over the one month LIBOR rate depending upon the ratio of the Company’s
funded debt to EBITDA.  The current rate of interest on this available
line of credit, taking into account the variable interest rate and LIBOR, was
approximately 5.80% at December 31, 2007.
  On
December 13, 2001, the Company entered into an agreement with a commercial bank
to finance the construction of new facilities at its Windham, Maine location.
This agreement provided for up to $1.5 million in financing, $351,000 of
which was outstanding at December 31, 2007, and is repayable over seven years,
with principal payments that began on October 1, 2002. The loan bears a variable
interest rate of between 100 basis points and 275 basis points over the one
month LIBOR rate depending upon the ratio of the Company’s funded debt to
EBITDA, as defined. Payments are due monthly, with equal amortization of
principal payments plus interest. The Company’s current rate of interest on this
loan, taking into account the variable interest rate and LIBOR, was
approximately 5.80% at December 31, 2007.
  34
  On August
21, 2007, the Company entered into an agreement with a commercial bank to
finance the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2 million in financing, $1.9 million of which was
outstanding at December 31, 2007, and is repayable over five years, with
principal payments that began on October 1, 2007. The loan bears a fixed
interest rate of 5.961%.  Payments are due monthly with equal
amortization of principal payments plus interest.
  Under the
terms of the above financings, the Company is required to meet certain quarterly
financial covenants that include a ratio of EBITDA to current maturities of debt
plus interest and cash paid for taxes greater than 1.50 and a ratio of funded
debt to EBITDA not to exceed 3.25.  The Company met all of its
financial covenants with respect to this indebtedness at December 31, 2007 and
expects that it will be able to meet all of its financial covenants with respect
to this indebtedness for at least the next 12 months.
  For the
year ended December 31, 2007, the Company satisfied all of its cash requirements
from the net cash provided by operating activities, cash available and on-hand
and from the financing agreements described above. At December 31, 2007, the
Company had $2.3 million in debt and stockholders’ equity of $37.1 million.
Although the Company has no material commitments for capital expenditures at
December 31, 2007, it does anticipate that it may spend approximately $1.2
million in 2008 to upgrade or expand certain manufacturing, research and
development and office systems.
  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.
  Non-GAAP
Financial Measures
  The
Company presents an 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, 2007 and 2006, respectively, is as
follows (amounts in thousands):
  35
  Twelve
      Months EndedDecember
      31,2007
                
                
                2006(in
      thousands)Net
      cash provided by operating activities
                
                $
                2,302
                
                
                $
                1,667Changes
      in assets and liabilities:Receivables
                
                
                432
                
                
                
                436Inventories
                
                
                1,026
                
                
                
                (34
                )Other
      current assets
                
                
                29
                
                
                
                130Other
      assets
                
                
                14
                
                
                
                (26
                )Accounts
      payable
                
                
                (32
                )
                
                
                (77
                )Accrued
      expenses
                
                
                (411
                )
                
                
                (16
                )Deferred
      revenue
                
                
                128
                
                
                
                74Other
      non-current liabilities
                
                
                (130
                )
                
                
                -Net
      change in deferred income tax
                
                
                (769
                )
                
                
                (124
                )Income
      tax provision
                
                
                976
                
                
                
                282Loss
      on disposal of fixed assets
                
                
                (93
                )
                
                
                (42
                )Stock
      compensation expense
                
                
                (430
                )
                
                
                (277
                )Interest
      income, net
                
                
                (433
                )
                
                
                (386
                )EBITDA
                
                $
                2,609
                
                
                $
                1,607
    36
  Off-Balance
Sheet Arrangements
  As of
December 31, 2007 the Company did not have any off-balance sheet arrangements as
defined in Item 304(a) (4) (ii) of Regulation S-K.
  Contractual
Obligations
  The
Company is committed to making cash payments in the future on two types of
contracts: our 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, 2007.
   Payments
      Due by Year2013
      and2008
                
                
                2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                Beyond
                
                
                Total(in
      thousands)Long-term
      debt (1)
                
                $
                611
                
                
                
                540
                
                
                
                400
                
                
                
                400
                
                
                
                300
                
                
                
                -
                
                
                
                2,251Operating
      leases (2)
                
                $
                798
                
                
                
                782
                
                
                
                77
                
                
                
                40
                
                
                
                30
                
                
                
                0
                
                
                
                1,727Total
      contractualcash
      obligations
                
                $
                1,409
                
                
                
                1,322
                
                
                
                477
                
                
                
                440
                
                
                
                330
                
                
                
                0
                
                
                
                3,978
  
 (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 8 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 and long-lived assets. 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, 2007 and December 31,
2006, were net of an allowance for doubtful accounts of $82,000 and $134,000,
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. 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.
  37
  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. Management considers the scheduled
reversal of existing temporary differences, projected future taxable income and
tax planning strategies in making this assessment. Based upon historical taxable
income and projections for future taxable income, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at December 31,
2007.
  At
December 31, 2007, management concluded that no valuation allowance is necessary
for federal deferred tax assets after considering the positive and negative
evidence. In making this determination, the Company considered the following
positive factors:
  ·
              U.S.
      income before taxes of $1.67 million $790,000 and $719,000 for
      each of the three years ending December 31, 2007, 2006 and 2005
      respectively;·
              operating
      margins of 60% in  2007, 54% in 2006 and 54% in
      2005;·
              past
      and anticipated new product launches;·
              use
      of annual election to capitalize research and experimentation expenses
      under Internal Revenue Code Section 59(e), which will then be amortized
      over a ten-year period; and·
              the
      expansion of the Company’s capacity for rabbit antibodies, with completion
      of a new rabbit barn in 2007.
  The
Company also considered the following negative factors:
  ·
              Uncertainty
      of the U.S. economy heading into 2008; and·
              Federal
      net operating loss carry forwards begin to expire in
  2010.
  At
December 31, 2007, management has concluded that a full valuation allowance
of approximately $119,000 is necessary for deferred tax assets in certain
state jurisdictions. For the state jurisdictions, management has considered the
same positive and negative evidence as utilized for the federal deferred tax
assets described above. The Company has also considered the substantial
reduction of its presence in North Carolina and Pennsylvania since the time when
the net operating losses were incurred in those jurisdictions as additional
negative evidence.
  At
December 31, 2007, the Company had approximately $6.2 million of net operating
loss carryforwards for tax purposes related to operations in the United Kingdom
(“UK”).  Management considered positive and negative indicators in
concluding that a substantial valuation allowance of approximately $1.6 million
was necessary for the foreign deferred tax assets of $1.7 million. The positive
indicators included the contribution to income before taxes by the operations in
the UK for 2007 and 2006, and the expected income before taxes in the UK for
2008. The negative indicators included 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 2008 resulting from concerns
about the future need for a foreign subsidiary.
  38
  The net
operating loss carryforwards differ from the accumulated deficit, principally
due to differences in the timing of recognition of certain research and
development expenses, depreciation and amortization, other non-deductible
reserves and limitations under federal and state tax regulations for acquired
net operating loss carryforwards.
  As of
December 31, 2007, the Company had federal net operating loss
carryforwards, including those acquired, of approximately $11.9 million, which
begin to expire as follows:
  Year
                
                NOL
                  (in
                  thousands)2010
                
                $
                4.8022017
                
                
                7602018
                
                
                1,3272019
                
                
                5502020
                
                
                662021
                
                
                562022
                
                
                2,2682024
                
                
                2,0322025
                
                
                3Total
                
                $
                11,864
  Based on
the best information available to the Company today, the Company expects to have
sufficient future taxable income to utilize such NOLs prior to the expiration of
the net operating loss carry forwards.
  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, collectibility is probable. Management
is required to make judgments based on actual experience about whether or not
collectibility 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 Long-Lived
Assets—Long-lived assets, such as property, plant, 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.
  Stock–Based Compensation—
the Company accounts for stock-based compensation in accordance with 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. We adopted SFAS
123 (R) on January 1, 2006 using the modified prospective transition method in
which compensation cost is recognized beginning January 1, 2006 for all
stock–based awards granted on or after that date and for all awards granted to
employees prior to January 1, 2006 that remain unvested on that date. Under this
transition method, compensation cost recognized in fiscal 2006 includes: (a)
compensation cost for all stock–based awards granted prior to, but not yet
vested, as of January 1, 2006, based on the grant date fair valueestimated
in accordance with the original provisions of SFAS 123, as adjusted for an
estimate of the number of awards that will be forfeited and (b) compensation
cost for all stock–based awards granted on or after January 1, 2006 based on the
grant date fair value estimated in accordance with the provisions of SFAS 123
(R).
  39
  Previously,
the Company had recognized the impact of forfeitures as they occurred. The grant
date fair value of the awards generally vests over the service period. The
stock-based compensation expense is included in SG&A expenses. SFAS 123 (R)
requires management to make estimates and assumptions to determine the
underlying value of stock options and restricted stock awards, including the
vesting for restricted stock awards and options containing performance-based
vesting features, the expected term of stock options, an estimate of future
forfeitures and the volatility of our stock price in the future. These
assumptions have an impact on the valuation assigned to equity awards and the
associated recognition of expense.
  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 Company’s 2000 Stock Incentive 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 income
statement in 2006 and future periods 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
might be recorded in future periods following the adoption of SFAS 123R; and,
the Company has decided to rely, to a substantial degree, on restricted stock as
opposed to options in future incentive compensation awards.
  New
Accounting Standards and Disclosures
 
 In June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement 109” (“FIN
48”).  This statement clarifies the criteria an individual tax
position must satisfy for some or all of the benefits of that position to be
recognized in a company’s financial statements.  FIN 48 prescribes a
recognition threshold of more-likely-than-not, and a measurement attribute for
all tax positions taken or expected to be taken on a tax return, in order for
those tax positions to be recognized in the financial
statements.  Effective January 1, 2007, the Company has adopted the
provisions of FIN 48 and there was no material effect on the consolidated
financial statements.  As a result, there was no cumulative effect
related to adopting FIN 48.
  In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No.
157 provides guidance for using fair value to measure assets and liabilities and
is intended to respond to investors’ requests for expanded information about the
extent to which a company measures assets and liabilities at fair value, the
information used to measure fair value and the effect of fair value measurements
on income. SFAS No. 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value but does not expand the use
of fair value to any new circumstances. SFAS No. 157 also requires expanded
disclosure of the effect on income for items measured using unobservable data,
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions and requires separate disclosure by level within the
fair value hierarchy. The provisions of SFAS No. 157 are effective for interim
financial statements issued for fiscal years beginning after November 15, 2007,
or the Company’s fiscal 2008. The Company is currently evaluating the impact of
adopting SFAS No. 157 on the Consolidated Financial Statements, but does not
expect the adoption of SFAS No. 157 to have a material effect on its
consolidated financial position, results of operations or cash
flows.
  40
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of SFAS No.
115.” The new statement allows entities to choose, at specified election dates,
to measure eligible financial instruments and certain other items at fair value
that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item’s fair
value in subsequent reporting periods must be recognized in current earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, in
the case of the Company, fiscal 2008.  The Company is currently
evaluating the impact of adopting SFAS No. 159 on the consolidated financial
statements.
  In June
2007, the FASB issued EITF No. 07-03, “Accounting for nonrefundable advance
payments for goods or services received for use in future research and
development activities.”  EITF No. 07-03 requires companies that make
nonrefundable advance payments for future research and development activities to
capitalize the payment, and recognize the expense as the goods are delivered or
services are performed.  EITF No. 07-03 is effective for fiscal years
beginning after December 15, 2007, (in the case of the Company, fiscal 2008),
but is to be applied prospectively to new contracts entered into on or after the
effective date.  The Company does not expect the adoption of EITF No.
07-03 will have a material effect on the consolidated financial
statements.
  In
November 2007, the EITF of the FASB reached a consensus on Issue No.
07-01,"Accounting for Collaborative Arrangements," ("EITF No. 07-01"). EITF No.
07-01 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. 07-01 is effective for the Company for
the reporting period beginning April 1, 2009. The Company is in the process of
evaluating the impact of the adoption of EITF No. 07-01 on its consolidated
financial statements
  In
December 2007, the FASB issued SFAS No. 141(Revised), “Business
Combinations,” or 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 noncontrolling interest in the acquiree 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 noncontrolling interest in the acquiree, 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.  We expect to
adopt this statement on January 1, 2009.  SFAS No. 141(R)’s
impact on accounting for business combinations is dependent upon acquisitions at
that time.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — An Amendment of ARB No. 51" (“SFAS
160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. The standard
also requires disclosure on the face of the consolidated statement of income, of
the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. In addition this standard establishes a single method
of accounting for changes in a parent’s ownership interest in a subsidiary that
do not result in deconsolidation and requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated. SFAS 160 also includes
expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 becomes effective for fiscal periods beginning
after December 15, 2008. The Company expects to adopt this statement on
January 1, 2009.  As the Company currently does not have a
noncontrolling interest in a subsidiary, the effect of SFAS 160 if any, will be
dependent on changes in the Company’s current business structure.
 
 For
further information related to new accounting standards and disclosures, see
Note 1 of the Notes to Consolidated Financial Statements.
  41
  Item
7A. Quantitative and Qualitative Disclosures About Market Risk
  The
Company has exposure to changing interest rates, and is currently not engaged in
hedging activities. Interest on approximately $351,000 of outstanding
indebtedness is at a variable rate of 100 basis points over the published one
month LIBOR rate.  At the Company’s current level of indebtedness,
each 1% change in the variable interest rate will have an effect of $4,000 on
the Company’s annual interest expense charges.
  The Company conducts operations in
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
              49Report
      of Independent Registered Public Accounting Firm
              50Consolidated
      Balance Sheets as of December 31, 2007 and 2006
              51Consolidated
      Statements of Operations for each of the years in the three-year period
      ended December 31, 2007
              52Consolidated
      Statements of Stockholders’ Equity and Comprehensive Income for each of
      the years in the three-year period ended December 31, 2007
              53Consolidated
      Statements of Cash Flows for each of the years in the three-year period
      ended December 31, 2007
              54Notes
      to Consolidated Financial Statements
              55
  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, 2007, 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 year ended
December 31, 2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  42
 
 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
 
 43
  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
              
              PositionMatthew
      H. Knight
              
              51
              
              President
      and Chief Executive OfficerJames
      W. Stave
              
              53
              
              VP
      – Research and Development and Chief Science OfficerStanley
      Fronczkowski
              
              56
              
              VP
      – Finance, Chief Financial Officer and Corporate
  SecretaryFrancis
      M. DiNuzzo
              
              52
              
              EVP
      – Marketing and Chief Commercial Officer  (effective February
      25, 2008)
 
 
 Matthew H. Knight joined SDI
in September 2003 as President and CEO, and also serves as a Director. Prior to
joining SDI, Mr. Knight spent 23 years at Nalco Chemical Company. He began his
career in field sales in 1980, and advanced through a series of sales and
marketing management positions over the next 15 years. In 1996, Mr. Knight
became General Manager of Nalco’s European operating group serving the water
management needs of manufacturers, including the food, beverage and
pharmaceutical industries. In 1998, he was promoted to General Manager of
Nalco’s largest water treatment business unit and in 2000 he was promoted to
Group Vice President and President of the company’s Industrial Division. Mr.
Knight also served as Group Vice President, Sales Force Optimization, focused on
development of sales and sales management processes for Nalco’s global sales
force. Mr. Knight is a graduate of Miami University of Ohio, with a B.A. in
Chemistry, and the Amos Tuck Executive Program.
 
 James W. Stave joined SDI 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.
 
 44
  Francis M. DiNuzzo joined the
Company in February 2008 as Executive Vice President – Marketing and Chief
Commercial 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 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.
  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, 2007 concerning securities
issuable in connection with equity compensation plans that have been approved by
the Company’s shareholders and that have not been approved by the Company’s
shareholders.
  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 planapproved
      by securityholders
                
                
                951,620
                
                
                $
                3.70
                
                
                
                761,071Equity
      compensationnot
      approved bysecurity
      holders
                
                
                300,000
                
                
                $
                4.00
                
                
                
                -Total
                
                
                1,251,620
                
                
                $
                3.77
                
                
                
                761,071
   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 new 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.
  45
  Item
14. Principal Accountant Fees and Services
  The
applicable information set forth in the Company’s Definitive Proxy Statement is
incorporated herein by reference.
  PART
IV.
  Item
15. Exhibits and Financial Statement Schedules
  
 1.
Financial Statements
 
 (a) See
the Consolidated Financial Statements which begin on page F-1 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
 
 ExhibitNumber
              
              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 Incorporated
              
              (6)
  46
  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)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
              
              (15)  (16)of
      E.I. du Pont de Nemours10.35
              
              Strategic
      Diagnostics Inc. Change of Control Severance Agreement*
              
              (17)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 Matthew H. Knight 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
  47
  (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.*
              Management
      contract or compensatory plan.
  48
 
 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, 2007 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, 2007, 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/ Matthew H.
      Knight
              /s/ Stanley
      FronczkowskiMatthew
      H. Knight
              Stanley
      FronczkowskiPresident
      and Chief Executive Officer
              Vice
      President – Finance and ChiefFinancial
      Officer
 
 Dated: March 31,
2008
  49
   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, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity and comprehensive
income and cash flows for each of the years in the three-year period ended
December 31, 2007. 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007 in conformity with U.S. generally accepted accounting
principles.
  As
discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised), “Share-Based Payment” effective January 1, 2006, and
Financial Accounting Standards Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an Interpretation of SFAS No. 109, effective
January 1, 2007.
 /s/
      KPMG LLPPhiladelphia,
      PennsylvaniaMarch
      31, 2008
  50
 
 STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
  CONSOLIDATED
BALANCE SHEETS
 (in
thousands, except share and per share data)
  December
      31,
                
                
                December
      31,2007
                
                
                2006ASSETSCurrent
      Assets :Cash
      and cash equivalents
                
                $
                12,988
                
                
                $
                10,892Receivables,
      net
                
                
                4,110
                
                
                
                3,678Inventories
                
                
                4,204
                
                
                
                3,178Deferred
      tax asset
                
                
                1,201
                
                
                
                831Other
      current assets
                
                
                521
                
                
                
                492Total
      current assets
                
                
                23,024
                
                
                
                19,071Property
      and equipment, net
                
                
                5,481
                
                
                
                4,058Other
      assets
                
                
                7
                
                
                
                3Deferred
      tax asset
                
                
                7,389
                
                
                
                8,484Goodwill,
      net
                
                
                4,201
                
                
                
                4,249Intangible
      assets, net
                
                
                1,847
                
                
                
                2,088Total
      assets
                
                $
                41,949
                
                
                $
                37,953LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities :Accounts
      payable
                
                $
                569
                
                
                $
                541Accrued
      expenses
                
                
                1,866
                
                
                
                1,455Deferred
      revenue
                
                
                5
                
                
                
                133Current
      portion of long-term debt
                
                
                611
                
                
                
                211Total
      current liabilities
                
                
                3,051
                
                
                
                2,340Long-term
      debt
                
                
                1,640
                
                
                
                351Other
      non-current liabilities
                
                
                130
                
                
                
                -Total
      non-current liabilities
                
                
                1,770
                
                
                
                351Stockholders'
      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,20,410,540
      and 20,192,402 issued and outstandingat
      December 31, 2007 and December 31, 2006, respectively
                
                
                205
                
                
                
                202Additional
      paid-in capital
                
                
                39,594
                
                
                
                38,605Accumulated
      deficit
                
                
                (2,830
                )
                
                
                (3,690
                )Cumulative
      translation adjustments
                
                
                159
                
                
                
                145Total
      stockholders' equity
                
                
                37,128
                
                
                
                35,262Total
      liabilities and stockholders' equity
                
                $
                41,949
                
                
                $
                37,953
   The
accompanying notes are an integral part of these statements
 51
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF OPERATIONS
 (in
thousands, except share and per share data)
  Year
      Ended December 31,2007
                
                
                2006
                
                
                2005Revenues
                
                $
                27,207
                
                
                $
                25,522
                
                
                $
                24,845Operating
      expenses:Manufacturing
                
                
                10,766
                
                
                
                11,715
                
                
                
                11,416Research
      and development
                
                
                2,938
                
                
                
                2,630
                
                
                
                3,034Selling,
      general and administrative
                
                
                11,990
                
                
                
                10,555
                
                
                
                9,722Loss
      on disposal of assets
                
                
                110
                
                
                
                42
                
                
                
                -Total
      operating expenses
                
                
                25,804
                
                
                
                24,942
                
                
                
                24,172Operating
      income
                
                
                1,403
                
                
                
                580
                
                
                
                673Interest
      income, net
                
                
                433
                
                
                
                386
                
                
                
                207Income
      before taxes
                
                
                1,836
                
                
                
                966
                
                
                
                880Income
      tax expense
                
                
                976
                
                
                
                282
                
                
                
                296Net
      income
                
                $
                860
                
                
                $
                684
                
                
                $
                584Basic
      net income per shareapplicable
      to common stockholders
                
                $
                0.04
                
                
                $
                0.03
                
                
                $
                0.03Shares
      used in computing basic net incomeper
      share applicable to common stockholders
                
                
                20,325,000
                
                
                
                20,032,000
                
                
                
                19,741,000Diluted
      net income per shareapplicable
      to common stockholders
                
                $
                0.04
                
                
                $
                0.03
                
                
                $
                0.03Shares
      used in computing diluted net incomeper
      share applicable to common stockholders
                
                
                20,563,000
                
                
                
                20,109,000
                
                
                
                19,870,000
  The
accompanying notes are an integral part of these statements.
 52
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 AND
COMPREHENSIVE INCOME
 (in
thousands)
  Additional
                
                
                
                
                
                
                
                
                CumulativePreferred
                
                
                Common
                
                
                Paid-In
                
                
                Accumulated
                
                
                Deferred
                
                
                TranslationStock
                
                
                Stock
                
                
                Capital
                
                
                Deficit
                
                
                Compensation
                
                
                Adjustments
                
                
                TotalBalance
      January 1, 2005
                
                $
                -
                
                
                $
                194
                
                
                $
                36,596
                
                
                $
                (4,958
                )
                
                $
                (206
                )
                
                $
                140
                
                
                $
                31,766Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                584
                
                
                
                -
                
                
                
                -
                
                
                
                584Currency
      translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (124
                )
                
                
                (124
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                460Exercises
      of stock options
                
                
                -
                
                
                
                5
                
                
                
                1,330
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,335Employee
      stock purchase plan
                
                
                -
                
                
                
                -
                
                
                
                37
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                37Issuance
      of restricted stock awards
                
                
                -
                
                
                
                1
                
                
                
                213
                
                
                
                -
                
                
                
                (214
                )
                
                
                -
                
                
                
                -Deferred
      compensation amortization
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                238
                
                
                
                -
                
                
                
                238Tax
      benefit of stock option exercises
                
                
                -
                
                
                
                -
                
                
                
                73
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                73Tax
      benefit of restricted stock awards
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (131
                )
                
                
                -
                
                
                
                (131
                )Balance
      December 31, 2005
                
                $
                -
                
                
                $
                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
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                33Deferred
      compensation amortization
                
                
                -
                
                
                
                -
                
                
                
                422
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                422Balance
      December 31, 2007
                
                $
                -
                
                
                $
                205
                
                
                $
                39,594
                
                
                $
                (2,830
                )
                
                $
                -
                
                
                $
                159
                
                
                $
                37,128
  The
accompanying notes are an integral part of these statements.
 53
 STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
  Twelve
      MonthsEnded
      December 31,2007
                
                
                2006
                
                
                2005Cash
      Flows from Operating Activities :Net
      income
                
                $
                860
                
                
                $
                684
                
                
                $
                584Adjustments
      to reconcile net income to netcash
      provided by (used in) operating activities :Depreciation
      and amortization
                
                
                1,206
                
                
                
                1,027
                
                
                
                924Stock-based
      compensation expense
                
                
                430
                
                
                
                277
                
                
                
                243Deferred
      income taxes
                
                
                769
                
                
                
                124
                
                
                
                296Loss
      on disposal of fixed assets
                
                
                93
                
                
                
                42
                
                
                
                210(Increase)
      decrease in :Receivables
                
                
                (432
                )
                
                
                (436
                )
                
                
                (135
                )Inventories
                
                
                (1,026
                )
                
                
                34
                
                
                
                6Other
      current assets
                
                
                (29
                )
                
                
                (130
                )
                
                
                5Other
      assets
                
                
                (14
                )
                
                
                26
                
                
                
                (1
                )Increase
      (decrease) in :Accounts
      payable
                
                
                32
                
                
                
                77
                
                
                
                (404
                )Accrued
      expenses
                
                
                411
                
                
                
                16
                
                
                
                184Deferred
      revenue
                
                
                (128
                )
                
                
                (74
                )
                
                
                207Other
      non-current liabilities
                
                
                130
                
                
                
                -
                
                
                
                -Net
      cash provided by operating activities
                
                
                2,302
                
                
                
                1,667
                
                
                
                2,119Cash
      Flows from Investing Activities :Purchase
      of property and equipment
                
                
                (2,484
                )
                
                
                (1,023
                )
                
                
                (1,217
                )Purchase
      of patent license
                
                
                -
                
                
                
                (117
                )
                
                
                (17
                )Proceeds
      from sale / disposal of assets
                
                
                2
                
                
                
                29
                
                
                
                -Net
      cash used in investing activities
                
                
                (2,482
                )
                
                
                (1,111
                )
                
                
                (1,234
                )Cash
      Flows from Financing Activities :Proceeds
      from exercise of stock options
                
                
                537
                
                
                
                389
                
                
                
                1,335Proceeds
      from employee stock purchase plan
                
                
                36
                
                
                
                20
                
                
                
                28Proceeds
      from  issuance of long and short term debt
                
                
                2,000
                
                
                
                -
                
                
                
                -Repayments
      on financing obligations
                
                
                (311
                )
                
                
                (211
                )
                
                
                (211
                )Net
      cash provided by financing activities
                
                
                2,262
                
                
                
                198
                
                
                
                1,152Effect
      on exchange rate changes on cash
                
                
                14
                
                
                
                129
                
                
                
                (124
                )Net
      increase in Cash and Cash Equivalents
                
                
                2,096
                
                
                
                883
                
                
                
                1,913Cash
      and Cash Equivalents, Beginning of Year
                
                
                10,892
                
                
                
                10,009
                
                
                
                8,096Cash
      and Cash Equivalents, End of Year
                
                $
                12,988
                
                
                $
                10,892
                
                
                $
                10,009Supplemental
      Cash Flow Disclosure :Cash
      paid (received) for taxes and tax refunds
                
                $
                233
                
                
                $
                (13
                )
                
                $
                (27
                )Cash
      paid for interest
                
                
                69
                
                
                
                48
                
                
                
                48
  The
accompanying notes are an integral part of these statements
 54
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (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.
  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, 2007, 2006 and 2005, the allowance for doubtful accounts was
$82, $134 and $117, 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, 2007, 2006 and 2005, net
accounts receivable were $4,110, $3,678 and $3,242, respectively.
  A summary
of the activity in the allowance for doubtful accounts for the years ended
December 31, 2007, 2006 and 2005 is as follows:
 
 2007
                
                
                2006
                
                
                2005Balance,
      January 1
                
                $
                134
                
                
                $
                117
                
                
                $
                186Additions/Reductions-charged/credited
      to costs and expenses
                
                
                (49
                )
                
                
                108
                
                
                
                (44
                )Deductions-written
      off as uncollectible
                
                
                (3
                )
                
                
                (91
                )
                
                
                (25
                )Balance,
      December 31
                
                $
                82
                
                
                $
                134
                
                
                $
                117
  Inventories
  The
Company’s 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.
  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.
  55
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
 At
December 31, inventories consisted of the following:
 
 2007
                
                
                2006Raw
      materials
                
                $
                1,354
                
                
                $
                1,221Work
      in progress
                
                
                903
                
                
                
                653Finished
      goods
                
                
                1,947
                
                
                
                1,304Net
      inventories
                
                $
                4,204
                
                
                $
                3,178
  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, plant, 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.
  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, collectibility is reasonably assured.
Management is required to make judgments based on actual experience about
whether or not collectibility 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.
  Stock-Based
Compensation
  Under the
Company’s employee share option plans prior to 2006, the Company granted
employees and outside directors stock options at an exercise price equal to the
fair market value at the date of grant. Compensation expense with respect to
stock awards granted was measured based upon the fair value of such awards at
the date of grant and was amortized over the vesting period.
  The
Company adopted SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”)
using the modified prospective basis on January 1, 2006 in which compensation
cost is recognized beginning January 1, 2006 for all stock-based awards granted
on or after that date and for all awards granted to employees prior to January
1, 2006 that remain unvested on that date.  SFAS 123(R) requires
compensation costs related to share-based payment transactions to be recognized
in the financial statements at fair value.
  56
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  The
following table illustrates the effect on net income (loss) and earnings (loss)
per share for the year ended December 31, 2005, if the fair value based method
had been applied to all outstanding and unvested awards.
  YearEnded
      December 31,2005Net
      income (loss)
                
                $
                584Add:
      Stock-based employee compensation expense included in reported net income,
      net of related tax effects
                
                
                160Deduct:  Total
      stock-based employee compensation expense determined under fair value
      based method for all awards, net of related
    tax effects
                
                
                (1,350
                )Pro
      forma net income (loss)
                
                $
                (606
                )Earnings
      (loss) per share:Basic
      - as reported
                
                $
                0.03Basic—pro
      forma
                
                $
                (0.03
                )Diluted
      - as reported
                
                $
                0.03Diluted—pro
      forma
                
                $
                (0.03
                )
  Research
and Development
  Research
and development costs are charged to expense as incurred. From time to time the
Company makes acquisitions, which may include in-process research and
development, which is expensed when acquired.
  Accounting
for Income Taxes
  Deferred
income tax assets and liabilities are determined based on 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, we recognize in our
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. Interest
and penalties related to unrecognized tax benefits are recorded as income tax
expense. See Note 10 for further information.
  57
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  Basic
and Diluted Income (Loss) per Share
  Basic
earnings (loss) per share (EPS) is 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. Basic loss per share excludes potentially dilutive
securities.  For the years 2007, 2006 and 2005, conversion of stock
options totaling 19,250, 954,895 and 986,000 into common share equivalents were
excluded from this calculation because they were antidilutive.
  Listed
below are the basic and diluted share calculations for the years ended
December 31, 2007, 2006 and 2005:
  2007
                
                
                2006
                
                
                2005Average
      common shares outstanding
                
                
                20,325,285
                
                
                
                20,031,833
                
                
                
                19,741,223Shares
      used in computing basic net incomeper
      share
                
                
                20,325,285
                
                
                
                20,031,833
                
                
                
                19,741,223Dilutive
      effect of stock options
                
                
                237,360
                
                
                
                76,855
                
                
                
                127,733Shares
      used in computing diluted net incomeper
      share
                
                
                20,562,645
                
                
                
                20,108,688
                
                
                
                19,868,956
  
 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
  Comprehensive
income (loss) is comprised of net income (loss) and currency translation
adjustments and is presented in the consolidated statements of changes in
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 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.
  58
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  New
Accounting Pronouncements
 
 In June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement 109” (“FIN
48”).  This statement clarifies the criteria an individual tax
position must satisfy for some or all of the benefits of that position to be
recognized in a company’s financial statements.  FIN 48 prescribes a
recognition threshold of more-likely-than-not, and a measurement attribute for
all tax positions taken or expected to be taken on a tax return, in order for
those tax positions to be recognized in the financial
statements.  Effective January 1, 2007, the Company has adopted the
provisions of FIN 48 and there was no material effect on the consolidated
financial statements.  As a result, there was no cumulative effect
related to adopting FIN 48.
  In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements.” SFAS No.
157 provides guidance for using fair value to measure assets and liabilities and
is intended to respond to investors’ requests for expanded information about the
extent to which a company measures assets and liabilities at fair value, the
information used to measure fair value and the effect of fair value measurements
on income. SFAS No. 157 applies whenever other standards require (or permit)
assets or liabilities to be measured at fair value but does not expand the use
of fair value to any new circumstances. SFAS No. 157 also requires expanded
disclosure of the effect on income for items measured using unobservable data,
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions and requires separate disclosure by level within the
fair value hierarchy. The provisions of SFAS No. 157 are effective for interim
financial statements issued for fiscal years beginning after November 15, 2007,
or the Company’s fiscal 2008. The Company is currently evaluating the impact of
adopting SFAS No. 157 on the Consolidated Financial Statements, but does not
expect the adoption of SFAS No. 157 to have a material effect on its
consolidated financial position, results of operations or cash
flows.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-including an amendment of SFAS No.
115.” The new statement allows entities to choose, at specified election dates,
to measure eligible financial instruments and certain other items at fair value
that are not otherwise required to be measured at fair value. If a company
elects the fair value option for an eligible item, changes in that item’s fair
value in subsequent reporting periods must be recognized in current earnings.
SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, in
the case of the Company, fiscal 2008.  The Company is currently
evaluating the impact of adopting SFAS No. 159 on the consolidated financial
statements.
  In June
2007, the FASB issued EITF No. 07-03, “Accounting for nonrefundable advance
payments for goods or services received for use in future research and
development activities.”  EITF No. 07-03 requires companies that make
nonrefundable advance payments for future research and development activities to
capitalize the payment, and recognize the expense as the goods are delivered or
services are performed.  EITF No. 07-03 is effective for fiscal years
beginning after December 15, 2007, (in the case of the Company, fiscal 2008),
but is to be applied prospectively to new contracts entered into on or after the
effective date.  The Company does not expect the adoption of EITF No.
07-03 will have a material effect on the consolidated financial
statements.
  In
November 2007, the EITF of the FASB reached a consensus on Issue No.
07-01,"Accounting for Collaborative Arrangements," ("EITF No. 07-01"). EITF No.
07-01 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. 07-01 is effective for the Company for
the reporting period beginning April 1, 2009. The Company is in the process of
evaluating the impact of the adoption of EITF No. 07-01 on its consolidated
financial statements.
  59
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  In
December 2007, the FASB issued SFAS No. 141(Revised), “Business
Combinations,” or 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 noncontrolling interest in the acquiree 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 noncontrolling interest in the acquiree, 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.  We expect to
adopt this statement on January 1, 2009.  SFAS No. 141(R)’s
impact on accounting for business combinations is dependent upon acquisitions at
that time.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — An Amendment of ARB No. 51" (“SFAS
160”). SFAS 160 amends Accounting Research Bulletin No. 51 to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires
consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. The standard
also requires disclosure on the face of the consolidated statement of income, of
the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. In addition this standard establishes a single method
of accounting for changes in a parent’s ownership interest in a subsidiary that
do not result in deconsolidation and requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated. SFAS 160 also includes
expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 becomes effective for fiscal periods beginning
after December 15, 2008. The Company expects to adopt this statement on
January 1, 2009.  As the Company currently does not have a
noncontrolling interest in a subsidiary, the effect of SFAS 160 if any, will be
dependent on changes in the Company’s current business structure.
  2.
PROPERTY AND EQUIPMENT
  As of
December 31, property and equipment consisted of the
following:
 
 2007
                
                
                2006Equipment
                
                $
                5,615
                
                
                $
                4,841Building
      improvements
                
                
                4,088
                
                
                
                3,039Furniture
      and fixtures
                
                
                113
                
                
                
                95Land
                
                
                1,380
                
                
                
                1,129Leasehold
      improvements
                
                
                771
                
                
                
                750Total
      property and equipment
                
                
                11,967
                
                
                
                9,854Less
      - accumulated depreciation and amortization
                
                
                (6,486
                )
                
                
                (5,796
                )Net
      property and equipment
                
                $
                5,481
                
                
                $
                4,058
  Depreciation
expense was $966, $793 and $710 in 2007, 2006 and 2005,
respectively.
  60
 
 STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
 
 3.
INTANGIBLE ASSETS
  As of
December 31, intangible assets consisted of the following:
  2007
                
                
                2006
                
                
                LivesGoodwill
                
                $
                4,774
                
                
                $
                4,822
                
                
                N/ALess
      - accumulated amortization
                
                
                (573
                )
                
                
                (573
                )Net
      goodwill
                
                $
                4,201
                
                
                $
                4,2492007
                
                
                2006
                
                
                LivesIntangible
      assets
                
                
                3,134
                
                
                
                3,134
                
                
                2-20Less
      - accumulated amortization
                
                
                (1,287
                )
                
                
                (1,046
                )Net
      intangible assets
                
                $
                1,847
                
                
                $
                2,088
 
 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 product group. The reduction in
goodwill in 2007 is due to the utilization of foreign tax benefits from the 2001
acquisition of Azur Environmental.  The Company continues to sell the
products acquired through these acquisitions at substantial
margins.
  The other
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 continued launches of new products in the
future based upon this intellectual property.
  A
director of the company was a majority shareholder of MCI and MCI continues to
receive royalties from the Company.  Royalties paid to MCI in 2007,
2006 and 2005 were $172, $210 and $172, respectively.
  Amortization
of these intangible assets is on a straight line basis over their useful lives
and was $240, $234 and $214 in 2007, 2006 and 2005, respectively. The following
table is a schedule of the expected amortization expense in each of the next
five years:


Year
                
                Amount2008
                
                $
                2372009
                
                
                1562010
                
                
                1192011
                
                
                1192012
                
                
                119
 
 
 61
 
 STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
 
 4.
ACCRUED EXPENSES
  As of
December 31, accrued expenses consisted of the following:
 
 2007
                
                
                2006Royalties
                
                $
                138
                
                
                $
                202Compensation
                
                
                1,241
                
                
                
                583Professional
      fees
                
                
                210
                
                
                
                204Purchases
                
                
                252
                
                
                
                305Other
                
                
                25
                
                
                
                161Total
      accrued expenses
                
                $
                1,866
                
                
                $
                1,455
  5.
LONG-TERM DEBT
  On May 5,
2000, the Company entered into a financing agreement with a commercial bank,
which was amended on August 10, 2007.  This agreement provides for up
to a $5,000 revolving line of credit, none of which was outstanding and all of
which was available at December 31, 2007.  The revolving line of
credit bears a variable interest rate of between 100 basis points and 225 basis
points over the one month LIBOR rate depending upon the ratio of the Company’s
funded debt to EBITDA.  The Company’s annual effective rate of
interest on this line of credit, taking into account the variable interest rate
and LIBOR, was approximately 5.80% at December 31, 2007.
  On
December 13, 2001, the Company entered into an agreement with a commercial bank
to finance the construction of new facilities at its Windham, Maine location.
This agreement provided for up to $1,500 in financing, $351 of which was
outstanding at December 31, 2007, and is repayable over seven years, with
principal payments that began on October 1, 2002. The loan bears a variable
interest rate of between 100 basis points and 275 basis points over the one
month LIBOR rate depending upon the ratio of the Company’s funded debt to
EBITDA, as defined. Payments are due monthly, with equal amortization of
principal payments plus interest. The Company’s annual effective rate of
interest on this loan at December 31, 2007 was approximately 5.80%.
  On August
21, 2007, the Company entered into an agreement with a commercial bank to
finance the construction of new facilities at its Windham, Maine location. This
agreement provided for up to $2,000 in financing, $1,900 of which was
outstanding at December 31, 2007, and is repayable over five years, with
principal payments that began on October 1, 2007. The loan bears a fixed
interest rate of 5.961% with equal amortization of principal payments plus
interest.
  Under the
terms of the above financings, the Company is required to meet certain quarterly
financial covenants that include a ratio of EBITDA to current maturities of debt
plus interest and cash paid for taxes greater than 1.50 and a ratio of funded
debt to EBITDA not to exceed 3.25.  The Company met all of its
financial covenants with respect to this indebtedness at December 31, 2007 and
expects that it will be able to meet all of its financial covenants with respect
to this indebtedness for at least the next twelve months.
  As of
December 31, 2007, the outstanding balance on all of the Company’s
commercial bank debt was $2,251. 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:
  62
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
 2008
                
                $
                6112009
                
                
                5402010
                
                
                4002011
                
                
                4002012
                
                
                3002,251Less
      - current portion of long-term debt obligations
                
                
                (611
                )Long-term
      debt
                
                $
                1,640
  Interest
expense was $78, $48 and $47 in 2007, 2006 and 2005, respectively.
  6.
STOCK OPTIONS AND AWARD PLANS
  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. 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.
  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 Company’s 2000 Stock Incentive 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 income
statement in 2006 and future periods 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
might be recorded in future periods following the adoption of SFAS 123R; and,
the Company has 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 2007 and 2006 is summarized as
follows:
  63
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  2007
                
                
                2006Stock
      options
                
                $
                249
                
                
                $
                76Employee
      stock purchase plan
                
                
                8
                
                
                
                2Restricted
      stock units
                
                
                173
                
                
                
                199Total
      share-based compensation expense
                
                $
                430
                
                
                $
                277
  The
deferred income tax benefit related to share-based compensation expense for the
years ended December 31, 2007 and December 31, 2006 was $120 and $105
respectively.  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.
  Information
with respect to the stock options granted under the 2000 Plan and options
granted separately from the 2000 Plan is summarized as follows:
  Weighted
                
                AggregateNumber
                
                
                
                
                
                
                Average
      Remaining
                
                Instrinsicof
      Shares
                
                
                Price
      Range
                
                Contractual
      term
                
                ValueBalance,
      December 31, 2004
                
                
                2,099,227
                
                
                $
                0.19
                -
                $
                6.94Granted
                
                
                166,500
                
                
                $
                2.51
                -
                $
                3.35Cancelled
      / forefeited
                
                
                (105,067
                )
                
                $
                3.05
                -
                $
                4.69Exercised
                
                
                (500,160
                )
                
                $
                0.19
                -
                $
                3.65Balance,
      December 31, 2005
                
                
                1,660,500
                
                
                $
                1.88
                -
                $
                6.94Granted
                
                
                100,895
                
                
                $
                3.80
                -
                $
                4.00Cancelled
      / forfeited
                
                
                (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
                
                
                $
                2.50
                -
                $
                6.94
                
                5.7
      years
                
                $
                2,016Vested
      and excercisable atDecember
      31, 2007
                
                
                1,070,945
                
                
                $
                2.50
                -
                $
                6.94
                
                5.2
      years
                
                $
                1,774Expected
      to vest as ofDecember
      31, 2007
                
                
                1,239,120
                
                
                $
                2.50
                -
                $
                6.94
                
                5.7
      years
                
                $
                1,998
  As of
December 31, 2007, options covering 1,070,945 shares were exercisable with
a weighted average exercise price of $3.72 per share, and 761,071 shares were
available for future grant under the 2000 Plan.
  For
options granted in 2007, the Company recognized as compensation expense, the
fair value of the option granted, amortized over the vesting period of the
options.  As of December 31, 2007 there was $226 of unrecognized
compensation expense related to non-vested stock options that is expected to be
recognized over a weighted average period of 2.5 years.
  64
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  The total
aggregate intrinsic value of options exercised during the years ended December
31, 2007, 2006 and 2005 was $257, $272 and $282 respectively.  Cash
received from the exercises during the years ended December 31, 2007, 2006 and
2005 was $537, $389 and $1,335 and are included within the financing activity
section of the consolidated statements of cash flows.
  The
following table provides additional information about the Company’s stock
options outstanding at December 31, 2007:
  Options
      Outstanding
                
                
                Options
      ExercisableWeighted
      Average
                
                
                
                
                
                Wtd.
      AverageRange
      of
                
                
                Number
      of
                
                
                Remaining
                
                Exercise
                
                
                Number
      of
                
                
                ExerciseExercise
      Prices
                
                
                Shares
                
                
                Contractual
      Life
                
                Price
                
                
                Shares
                
                
                Price$
                2.50
                
                -
                
                $
                2.61
                
                
                
                61,000
                
                
                6.3Years
                
                $
                2.52
                
                
                
                61,000
                
                
                $
                2.52$
                2.88
                
                -
                
                $
                4.69
                
                
                
                1,177,370
                
                
                5.7Years
                
                $
                3.81
                
                
                
                996,695
                
                
                $
                3.77$
                5.17
                
                -
                
                $
                6.94
                
                
                
                13,250
                
                
                3.6Years
                
                $
                5.49
                
                
                
                13,250
                
                
                $
                5.49$
                2.50
                
                -
                
                $
                6.94
                
                
                
                1,251,620
                
                
                5.7Years
                
                $
                3.77
                
                
                
                1,070,945
                
                
                $
                3.72
  The
weighted average fair value at the date of grant for options granted during
2007, 2006 and 2005 is estimated at $2.55, $2.50 and $2.09 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
59% in 2007, 69% in 2006 and 85% in 2005, risk-free interest rate of 4.25% in
2007, 4.57% in 2006 and 3.93% in 2005, and an expected option life of 5.5 years
in 2007, 6 years in 2006, and 5 years in 2005.  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.
  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 cost of the grant is charged to operations over the vesting
period.
  The
following table summarizes the changes in non-vested restricted stock units for
the three year period ending December 31, 2007:
  65
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  Weighted
      AverageGrant
      Date
                
                
                AggregateShares
                
                
                Fair
      Value
                
                
                Intrinsic
      ValueNon-vested
      RSU's at December 31, 2004
                
                
                100,000
                
                
                $
                3.55Granted
                
                
                77,296
                
                
                $
                3.35Vested
                
                
                (56,856
                )
                
                $
                3.73Cancelled
      / forfeited
                
                
                (11,430
                )
                
                $
                3.94Non-vested
      RSU's at December 31, 2005
                
                
                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
                
                
                (38,788
                )
                
                $
                3.54Cancelled
      / forfeited
                
                
                (15,750
                )
                
                $
                4.00Non-vested
      RSU's at December 31, 2007
                
                
                100,877
                
                
                $
                4.36
                
                
                $
                440Expected
      to vest at December 31, 2007
                
                
                96,077
                
                
                $
                4.36
                
                
                $
                $419
  The Company recorded compensation
expense of $174, $199 and $237 for the years ended December 31, 2007, 2006 and
2005, 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, 2007, 96,077 of the above non-vested RSU’s are expected to vest and
there is approximately $335 of unrecognized compensation expense related to
non-vested RSU’s that are expected to vest over a weighted average of 2.4
years.
  7.
SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
  Financial
Accounting Standards Board Statement 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 bio-services division. 
Such antibodies are incorporated into test kits manufactured by the Company's
industrial bio-detection services division for the detection of a wide variety
of substances related to food safety and water quality.  In addition,
antibodies from the bio-services 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
bio-services and industrial bio-detection services divisions for review by the
Chief Operating Decision Maker.
  Geographic:
  The
following table sets forth revenues by geographic region:
  66
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
   Twelve
      MonthsEnded
      December 31,2007
                
                
                2006
                
                
                2005United
      States
                
                $
                21,154
                
                
                $
                19,498
                
                
                $
                18,368Rest
      of the world
                
                
                6,053
                
                
                
                6,024
                
                
                
                6,477Total
                
                $
                27,207
                
                
                $
                25,522
                
                
                $
                24,845
  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.
  Products
and Services:
  The
following table sets out revenues by product category.
 
 Year
      EndedDecember
      31,2007
                
                
                2006
                
                
                2005Water
      quality
                
                $
                5,099
                
                
                $
                5,203
                
                
                $
                5,139Food
      safety
                
                
                7,671
                
                
                
                9,215
                
                
                
                8,981Contract
      revenue
                
                
                156
                
                
                
                -
                
                
                
                -Antibody
                
                
                14,281
                
                
                
                11,104
                
                
                
                10,725Net
      revenues
                
                $
                27,207
                
                
                $
                25,522
                
                
                $
                24,845
   8.
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, 2007, 2006
and 2005, was $843, $738 and $710, respectively. Future commitments under
non-cancelable leases at December 31 are as follows:
  2008
                
                $
                7982009
                
                
                7822010
                
                
                772011
                
                
                402012
                
                
                302013
      and thereafter
                
                
                -$
                1,727
 
  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 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, and no amounts have been included in the
non-cancelable lease table above.
  67
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  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.
  9.
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 50% basis up to 6% of gross wages. In 2007, 2006 and 2005,
the Company recognized expense of $172, $153 and $153, respectively, associated
with this plan.
  10.
INCOME TAXES
  The
components of income before tax expense as of December 31 are as
follows:
  2007
                
                
                2006
                
                
                2005United
      States
                
                $
                1,673
                
                
                $
                790
                
                
                $
                719Rest
      of the world
                
                
                163
                
                
                
                176
                
                
                
                161Total
                
                $
                1,836
                
                
                $
                966
                
                
                $
                880
  The
income tax expense (benefit) consists of the following:
  2007
                
                
                2006
                
                
                2005Federal
                current
                
                $
                95
                
                
                $
                56
                
                
                $
                -deferred
                
                
                710
                
                
                
                82
                
                
                
                179805
                
                
                
                138
                
                
                
                179State
                current
                
                
                63
                
                
                
                90
                
                
                
                18deferred
                
                
                59
                
                
                
                1
                
                
                
                99122
                
                
                
                91
                
                
                
                117Foreign
                current
                
                
                49
                
                
                
                53
                
                
                
                -deferred
                
                
                -
                
                
                
                -
                
                
                
                -49
                
                
                
                53
                
                
                
                -Total
                
                
                $
                976
                
                
                $
                282
                
                
                $
                296
  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:
  68
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  
 2007
                
                
                2006
                
                
                2005Statutory
      tax rate
                
                
                34.0
                %
                
                
                34.0
                %
                
                
                34.0
                %State
      taxes, net of U.S. Federal benefit
                
                
                4.4
                %
                
                
                6.2
                %
                
                
                8.8
                %Foreign
      NOL not previously recorded
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                (5.5
                %)Provision
      for uncertain tax positions
                
                
                10.4
                %
                
                
                0.0
                %
                
                
                0.0
                %Additional
      tax for reconciliation to 2006 return
                
                
                6.2
                %
                
                
                0.3
                %
                
                
                1.0
                %Research
      and development credits
                
                
                (6.7
                %)
                
                
                (14.6
                %)
                
                
                (11.0
                %)Other,
      net
                
                
                4.9
                %
                
                
                3.3
                %
                
                
                6.3
                %Total
                
                
                53.2
                %
                
                
                29.2
                %
                
                
                33.6
                %
  Significant
components of the Company’s deferred tax assets as of December 31 are as
follows:
  2007
                
                
                2006Net
      operating loss carryforwards
                
                $
                6,104
                
                
                $
                7,501Credit
      carryforwards
                
                
                967
                
                
                
                848Amortization
      and depreciation
                
                
                2,921
                
                
                
                2,531Deferred
      compensation
                
                
                61
                
                
                
                34Non-deductible
      reserves
                
                
                95
                
                
                
                35Inventory
      costs not currently deductible
                
                
                200
                
                
                
                178Total
      deferred tax assets
                
                
                10,348
                
                
                
                11,127Valuation
      allowance
                
                
                (1,758
                )
                
                
                (1,812
                )Net
      deferred tax assets
                
                $
                8,590
                
                
                $
                9,315
  At
December 31, 2007, management concluded that no valuation allowance is necessary
for federal deferred tax assets after considering the positive and negative
evidence. In making this determination, the Company considered the following
positive factors:
  ·
              U.S.
      income before taxes of $1,673, $790 and $719 for each of the three years
      ending December 31, 2007, 2006 and 2005 respectively;·
              operating
      margins of 60% in  2007, 54% in 2006 and 54% in
      2005;·
              past
      and anticipated new product launches;·
              use
      of annual election to capitalize research and experimentation expenses
      under IRS code 59(e), which will then be amortized over a ten year period;
      and·
              the
      expansion of the Company’s capacity for rabbit antibodies, with completion
      of a new rabbit barn in 2007.
  The
Company also considered the following negative factors:
  ·
              uncertainty
      of the US economy heading into 2008; and·
              federal
      net operating loss carry forwards begin to expire in
  2010.
  69
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  At
December 31, 2007, management has concluded that a full valuation allowance
of approximately $119 necessary for deferred tax assets in certain state
jurisdictions. For the state jurisdictions, management has considered the same
positive and negative evidence as utilized for the federal deferred tax assets
described above. The Company has also considered the substantial reduction of
its presence in North Carolina and Pennsylvania since the time when the net
operating losses were incurred in those jurisdictions as additional negative
evidence.
  At
December 31, 2007, the Company had approximately $6,208 of net operating loss
carryforwards for tax purposes related to operations in the United Kingdom
(“UK”).  Management considered positive and negative indicators in
concluding that a substantial valuation allowance of approximately $1,638 was
necessary for the foreign deferred tax assets of approximately $1,738. The
positive indicators included the contribution to income before taxes by the
foreign operations in the UK for 2007 and 2006, and the expected income before
taxes in the UK for 2008. 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
2008 resulting from concerns about the future need for a foreign
subsidiary.
  The net
operating loss carryforwards differ from the accumulated deficit, principally
due to differences in the timing of recognition of certain research and
development expenses, depreciation and amortization, other non-deductible
reserves and limitations under federal and state tax regulations for acquired
net operating loss carryforwards.
  As of
December 31, 2007, the Company had Federal net operating loss
carryforwards, including those acquired, of approximately $11.9 million, which
begin to expire as follows:
  Year
                
                NOL
                  (in
                  thousands)2010
                
                $
                4,8022017
                
                
                7602018
                
                
                1,3272019
                
                
                5502020
                
                
                662021
                
                
                562022
                
                
                2,2682024
                
                
                2,0322025
                
                
                3Total
                
                $
                11,864
  Based on
the best information available to the Company today, the Company expects to have
sufficient future taxable income to utilize such NOLs prior to the expiration of
the net operating loss carry forwards.
  Of the
total net operating loss carryforwards, $7,505 is subject to federal tax
regulations concerning limitations as to utilization of net operating loss
carryforwards 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 does not expect net operating loss carryforwards to
expire unused.
 
 As of
January 1, 2007, the Company provided a liability for approximately $362 of
unrecognized tax benefits, of which $326 would impact the Company’s effective
tax rate if recognized.  For the year ended December 31, 2007,
unrecognized tax benefits increased $218 to $580, of which approximately $513
would impact the Company’s effective tax rate if recognized.
  70
  STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
  The
change in our unrecognized tax benefits for the year ended December 31,
2007 was:
  
 January
      1, 2007
              
              $
              362Increases
      from positions taken in prior periods
              
              
              128Decreases
      from positions taken in prior periods
              
              
              -Increases
      from positions taken in current period
              
              
              92Decreases
      in unrecognized tax benefits relating to settlements with taxing
      authorities
              
              
              (2
              )Reductions
      to unrecognized tax benefits as a result of a lapse of applicable statute
      of limitations
              
              
              -December
      31, 2007
              
              $
              580
 
 
 The
Company is subject to U.S. Federal and United Kingdom income tax, as well as
income taxes of multiple state jurisdictions.  The Company’s 2005
income tax return was reviewed by the Internal Revenue Service. The 2005
examination resulted in an increase of tax for the return period of
approximately $6.
 
 The
Company recognizes interest and penalties related to uncertain tax positions in
income tax expense.  Upon adoption of FIN 48 and at December 31, 2007,
the Company had no interest or penalties accrued related to uncertain tax
positions, due to available net operating loss carryforwards.
 
 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 expects no change
in its liability for unrecognized tax benefits related to positions taken in
prior periods during the next twelve months.
  71
 
 STRATEGIC
DIAGNOSTICS INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  DECEMBER
31, 2007
 (in
thousands, except share and per share data)
   11.
QUARTERLY FINANCIAL DATA (unaudited)
 
 Three
      Months Ended,March
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31(In
      thousands except per share data)2007Revenues
                
                $
                6,647
                
                
                $
                6,725
                
                
                $
                6,564
                
                
                $
                7,271Gross
      profit (1)
                
                
                4,070
                
                
                
                4,078
                
                
                
                3,897
                
                
                
                4,396Net
      income (loss)
                
                
                490
                
                
                
                204
                
                
                
                -
                
                
                
                166Basic
      earnings (loss) per share
                
                
                0.02
                
                
                
                0.01
                
                
                
                -
                
                
                
                0.01Diluted
      earnings (loss) per share
                
                
                0.02
                
                
                
                0.01
                
                
                
                -
                
                
                
                0.012006Revenues
                
                $
                6,268
                
                
                $
                5,640
                
                
                $
                6,624
                
                
                $
                6,990Gross
      profit (1)
                
                
                3,328
                
                
                
                2,912
                
                
                
                3,659
                
                
                
                3,902Net
      income (loss)
                
                
                92
                
                
                
                (231
                )
                
                
                332
                
                
                
                491Basic
      earnings (loss) per share
                
                
                -
                
                
                
                (0.01
                )
                
                
                0.02
                
                
                
                0.02Diluted
      earnings (loss) per share
                
                
                -
                
                
                
                (0.01
                )
                
                
                0.02
                
                
                
                0.02(1) Gross
      profit is revenues less manufacturing expenses.
 
 
 72
  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, 2008
              /s/ Matthew H. KnightMatthew
      H. KnightPresident,
      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, 2008
              /s/ Grover C. WrennGrover
      C. WrennChairman
      of the Board of DirectorsDate: March
      31, 2008
              /s/ Matthew H. KnightMatthew
      H. KnightPresident,
      Chief Executive Officer and Director(Principal
      Executive Officer)Date: March
      31, 2008
              /s/ Stanley FronczkowskiStanley
      FronczkowskiVice
      President – Finance and Chief Financial Officer (Principal Financial and
      Accounting Officer)Date: March
      31, 2008
              /s/ Steven BeckerSteven
      BeckerDirectorDate: March
      31, 2008
              /s/ Morton CollinsMorton
      CollinsDirectorDate: March
      31, 2008
              /s/ Geoffrey DavisGeoffrey
      DavisDirectorDate: March
      31, 2008
              /s/ Herbert LotmanHerbert
      LotmanDirector
 
 Date: March
      31, 2008
              /s/ Clifford L. SpiroClifford
      L. SpiroDirectorDate: March
      31, 2008
              /s/ Richard van den BroekRichard
      van den BroekDirectorDate: March
      31, 2008
              /s/ Stephen L. WaechterStephen
      L. WaechterDirector








73