<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             -----------------------

                                    FORM 10-K
(Mark One)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [FEE REQUIRED]

                   For the Fiscal Year Ended December 31, 1998

[   ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

               For The Transition Period From _______ to _________

                          Commission File No. 0-684401

                           STRATEGIC DIAGNOSTICS INC.
             (Exact name of Registrant as specified in its charter)
                            -------------------------

                       Delaware                             56-1581761
             -------------------------------             ------------------
             (State or other jurisdiction of              (I.R.S. Employer
              incorporation or organization)             Identification No.)

                  111 Pencader Drive
                   Newark, Delaware                            19702
         ---------------------------------------             ---------
         (Address of principal executive offices)            (Zip Code)

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

        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 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 past 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 ___
                                      ---

         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. [ ]

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant was $19,500,000 as of March 8, 1999.

         As of March 8, 1999 there were 13,262,157 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 with the Securities and Exchange Commission relative to
the Company's 1999 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Report.


<PAGE>
<TABLE>

<S>                                                                                                                       <C>    
PART I......................................................................................................................1

   ITEM 1.     BUSINESS.....................................................................................................1
     Overview...............................................................................................................1
     Immunoassay Technology.................................................................................................1
     Markets and Products...................................................................................................3
     Major Customers........................................................................................................7
     Sales and Marketing Strategy...........................................................................................7
     Regulatory Approvals...................................................................................................7
     Manufacturing..........................................................................................................9
     Research and Development...............................................................................................9
     Proprietary Technology and Patents....................................................................................10
     Competition...........................................................................................................12
     Employees.............................................................................................................12
   ITEM 2.    PROPERTIES...................................................................................................12
   ITEM 3.    LEGAL PROCEEDINGS............................................................................................13
   ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................................13
   ITEM 4(A)  EXECUTIVE OFFICERS OF THE REGISTRANT.........................................................................14

PART II....................................................................................................................15

   ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................15
   ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA........................................................................16
   ITEM 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION.......................17
     Forward Looking Statements............................................................................................17
     Overview..............................................................................................................17
     Recent Developments...................................................................................................19
     Results of Operations.................................................................................................20
     Year ended December 31, 1998 versus year ended December 31, 1997......................................................20
     Year ended December 31, 1997 versus year ended December 31, 1996......................................................21
     Liquidity.............................................................................................................21
     Year 2000 Issues......................................................................................................22
   ITEM 8.     FINANCIAL STATEMENTS AND SUPLEMENTARY DATA..................................................................23
   ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................23

PART III...................................................................................................................23

   ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT..............................................................23
   ITEM 11.    EXECUTIVE COMPENSATION......................................................................................23
   ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................23
   ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................................24

PART IV....................................................................................................................24

   ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.............................................24



</TABLE>


<PAGE>



                                     PART I

ITEM 1. BUSINESS

Overview


         Strategic Diagnostics Inc. (the "Company") develops, manufactures, and
markets immunoassay-based test kits and strip tests for rapid, cost effective
detection of a wide variety of different analytes in three primary market
segments: water quality, industrial testing and agricultural. The Company is the
entity resulting from the combination of EnSys Environmental Products, Inc.
("EnSys"), Ohmicron Corporation ("Ohmicron") and Strategic Diagnostics, Inc.
("SDI"). On August 30, 1996, Ohmicron was merged with and into SDI. On December
30, 1996, SDI was merged with and into EnSys. The surviving entity was then
renamed Strategic Diagnostics Inc.

         The Company is a recognized leader in the field of immunoassay
research, development and manufacturing and develops products in markets where
the attributes of immunoassay technology (i.e. speed, ease-of-use, cost
effective, quantitation, and flexibility), meet specific customer needs. The
substances detected by the Company's test kits and strip tests include chemicals
used to treat drinking water, proprietary chemicals used in industrial
processes, environmental contaminants, pesticides, genetically engineered traits
in plants, and diseases of commercial crops.

         The Company's tests for the detection of pesticides and environmental
contaminants (D TECH(R), EnviroGard(TM), EnSys RISc(TM) and RaPID Assay(R)) are
well recognized in the immunoassay field testing market. The Company sells its
environmental products through its direct sales force in the U.S. and through
distributors in Europe and the rest of the world. The Company's "one-step" strip
tests hold a leading position in the emerging markets of analytical tests for
the detection of water-soluble polymers and specific traits of genetically
engineered plants. In addition to products serving the three primary markets,
the Company manufactures and sells select immunoassay test kits for medical
research applications.

         In addition to developing and marketing test kits and strip tests, the
Company provides fully integrated monoclonal antibody development and large
scale manufacturing services to pharmaceutical and medical diagnostic companies
through it's wholly-owned subsidiary, TSD BioServices, Inc.


Immunoassay Technology

         An immunoassay is an analytical test that uses antibodies to detect the
presence of a target compound in a complex sample matrix with high degrees of
precision and accuracy.


         The technology was first developed more than 25 years ago and has
replaced many laboratory diagnostic tests in the medical industry. The Company
has applied immunoassay technology 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
specific, accurate, cost-effective and timely data in a manner previously
unavailable.


         The major attributes of immunoassay technology can be summarized as
follows:

         Sensitivity:      Immunoassays can measure extremely low concentrations
                           of compounds (routinely as low as parts per billion;
                           i.e., one millionth of one gram in a liter of
                           liquid).
         Specificity:      Immunoassays can measure one specific compound out of
                           a chemical "soup," reducing the need for sample
                           preparation.
         Speed:            Total time to obtain a test result ranges from 1
                           minute to several hours as compared to several days
                           to several weeks with many competing laboratory
                           testing methods.
         Cost:             Price per test for immunoassays range from $1 to $50;
                           price per test for similar laboratory testing can
                           range from $5 to $1,000.
         Accuracy:         Immunoassays are typically as or more accurate than
                           their laboratory counterparts.
         Flexibility:      Immunoassays can be developed in a wide variety of
                           test formats, including multiple sample
                           laboratory-based tests, disposable, single-use units,
                           and large automated instruments. They can be designed
                           for use by non-technical persons on-site under a
                           variety of field conditions for testing of diverse
                           sample types.

                                       1
<PAGE>

         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 response to invasion by foreign substances like
bacteria and viruses. An antibody physically binds only to the substance that
elicited its production. This characteristic of specific binding makes
antibodies useful tools for detecting substances in complex sample matrices
(e.g., blood, plant tissue, soil and water). Methods exist for isolating and
purifying antibodies from animals, and labeling them in such a way that they can
be used as components, or reagents, within a test to detect the presence of the
substance of interest. Immunoassay technology has advanced to the point that
antibodies can be made to a wide variety of substances including microorganisms,
drugs, hormones, proteins, 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 customer's
application. In the human clinical chemistry market, antibodies are employed as
reagents on large, automated instruments that can analyze hundreds of samples
per hour. In contrast, antibodies can also be packaged into single use,
disposable formats such as the 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 and may include factors such as ease-of-use, cost per test, number of
samples to be tested, the location the test will be performed and experience of
the user.


         The Company has expertise and proprietary technology relating to the
development and manufacture of primarily five immunoassay formats: latex
filtration, magnetic particle, one-step strip tests, coated-tube and microtiter
plate. Latex filtration assays offer ease-of-use, field portability and
semi-quantitative results and are ideally suited for on-site, field screening
applications where limited numbers of samples are to be analyzed.

         Magnetic particle assays have a greater number of steps and require
more technical expertise to execute than latex filtration assays, but are more
suited to the processing of larger number of samples at a single time, can be
highly quantitative, and are relatively inexpensive on a cost-per-test basis.
These characteristics make magnetic particle immunoassays effective measurement
tools in both laboratory and certain field applications, especially where highly
precise results are required.

         Lateral flow immunoassay strips, often referred to as 'one-step' strip
tests, require only that the user apply a prepared sample to the test strip to
obtain the test result--much like pH or Litmus paper tests. The low cost and
simplicity of these tests make them ideally suited for a wide range of
applications in many different markets. The current state-of-the-art of lateral
flow immunoassays is such that the results obtained using these tests are
qualitative, not quantitative, which imposes some limits on the applicability of
the format.

         Coated-tube immunoassays are well suited for analyzing relatively large
numbers of samples in the field, yield a semi-quantitative result and are
intermediate in their ease-of-use and cost-per-test.

         Microtiter plate assays are well established in the medical diagnostic
industry and offer many of the advantages of magnetic particle assays, including
quantitative results and the capacity to analyze large numbers of samples at a
relatively low cost-per-test. Special laboratory equipment, relatively high
levels of technical training, and a time-to-result measured in hours limits this
test format to laboratory applications.


         All measurement technologies, including immunoassays, have strengths
and limitations. 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.

                                       2
<PAGE>

Markets and Products

         The Company sells products in the water quality, industrial testing and
agricultural market categories through its direct sales force, through a network
of over 40 distributors in Canada, Mexico, Latin America, Europe and Asia, and
through its corporate partners. This section describes the Company's current
markets and products as well as those in development.

         Water Quality


         The Company believes that all of its products sold in this market are
unique to the Company and provide high value testing solutions to fill largely
unserviced analytical needs in this critical and highly regulated industry. In
this arena, the Company markets established products such as those for the
detection of pesticides, as well as emerging products for the detection of
pathogenic microorganisms and toxic chemicals resulting from chlorine
disinfection of drinking water. Also included in this market category are
products developed and others currently under development for the detection of
water treatment polymers used to clarify water and prevent scale formation.


         Water Treatment Polymers. The water treatment market encompasses both
industrial and municipal water treatment systems. Water treatment chemicals,
typically polymers, are critical to preparing finished drinking water in
municipal settings and to controlling water quality in industrial settings.
Competition between water treatment chemical manufacturers is intense and new
chemicals have evolved to the point that some of the more effective chemicals
are quite expensive. Cost effective use of these chemicals requires careful
control of polymer concentrations throughout the system in which they are being
employed. Many of these polymers are toxic and have been implicated in fish
kills when industrial effluents have been discharged to natural bodies of water.
As a result, there is increased regulatory pressure to measure the amount of
chemical being discharged into surface waters. Polymer detection is quite
difficult and currently there is no other detection method capable of measuring
these substances at the levels at which they are used or discharged in
effluents.


         The Company, working in collaboration with its corporate partners, has
successfully developed highly sensitive and accurate immunoassays for the
detection of a number of water treatment polymers. These immunoassays have been
demonstrated to be a reliable and cost-effective way to measure water treatment
polymers in samples from municipal water supplies, boilers, cooling towers, and
other processes and raw water sources. Some specific applications are: (i)
measuring concentrations of chemicals to allow more efficacious use of costly
compounds, (ii) detecting the presence of particular compounds in effluent
discharge in order to gauge regulatory compliance, and (iii) monitoring
processes to prevent fouling of highly expensive systems (like reverse osmosis)
by excess polymer.


         Pesticides. The entrance of pesticides into the water supply as a
result of agricultural and residential runoff continues to be a problem
requiring analytical testing. In areas of substantial agricultural activity,
drinking water is tested for several pesticides in order to ensure compliance
with federal regulations. Imported grains, fruits and vegetables are tested for
the presence of pesticide residues prior to use in the U.S. In addition,
pesticide residues in crops call for extensive testing at the time of pesticide
registration or re-registration under the Federal Insecticide, Fungicide, and
Rodenticide Act (FIFRA). In spite of their banned status, pesticides such as DDT
and chlordane still persist in soil at sites where they were stored or
distributed. The clean up of these sites requires the use of specific analytical
methods of pesticide detection.

         Cryptosporidium and Giardia. During 1994, the Company entered into an
exclusive five-year license agreement, under which it would manufacture and sell
Hydrofluor(TM), an EPA-accepted immunoassay-based method for detecting the
pathogenic protozoa Cryptosporidium and Giardia in water. According to the EPA,
Cryptosporidium and Giardia cause more outbreaks of disease than any other water
born pathogens. The Company's Hydrofluor-Combo(TM) test kit has been designated
as the American Society for Testing and Materials (ASTM) standard method for
detection of these pathogenic protozoa and also has been designated as the
method for use in complying with the EPA's Information Collection Rule to
establish the extent of contamination in the nation's drinking water.


         Total Trihalomethanes. Trihalomethanes are regulated, toxic by-products
that result from chlorine disinfection of drinking water. The Company's test is
a non-immunoassay-based test for the detection of `total trihalomethanes'
(TTHMs). The test is fast, easy and inexpensive, detects TTHMs at levels much
lower than the new proposed safe drinking water guideline. The Company's TTHM
kit has received US EPA Method Approval (Method 8530).

                                       3
<PAGE>
         RaPID Assay(R) and EnviroGard(TM). The RaPID Assay(R) and
EnviroGard(TM) pesticide test kits are being used extensively by water quality
researchers, resource managers, regulators and drinking water system operators
for surface and groundwater monitoring, drinking water source and supply
management, and chemical fate and transport studies. Users of the Company's
water quality pesticide products include 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.

         Industrial Testing

         The industrial testing market category is comprised of immunoassays for
pollutants, proprietary chemicals and industrial markers.


         Pollutants. Analysis of soil, water and waste samples to determine the
presence of hazardous chemicals has become increasingly important in connection
with environmental remediation and environmental monitoring activities. These
activities are largely the result of environmental legislation such as RCRA,
CERCLA, TSCA, the Safe Drinking Water Act (SDWA) and Federal Water Pollution
Control Act (the "Clean Water Act"). The Company believes that approximately
1,200 commercial environmental testing laboratories, as well as "in-house"
laboratories at industrial and disposal facilities provide environmental
testing.


         Environmental remediation activities require a substantial amount of
testing in connection with the clean up of contaminated sites. After initial
characterization of toxic chemicals at a site, substantial testing typically is
required to complete an assessment of the site to determine the extent and
location of contamination and the appropriate remediation plan. Upon the
commencement of the remediation project, additional testing is necessary to
determine the effectiveness of the remediation measures. In addition, ongoing
testing to monitor soil and groundwater is often required after completion of
the remediation activities. The contaminants of primary concern for remediation
activities include petroleum fuel products, polyaromatic hydrocarbons (PAHs),
polychlorinated biphenyls (PCBs), benzene, certain metals and chlorinated
solvents.

         Environmental monitoring activities under SDWA and National Pollution
Discharge Elimination System (NPDES) legislation require periodic testing for
various hazardous chemicals. The nation's 58,000 drinking water systems test for
contaminants such as metals, benzene, other volatile organic compounds and
microbiological contamination. Approximately 6,400 major industrial and
municipal wastewater treatment facilities monitor and test wastewater for
contaminants such as chlorinated solvents, metals and volatile organic
compounds. Hazardous waste handling and disposal companies carry out large
volumes of analytical work, including pre-acceptance testing to determine the
suitability of waste streams for disposal and routine testing of incoming
shipments. In addition, the ongoing management of chemicals in the petrochemical
and pesticide industries also results in the need to test samples at many points
in the production, use and disposal cycle. Electrical utilities have on-going
analytical needs pertaining to disposal of PCB containing materials.

         Proprietary Chemicals. The proprietary chemical market category
includes tests, commissioned by chemical manufacturers, that specifically
measure the particular compound of interest. In the chemical market category the
benefits of immunoassay testing have led to three key applications: (i)
regulatory registration, in which immunoassay data is generated to support the
registration of a product with the EPA; (ii) detection, to determine whether a
target compound is present in a complex matrix; and (iii) monitoring, in which
tests are performed to determine chemical concentrations for control purposes.

         The application of immunoassay technology in conjunction with
regulatory registration is significant because of the requirement that
large-scale chemical manufacturers register their chemicals under FIFRA with the
EPA. As part of this registration process, manufacturers must provide extensive
data for both registration and post-registration analyses regarding toxicity and
environmental impact. For many new compounds, certain aspects of this analysis
require sensitivity which instrument-based testing cannot achieve. For others,
no classical analytical methods are available to measure the compound. In either
case, EPA requires the manufacturer to supply a method to monitor the compound
in the environment. The Company is currently commercializing four tests in this
area for two chemical companies. Agreements are in place for the development of
seven additional tests.


                                       4

<PAGE>

         Industrial Markers. The Company is collaborating with a corporate
partner in this market category, which consists of test kits that detect marked
products. The product marking technology is based on the incorporation of trace
levels of inert chemicals or markers into solid or liquid products or on the
surface of the products. The use of these markers, in conjunction with
immunoassay techniques for marker detection, allows for the covert marking and
testing of nearly any product. This technology can be used to prevent revenue
loss due to counterfeiting and product diversion, limit a manufacturer's
exposure to unwarranted product liability, and enhance process efficiency and
product quality assurance.

         Pollutant Test Products. The Company sells four different format
immunoassays into the environmental market: (i) D TECH(R) latex filtration
tests, (ii) EnSys RISC(TM) and EnviroGard(TM) coated-tube tests, (iii) RaPID
Assay(R) magnetic particle tests and (iv) EnviroGard(TM) microtiter plate tests.
Each of the four different test formats has performance characteristics that
make them more or less suited for a particular customer application. The Company
positions the sale of all of its products so as to provide the customer with the
best product for its specific application.

         The D TECH(R) and EnSys RISC(TM) tests do not require refrigeration
which make them ideally suited for on-site, field applications. All of the
environmental test kits include components for the extraction of target analytes
from the sample and subsequent analysis. Sample preparation time is typically
less than five minutes per sample. All of the Company's environmental test kits
are capable of analyzing at least ten samples per hour and some allow analysis
of as many as forty samples per hour.

         D TECH(R). The D TECH(R) tests are a latex filtration immunoassay
format and provide for rapid, easy to use, on-site, field screening analysis of
soil and water samples containing EPA Priority Pollutants like PCBs, PAHs
(polyaromatic hydrocarbons), TNT, BTEX (benzene, toluene, ethylbenzene and
xylene) and others. D TECH is very simple to use, requires little or no user
training, yields a semi-quantitative result and is ideally suited for true field
applications where limited numbers of samples are to be analyzed at one time.

         RaPID Assay(R). The RaPID Assay(R) magnetic particle immunoassay
product line currently contains kits and accessories for detection of 21
different pesticides (herbicides, insecticides and fungicides), and 6 toxic
organic compounds. The magnetic particle test format is ideally suited for
applications requiring highly precise determination of contaminant
concentrations. Like the Company's other immunoassay tests, RaPID Assay(R) is
fast and easy to perform, but not as field-portable. RaPID Assay(R) pesticide
test kits are used for quantitation of pesticides in water, soil and food. RaPID
Assay(R) test kits for toxic organic chemicals are used for measuring
contaminant concentrations in both water and soil.

         EnviroGard(TM) and EnSys RISC(TM). Like D TECH(R) and RaPID Assay(R),
these coated-tube and microtiter plate format testing products detect some of
the most commonly encountered toxic chemicals found in soil, water and on
surfaces at contaminated sites, including PCBs, fuel products, PCP, TNT,
benzene, PAHs, crude oil, and pesticides. Additionally, the EnviroGard(TM)
products detect pesticides in drinking water and foodstuffs. The coated-tube
format tests are used extensively to analyze relatively large numbers of samples
in the field and yield a semi-quantitative result. The EnviroGard(TM) microtiter
plate kits are designed for use in the laboratory and are ideally suited for
analysis of large numbers of samples where determination of exact concentrations
of contaminants are required.

         Agricultural


         The agricultural market segment includes tests to detect targeted
traits in genetically engineered plants, two plant fungi, Rice Blast and
Botrytis (crop testing), and tests to detect Genetically Modified Organisms
(GMOs) in food and food fractions (food testing).

         Crop Testing


         Genetically Engineered Crops. Agricultural companies are developing
varieties of commercially important crops like corn, cotton and soybeans that
have new additional genes which confer some commercial advantage to the plant,
such as insect or pesticide resistance or enhanced growth or nutritional
characteristics. Industry experts predict that roughly one quarter of the
acreage used to grow corn in the U.S. will be planted with genetically
engineered seed by the year 2000, in comparison to only 0.5% in 1996.

                                       5
<PAGE>
         A large agricultural chemical company that has developed proprietary
varieties of insect-resistant corn and cotton using genetic engineering
technology commissioned the Company's first test in this market. Not all the
seed produced by a genetically engineered plant contains the gene for the
desired trait and therefore not all the plants arising from a batch of seed will
express the desired characteristic. The Company has developed a simple
`one-step' strip test that is used at the point of testing to determine if an
individual plant contains the new genetic trait. The Company has also developed
similar one-step products for other crops. Commercial seed producers use these
products to ensure the quality of their products. This type of test can also be
used for enforcement purposes in crops to prevent unlicensed application of the
genetic technology.


         Sales of this strip test and similar products to detect the presence of
genetically engineered traits in plants have been increasing rapidly since their
introduction in the third quarter of 1995 and the Company believes sales will
continue to grow. The number of acres of crops with genetically enhanced traits
under cultivation grew rapidly in 1998 and published reports indicate that the
farmers' experience with these products was positive. Acreage in 1999 is
expected to grow further based on these results and with this increased volume,
the Company expects sales of these products to grow. Additional tests for
genetically engineered plants are currently under development.

         Food Testing

         In 1998, a significant market opportunity for immunodiagnostic analysis
was created. This opportunity arose from regulatory response to public demands
to address a consumer's right-to-know whether a food product contains
concentrations of Genetically Modified Organisms (GMOs). In May 1998, the
European Commission enacted food regulations governing the labeling of
foodstuffs that are derived from genetically-modified crops. The legislation
affects food processors in all fifteen member states within the European Union.
Under the European Commission's EC 258/97 and EC 1139/98, beginning March 1,
1999, food processors are required to label food ingredients for the presence of
GMOs.

         During the second half of 1998, the Company entered into licenses to
use proprietary genetic traits with major developers of genetically-engineered
plants, and began developing an immunodiagnostic test to detect the presence of
GMO's at specified concentrations. This research and development was completed
and the Company participated in a Joint Research Centre - Institute for Health
and Consumer Protection Food Products Unit sponsored validation study of its
first test kit. Validation studies are common in the food testing industry and
are generally referred to as "Ring Studies." This Ring Study involved 38
qualified laboratories throughout Europe and was completed in December 1998. The
JRC has informed the Company that its products have been validated to detect the
presence of the tested traits at the thresholds established in the Ring Study
protocol.

         Also during the second half of 1998, the Company began to introduce its
technology and product plans to food processors. The reaction from the
marketplace was and continues to be positive. Prospective customers have shown
interest in the ability of the Company's technology and products to detect the
presence of GMOs above a specified threshold level, its fast time-to-result and
cost advantages.

         First shipments of this initial test kit occurred in the first quarter
of 1999. The Company expects this newly created market opportunity to expand
rapidly throughout 1999. The Company's initial products, as well as others
planned for 1999, provide food companies an alternative to the more expensive
and time-consuming DNA methods. The Company has developed a customer council
consisting of three of the world's largest food companies to assist in the final
design and validation of the test formats. Food companies have indicated that
they believe the simplicity of the Company's test kit compares favorably against
DNA methods that usually require more significant laboratory analysis and a
longer time-to-result. The Company's test kit will allow food processors to
conduct the testing at each manufacturing site. This will not only reduce costs,
but will also allow for easier integration into the daily operations of
manufacturing facilities.

         The Company estimates the market potential for food test kits could
reach $20 million by the end of the year 2001. This estimate is based on the
volume of food fractions used by the more than 22,000 European food processors.
The Company believes this newly created market opportunity could expand even
further. Legislation similar to the European legislation was passed in Australia
and New Zealand in December 1998. Japan and Canada are considering similar
legislation as well. The two largest crops that are currently being genetically
modified are soya and maize, but others such as rice and wheat will add to the
growth. Projected production of rice for 1999 is 376.6 million tons of the
milled variety, and world consumption is projected at 385 million tons.

                                       6
<PAGE>

         Other Products


         Macra(R) Lp(a). Macra(R) Lp(a) is a microtiter plate assay that
measures a lipoprotein found in human serum. This lipoprotein has been shown to
be an indicator of risk for myocardial infarction, heart disease and stroke. A
great deal of clinical data has been generated with the Macra Lp(a) kit because
of its leading research position, and its use in benchmark projects such as the
Framingham Study, a multi-generation analysis of coronary risk factors. The
product received FDA 510(k) approval during 1998, and the rights to this product
were subsequently sold in July 1998 (see Note 19 in Notes to the Consolidated
Financial Statements).


         RapidChek(R) SRB. Sulfate Reducing Bacteria ("SRBs") are
environmentally significant because they generate hydrogen sulfide gas and cause
corrosion of stainless steel pumps, pipelines, and drilling rigs and result in
the souring of oil reserves. SRBs can be controlled by the addition of treatment
chemicals. Historically, the majority of testing in this market was performed
using a culture method called the American Petroleum Institute Recommended
Procedure No. 38. This method requires that samples be incubated from 14-28 days
before a result is obtained. RapidChek(R) SRB test is a simple to use, field
portable test that provides the user with accurate results in 20 minutes and
allows for an immediate, more cost effective application of treatment chemicals.


Major Customers

          In 1998, Delta and Pine Land Company accounted for 10% of the
Company's revenues. Delta & Pine Land Company and Rohm and Haas Corp. each
accounted for 10% of the Company's 1997 revenues. In 1996, EM Industries and
Ensys (see Note 3 in Notes to the Consolidated Financial Statements) accounted
for 11% and 19% of the Company's revenue, respectively.


Sales and Marketing Strategy

         As a result of the consolidation of SDI, EnSys, Ohmicron and
EnviroGard(TM) businesses, the Company has formed an experienced sales and
marketing organization of 25 individuals. In addition to its direct sales force,
the Company sells product through an extensive network of distributors, and
through its corporate partners.


         The Company uses a number of strategies for the sale of its products
worldwide. In the U.S., the major route of sale of its industrial testing
products is through a national field sales force in defined sales territories.
The field sales force is augmented by an in-house sales force, which in addition
to selling product directly to customers, provide marketing and logistic support
to the field sales personnel and interface between customers and technical
support.


         In 1993 the Company opened a European headquarters and sales operation
near London, England, and the sale of the EnSys RISC(TM), RaPID Assay(R) and
EnviroGard(TM) products in Europe are principally directed through that office.
Sales and distribution of the D TECH product line outside of the U.S. are made
exclusively by E. Merck KGaA, Darmstadt, Germany.

         Sales of the Company's products for detecting water treatment polymers,
proprietary chemicals, industrial markers, genetically engineered crops and Rice
Blast are through the Company's corporate partners in selected markets and
through the Company's direct organization in others. The RapidChek(R) SRB test
kit is sold directly by the Company and through 5 international distributors.

Regulatory Approvals

         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. As the Company expands its product line to meet the
environmental monitoring needs of municipalities and industrial facilities, the
SDWA, the Clean Water Act and the NPDES permitting program under the Clean Water
Act also will be significant to the Company's business. These laws regulate the
management, disposal and clean up of hazardous substances and protect the
nation's ground and surface water and drinking water supplies. In addition,
regulatory responsibilities in a number of areas have been delegated to state
agencies and state and local laws and regulations impose additional restrictions
and requirements. While environmental regulations overseas vary, many countries,
particularly in Europe, have counterparts to the U.S. legislation.


                                       7

<PAGE>
         The Company believes that regulatory acceptance, though not required
for the use of its products in most cases, is a significant factor in gaining
market acceptance. There are two main areas in which the Company is seeking
regulatory acceptance for its products: hazardous waste testing methods by the
federal and state environmental protection agencies and water testing methods by
the federal and state environmental protection agencies. The federal
Environmental Protection Agency and some state agencies have evaluated certain
of the Company's analytical methods and accepted their use for certain
remediation and monitoring activities. Further acceptance by these agencies
would further stimulate demand for the Company's products. The Company expects
that as its products are subjected to wider use under a variety of conditions
and subjected to traditional validation techniques, such acceptance will
generally be granted. Such acceptance would serve to strengthen already
compelling customer motivations such as the ease-of-use and specificity
characteristics of the Company's products and is not a prerequisite to selling
the products in the markets the Company serves.


         Hazardous Waste Testing Methods. EPA SW-846 is the compendium of
analytical and test methods published by the EPA's Office of Solid Waste (OSW).
A number of provisions of the EPA's hazardous waste regulations under RCRA
mandate the use of SW-846 methods. In other contexts, SW-846 is a guidance
document setting forth acceptable, although not required methods to be
implemented by the user in response to sampling and analysis requirements. Some
states also require the use of SW-846 methods under their hazardous waste
programs. While SW-846 methods are technically only applicable to regulatory
programs under RCRA, 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 process for a method to be incorporated into EPA SW-846 generally
takes approximately 24 to 36 months. The OSW evaluates the applicant's test
results and obtains additional information or conducts its own tests if
necessary. After a method is deemed acceptable, it is published by the EPA in
draft form ("EPA Draft Method"). Periodically, the EPA updates SW-846 through a
notice in the Federal Register referencing the EPA Draft Methods published since
the last update. Following a comment period, the EPA Draft Methods are
referenced in the Federal Register as a Final Rule and incorporated into SW-846.
The following table summarizes the EPA acceptance status of the Company's
products.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
     EPA SW-846
       Method              D TECH(R)       EnSys RISC(TM)      EnviroGard(TM)      RaPID Assay(R)
No.         Analyte
------------------------------------------------------------------------------------------------
<S>           <C>           <C>             <C>            <C>                      <C>    
4010          PCP                        Soil & Water                                  Soil
------------------------------------------------------------------------------------------------
4015          2,4-D                                            Soil & Water         Soil & Water
------------------------------------------------------------------------------------------------
4020          PCB           Soil          Soil & Oil               Soil                 Soil
------------------------------------------------------------------------------------------------
4030          TPH                            Soil                  Soil
4035          PAH                        Soil (APAH)            Soil (APAH)          Soil (APAH)
                                                                                     Soil (CPAH)
------------------------------------------------------------------------------------------------
4040         Toxaphene                                             Soil
4041         Chlordane                                             Soil
4042         DDT                                                   Soil
------------------------------------------------------------------------------------------------
4050         TNT            Soil & Water                                            Soil & Water
4051         RDX            Soil & Water
------------------------------------------------------------------------------------------------
4670        Triazines                                                                   Water
------------------------------------------------------------------------------------------------
8510          RDX                            Soil
8515          TNT                            Soil
8530         TTHM                            Water
------------------------------------------------------------------------------------------------
</TABLE>


         Water Testing Methods. Water testing methods approved for use in
compliance with the SDWA are published periodically in the Federal Register.
Newly developed methods are reviewed by the EPA's Environmental Monitoring and
Systems Laboratory in Cincinnati to determine whether they are (i) an acceptable
version of a previously approved method or (ii) a new method in need of a
comparability study and proceed through a comment and approval procedure. The
EPA has a program aimed at expediting the approval of new methods that involves
the cooperation of the Solid Waste, Drinking Water, and Waste Water methods
groups.

                                       8
<PAGE>
         The TTHM (total trihalomethanes) water test has been accepted as Method
8530. In addition, the RaPID Assay(R) Atrazine test was accepted as the first
quantitative immunoassay method. It is anticipated that the EPA Office of
Drinking Water will adopt this method for screening according to the Drinking
Water Regulations for Triazines under the SDWA. More recently, the Company's
RaPID Assay(R) for Spinosad has been adopted by the EPA office of Pesticide
Programs as the official enforcement method for this pesticide. The
Hydrofluor-Combo(TM) test kit is the ASTM standard method for detection of these
pathogenic protozoa and has been designated as the method for use in complying
with the EPA's Information Collection Rule to establish the extent of
contamination in the nation's drinking water.

         Tests for water treatment polymers, genetically engineered traits in
plants, and fungal plant pathogens are currently unregulated. However, agencies
such as the EPA, the FDA and the Food Safety and Inspection Service of the U.S.
Department of Agriculture are engaged in testing environmental samples and,
together with the Association of Official Analytical Chemists ("AOAC"), maintain
compilations of official methods for use in testing for environmental
contaminants in certain market segments. Some of these organizations also issue
procedures and guidelines for validating new methods.


Manufacturing


         The Company currently manufactures over 150 different test kits for the
detection of a wide array of analytes in five immunoassay formats; one-step
strip tests, coated-tubes, latex particles, magnetic particles and microtiter
plates. In addition to test kits, the Company supplies its customers with
ancillary equipment and supplies including spectrophotometers, pipettes,
balances and timers among others.


         The kit manufacturing process consists mainly of critical reagent
production and in process testing, filling and dispensing, labeling, kit
assembly, quality control, packaging and shipping. The Company's Technical
Reagents Manufacturing group produces critical reagents from its laboratories in
Newark, DE. Sub-assemblies and finished kits are manufactured and shipped
worldwide out of the Company's headquarters facility in Newark, DE.

         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 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
adequately 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 put in place systems designed to
control all elements of the manufacturing process including raw materials,
inventory, processes, documents, work-in-process, lot records, equipment and
training. Integrated inventory control, purchasing, manufacturing scheduling,
order processing, shipping and customer invoicing are elements of the Company's
computerized Manufacturing Resource Planning (MRP) systems.

         The Company's manufacturing organization, including the Technical
Reagents Manufacturing group, consists of 39 individuals. The Company believes
the existing facilities and equipment are sufficient to support a significantly
larger manufacturing base. Manufacturing operations are currently running a
single shift.

                                       9
<PAGE>

Research and Development


         The Company engages in substantial research and development activities
involving antibody and immunoassay development. In the three years ended
December 31, 1998, 1997 and 1996, the Company incurred approximately $1,922,000,
$1,580,000 and $1,569,000, respectively in research and development
expenditures, substantially all of which are pursuant to customer research
agreements or Corporate Partnerships. The Company's laboratory facilities
located in Newark, DE were designed and built specifically for conducting
research and development relating to antibody and immunoassay technology. These
facilities include the state-of-the art, GMP, American Association for
Accreditation of Laboratory Animal Care ("AAALAC") approved, TSD BioServices
monoclonal antibody development and large-scale production facility. The Company
has assembled a scientific staff with extensive experience in the development of
monoclonal and polyclonal antibodies, immunogens and assay reagents. The
Company's assay development scientists are experienced in developing tests in a
variety of different immunoassay formats including one-step strips, latex
filtration, magnetic particles, coated tubes and microtiter plates. Research and
development personnel have complementary skills in several advanced research
disciplines, including synthetic organic chemistry, protein chemistry,
biochemistry, immunology, immunochemistry, microbiology and soil science. In
addition to the technical expertise resident within research and development,
TSD BioServices provides the Company scientists, as well as its outside clients,
with large-scale GMP production, bioprocessing, purification and quality control
of antibodies and reagents.


         The Company's research and development activities are focused on
developing products to expand its manufacturing base and leverage its Sales and
Marketing organization. The Company is a recognized leader in the field of
contract antibody and immunoassay research and development in the industrial,
water quality and agricultural sectors, and markets its services primarily to
large chemical and pharmaceutical companies. Product development is typically
performed in collaboration with a corporate partner that has identified a
specific market need and provides funds to the Company to develop an assay.
Research and development contracts are typically structured such that technology
developed within the program are co-owned by the Company and its partner and the
Company maintains exclusive manufacturing rights.

         To the extent the Company believes that improvements to existing
products significantly enhance competitiveness, expand a market or improve
market penetration, the Company has periodically funded such efforts. In the
markets where the Company has chosen to compete, rapid field screening tests are
highly valued and the Company is actively engaged in developing proprietary
technology to better meet those needs and enhance the Company's overall
performance. Through its continuing development of tests to detect genetically
engineered plants and water treatment polymers, the Company has gained extensive
expertise in development and manufacture of one-step strip tests, and is working
aggressively to further develop this technology.


         The Company's technology organization, including research and
development, TSD, Technical Reagents Manufacturing, and Technical Marketing
Support consists of approximately 48 individuals of which 15 hold advanced
academic degrees.


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 agree 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 seventeen issued U.S.
patents and the claims for another is in a state of allowance. Two U.S. patents
have been licensed for exclusive use by the Company and six U.S. patent
applications are pending.

         During 1998, the Company reached an agreement with FMC Corporation,
which resulted in FMC assigning certain patent applications to the Company, in
return for development of test kits for the detection of FMC water treatment
polymers. The assignment of the FMC applications effectively resolved the
interference proceeding, pending against the Company, related to U.S. Patent
5,593,850, also relating to immunoassays for the detection of water treatment
polymers.

                                       10
<PAGE>
         An alternative method of detecting water treatment polymers is to
chemically couple an unrelated "marker" substance to the polymers and use
antibodies and immunoassays that bind to the marker to detect the polymer. The
technology for using anitbodies to detect markers that are chemically coupled to
a substance to be detected is patented by Biocode Incorporated (U.S. Patent
5,429,952). In 1996 the Company licensed from Biocode Incorporated the exclusive
rights to this technology for the detection of water treatment polymers. The
Company believes that together, the `850 patent, FMC applications and the
Biocode license provide broad protection for the use of immunoassay detection of
water treatment polymers.


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------

U.S. Patent          Title

---------------------- -------------------------------------------------------------------------------------
<S>                    <C>    
4,999,286            Sulfate reducing bacteria determination and control
5,200,346            Aldicarb immunoassay by sulfone equivalents
5,411,869            Immunological analogs for captan
5,449,611            Polyaromatic hydrocarbon (PAH) immunoassay method, its components and a kit for use in
                     performing the same
5,484,709            Immunoassay method for detecting an immunologically non-remarkable compound 
5,547,877            Methods for the rapid detection of toxic halogenated hydrocarbons and kits useful in  
                     performing the same
5,554,730            Fungus extraction method and kit
5,576,187            Standards for phosphorothioate insecticide immunoassays
5,593,850            Monitoring of industrial water quality using monoclonal antibodies to polymers
5,618,681            Polyaromatic hydrocarbon (PAH) immunoassay method, its components and a kit for use in
                     performing the same
5,658,463            Kits and processes for extraction of analytes from solid materials
5,679,574            Quantitative test for oils, crude oil, hydrocarbon, or other contaminants in soil and a 
                     kit for performing the same
5,691,148            A petroleum immunoassay method, its components and a kit for performing the same
Allowed              Immunoassay standards for volatile analytes with benzene rings
5,780,250            Immunoassay standards for polyaromatic hydrocarbon detection
5,834,222            Polychlorinated Biphenyls (PCB) immunoassay method
5,858,692            PCB immunoassay
5,874,216            Indirect label assay device for detecting small molecules and method of use thereof
5,541,079            Monoclonal and polyclonal antibodies and test method for determination of
                     organophosphates (license)
5,429,952            Marking of products to establish identity and source (license)
</TABLE>

         The Company believes that low-cost, easy to use, rapid field screening
tests have the potential to be significant products in its chosen markets.
Therefore, the Company is aggressively developing technology relating to
immunoassay formats with those features. Two of the Company's pending
applications involve one-step strip test formats, and one of the applications
has to do with a novel latex filtration test format. In addition to the assay
format patent applications, the Company has pending applications relating to
immunoassays for trichloroethylene (TCE) and 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. The Company has developed a
number of proprietary technologies which the Company 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
monoclonal antibodies to transgenic plant proteins, water treatment polymers,
the explosive RDX, BTEX and TCE.

                                       11

<PAGE>
         Under two license agreements, the Company has been granted the right
and license throughout the world to use magnetocluster technology in connection
with the Company's RaPID Assay(R) products for the detection of environmental
analytes. This license carries royalties starting at 4% of net sales of such
products each year and declining to 2% based upon the volume of sales in such
year.

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. Other companies may be
developing additional products for one or more of the Company's markets that
could be competitive with the Company's products. Nevertheless, the Company
believes that its competitiveness has been significantly enhanced as a result of
the consolidation of the SDI, EnSys, Ohmicron and EnviroGard(TM) businesses.

         Currently, the Company believes that there are no similar competing
immunoassay products for the Company's RapidChek(R) Rice Blast, Botrytis and
SRB, GeneCheck(TM) B.t.k., proprietary chemical, industrial marker or water
treatment polymer tests. The Company holds U.S. patents relating to the Rice
Blast and SRB tests and believes they will help to provide a competitive
advantage in the event that competing products enter the market. The Company's
water treatment polymer tests are unique to the industry and the Company has
secured U.S. patents and an exclusive technology license and believes that such
property will help to provide a competitive advantage in the event that
competing products enter the market.

         A number of companies already have pursued, and are actively pursuing,
products for the detection of Cryptosporidium and Giardia in drinking water and
it is likely that the Company's Hydrofluor products will face increasing
competition in the future. Hydrofluor currently benefits from its designation as
the ASTM standard method for detection of these protozoa and from its selection
by the EPA as the method for use in complying to the EPA's Information
Collection Rule to establish the extent of contamination in the nation's
drinking water.


         The Company's Macra(R) Lp(a) product competes with other existing
immunoassay tests in the marketplace, but since it was first to the market,
Macra(R)'s competitive position is enhanced by the large quantity of clinical
data that has been generated by researchers and clinicians that have used the
test in large prospective studies (see Note 19 in Notes to the Consolidated
Financial Statements).


Employees


         As of December 31, 1998, the Company employed 107 full time and 2 part
time individuals including 96 regular and 13 contract employees. All of the
Company's employees have executed agreements with the Company agreeing not to
disclose the Company's proprietary information, assigning to the Company all
rights to inventions made during their employment, and 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.




ITEM 2.  PROPERTIES

         The Company is headquartered in Newark, DE, and occupies approximately
28,000 square feet of space under an operating lease expiring in December 2007.
The Company also leases approximately 26,000 square feet of manufacturing and
research space also in Newark, DE under three operating leases that expire in
October 2000, October 2001 and November 2003, respectively.

                                       12
<PAGE>
         TSD BioServices Inc. occupies approximately 8,000 square feet of
manufacturing, research and animal facility space, in Newark, DE.


         Prior to the merger with the Company, EnSys leased approximately 18,000
square feet of space in one building in the Research Triangle park area in North
Carolina under a ten-year lease that expires in 1999 with a renewal option
through 2004. Following the merger, the Company closed the North Carolina
operation and has sub-let the space to an unrelated third party for the
remaining term of the lease. The Company leases regional sales offices near
London, England, Newport Beach, CA, and Chestnut Hill, MA. The Company also
leases warehouse space of 1,600 square feet or less with leases that run one
year or less. The Company believes that its equipment and facilities are
adequate for its present purposes.

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, 1998.


                                       13


<PAGE>


ITEM 4(a)         EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers of the Company, their positions with the Company
and ages are as follows:
<TABLE>
<CAPTION>
         Name                         Age          Position
         ----                         ---          --------
            <S>                       <C>            <C>    

         Richard C. Birkmeyer         45           President and Chief Executive Office
         Kelly J. Cullum              38           Vice President - Sales and Marketing
         Arthur A. Koch, Jr.          45           Vice President - Finance & Chief Operating Officer
         Martha C. Reider             44           Vice President - Quality Assurance/Human Resources
         James W. Stave, Ph.D.        44           Vice President - Research and Development

</TABLE>

         Richard C. Birkmeyer, age 45, cofounded SDI in 1990 and has served as
its President and Chief Executive Officer and a director since its inception.
Prior to founding SDI, Mr. Birkmeyer was employed by E.I. du Pont de Nemours
("DuPont") from 1983 to 1990, where he most recently served as Product Manager.
Mr. Birkmeyer received a Ph.D. in Biochemistry/Immunology from the State
University of New York at Binghamton and his BS in Biology from the State
University of New York at Plattsburgh. In addition, Mr. Birkmeyer completed
post-doctoral research in immunogenetics at Iowa State University.

         Kelly J. Cullum, age 38, joined the Company in February 1998 as Vice
President - Sales and Marketing. Prior to joining the Company, Ms. Cullum was
employed at Idexx Laboratories in Tokyo, Japan, as Corporate Vice President,
Pacific Rim Division. From 1994 to 1995, Ms. Cullum was Global Director of
Marketing for Veterinary Products Division at Idexx. Prior to this position and
since 1987, Ms Cullum held a variety of sales management positions at Idexx. Ms.
Cullum received her BS in Marketing from the University of Massachusetts,
Amherst.

         Arthur A. Koch, Jr., age 45, joined the Company in April 1997 as Vice
President - Finance and Chief Financial Officer. In October 1998, Mr. Koch was
appointed the Company's Chief Operating Officer. Prior to joining the Company,
Mr. Koch was Vice President and Chief Financial Officer of Paracelsian, Inc., a
publicly held biotechnology company. From 1992 to 1995, Mr. Koch was Vice
President and Chief Financial Officer of IBAH, Inc. a publicly held contract
clinical research corporation. Mr. Koch received a BA in Business Administration
from Temple University and is a Certified Public Accountant.

         Martha C. Reider, age 44, co-founded SDI in 1990 and has served as Vice
President - Manufacturing and Secretary since inception. In 1998 Ms. Reider was
appointed Vice President Quality Assurance/Human Resources. Ms. Reider continues
to serve as the Corporate Secretary. From inception to December 30, 1996, Ms.
Reider was a director of SDI. Prior to founding SDI, Ms. Reider worked for
DuPont from 1976 to 1990 where she most recently served as supervisor of Quality
Control and Quality Assurance. Ms. Reider received her BA in Biological Sciences
from Ohio Northern University.

         James W. Stave, age 44, joined SDI in March 1991 as a research group
leader. Subsequently, Dr. Stave was promoted to director of Research and
Development, in October 1993 was promoted to Vice President - Research and
Development. 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.


                                       14
<PAGE>


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The Company's Common Stock is traded on The Nasdaq National 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 Nasdaq:

                                         Common Stock Price Range
                                         -------------------------
                                           High              Low
                                         --------          -------
Fiscal Year Ended

December 31, 1998:
First Quarter                             4  3/4            2  1/2
Second Quarter                            4                 2  7/8
Third Quarter                             3  5/8            1  29/32
Fourth Quarter                            2  5/8            1  5/8

December 31, 1997:
First Quarter                             2  3/4            1  3/8
Second Quarter                            2                 1  1/4
Third Quarter                             1  13/16          1
Fourth Quarter                            2  5/16           1  1/16
                                         


         On March 8, 1999, there were approximately 1,612 holders (112 holders
of record) of the Common Stock of the Company. The Company has never paid any
cash dividends on its Common Stock and has no plans to pay cash dividends in the
foreseeable future.

                                       15



<PAGE>


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                     ----------------------------------------------------------                  
                                                       1998           1997       1996(1)      1995        1994
                                                     --------      -------       -------     -------      -----
                                                               (in thousands, except share and per share data)
<S>                                                        <C>        <C>          <C>          <C>         <C>    
STATEMENT OF OPERATIONS DATA:
REVENUES:         
         Product related                              $14,172      $12,703       $3,402       $1,605      $1,192
         Contract and other                             1,553        1,717        2,435        2,084       2,580
                                                     --------      -------       -------     -------      -----
         Total revenues                                15,725       14,420        5,837        3,689       3,772

OPERATING EXPENSES:
         Manufacturing cost of sales                    6,222        5,305        2,839        1,288         910
         Research and development                       1,922        1,580        1,569        2,272       2,832
         Selling, general and administrative            7,156        6,132        1,737        1,190       1,385
         Acquired research and development                  -            -        8,266            -           -
                                                     --------      -------       -------     -------      -----
         Total operating expenses                      15,300       13,017       14,411        4,750       5,127

Operating Income (Loss)                                   425        1,403       (8,574)      (1,061)     (1,355)
                 
Interest and other income (expense), net                  356          274          186         (165)         30
                                                     --------      -------       -------     -------    --------
                  
NET INCOME (LOSS)                                        $781       $1,677      $(8,388)     $(1,226)    $(1,325)
                  
Accretion of redeemable preferred
stock liquidation value(1)                                  -            -         (635)        (367)       (367)
                                                     --------      -------       -------     -------    --------
Net Income (Loss) applicable to common
         stockholders                                    $781       $1,677      $(9,023)     $(1,593)    $(1,692)
                                                     ========      =======      ========     =======     =======
                  
Basic Net Income (Loss) Per Share
Applicable to Common Stockholders                       $0.06        $0.13       $(2.12)      $(0.46)     $(0.56)
                                                     ========      =======      ========   =========     =======
Shares used in Computing Basic Net Income (Loss)  
Per Share Applicable to Common Stockholders        13,174,000   13,084,000    4,248,000    3,464,000   3,041,000
                                                   ==========   ==========    =========    =========   =========

Diluted Net Income (Loss) Per Share
Applicable to Common Stockholders                       $0.05        $0.11       $(2.12)      $(0.46)     $(0.56)
                                                   ==========   ==========    =========    =========   =========
Shares used in Computing Diluted Net Income (Loss)
Per Share Applicable to Common Stockholders        16,103,000   15,712,000    4,248,000    3,464,000   3,041,000
                                                   ==========   ==========    =========    =========   =========
</TABLE>
                                       16
<PAGE>
                  
<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                     ----------------------------------------------------------                  
                                                       1998           1997       1996(1)      1995        1994
                                                     --------      -------       -------     -------      -----
                                                               (in thousands, except share and per share data)
<S>                                                        <C>        <C>          <C>          <C>         <C>    

BALANCE SHEET DATA:

Cash and cash equivalents                             $1,864         $2,580         $917         $35        $67
Short-term investments                                 3,990          3,638        5,710           -          -
                                                     -------        -------      -------      ------     ------
         Sub total                                     5,854          6,218        6,627          35         67
                  
Working capital (deficit)                             10,158          9,403        7,170        (891)       126
                  
Total Assets                                          15,093         14,060       14,581       2,076      2,106
                  
Redeemable convertible preferred stock(1)                  -              -            -       3,879      3,512
                  
Long-term debt                                           265             25           50           -          -
                 
Accumulated deficit(2)                               (10,921)       (11,702)     (13,379)     (4,356)    (2,763)
                  
Stockholders' equity (deficit)                        13,155         12,340       10,673      (4,064)    (2,580)
                  
</TABLE>


(1) The redeemable convertible preferred stock was reclassified into
    stockholders' equity in connection with the EnSys merger.
(2) There have been no common stock dividends declared or paid since the
    inception of the Company.



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
        AND FINANCIAL CONDITION

Forward Looking Statements

         This Form 10-K contains several forward-looking statements reflecting
the Company's current expectations. When used in this Annual Report, the words
"anticipate", "estimate", "enable", "believe", "expect" 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, the Company's ability to manage growth, the integration of acquired
companies, including HTI Bio-Products, Inc., unknown Year 2000 issues, changes
related to acquisitions such as the amortization of significant goodwill and
other intangible assets, changes in demand for products, delays in product
development, inability to obtain required government approvals, modifications to
existing government regulations, modifications to development and sales
relationships, the ability to achieve anticipated growth, seasonality,
competition and other factors more fully described in the Company's public
filings with the U.S. Securities and Exchange Commission.

Overview

         The Company is the entity resulting from the combination of EnSys,
Ohmicron and SDI. On August 30, 1996, Ohmicron was merged with and into SDI,
with certain Ohmicron stockholders and note holders receiving shares of SDI
common stock. On December 30, 1996, SDI was merged with and into EnSys. The
surviving entity was then renamed Strategic Diagnostics Inc. Each of these
transactions was accounted for as a purchase with SDI as the acquiring company
and, therefore, the surviving company for financial reporting purposes. As a
result, the historical financial information discussed includes the results of
SDI for all periods presented and the actual results of Ohmicron from August 30,
1996 and EnSys from December 30, 1996.


                                       17
<PAGE>

         EnSys was formed in 1987 to develop proprietary biotechnology based
test systems designed for fast and inexpensive detection of various chemicals in
soil and water samples. EnSys raised approximately $30 million in equity
financing, including approximately $16 million from the sale of 1,800,000 shares
of EnSys common stock in its initial public offering in October 1993. Since
1991, EnSys commercialized eleven immunoassay test kits and four other test kits
for the detection of various environmental contaminants. EnSys marketed and sold
these test kits and other associated products and services to environmental
consulting and engineering firms, hazardous waste processing firms,
environmental testing laboratories, and various state and federal agencies
through distributors and a regionally based direct sales force in the U.S. EnSys
also marketed and sold its products in Europe through EnSys (Europe) Limited, a
wholly owned subsidiary of EnSys. In March 1996, EnSys acquired from Millipore,
Inc. certain assets, which consisted primarily of inventory, work-in-process,
equipment, intellectual property rights, contract rights and customer lists
related to Millipore's EnviroGard(TM) product line for $1 million and 1,100,000
shares of EnSys common stock.

         Ohmicron was founded in 1984 and began marketing its RaPID Assay(R)
products in 1991 to the same general market and in the same fashion as
previously described for EnSys.

         Since its inception, SDI has focused on using proprietary technology
and know-how to develop, manufacture and market immunoassay test kits for
applications primarily in the water quality, industrial testing and agricultural
markets. One of the strategies SDI used to develop its business was to establish
relationships with other companies that had significantly greater resources and
capabilities to evaluate market opportunities and potential for new products.
The Company refers to these relationships as "Corporate Partnerships". Corporate
Partners, who had identified and researched a market opportunity, funded SDI to
develop and manufacture immunoassay products to meet the market need. Most of
the Corporate Partner agreements were written so that SDI retained a right to
manufacture the finished product, and any technology developed during the course
of the project was co-owned by SDI and its partner. In this way, SDI developed
proprietary technology and built a base of manufactured commercial products.
Commercial operations of SDI were initiated with an agreement with a Corporate
Partner (a large integrated chemical company) to develop an immunoassay test to
detect certain corrosion causing bacteria. This product was introduced in late
1991 and SDI purchased all rights and technology related to this product in
1994.

         In February 1992, SDI entered into a $3.9 million Corporate Partnership
with EM Industries, Inc. (an affiliate of Merck KGaA, Darmstadt, Germany) for
the development and manufacture of a line of immunoassay test kits capable of
identifying and quantifying targeted priority pollutants. The first products
under this agreement were introduced in 1993. Through August 1996, these
products were manufactured by SDI and marketed by EM Industries, Inc. In
September 1996, EM Industries, Inc. and SDI reached an agreement whereby the
February 1992 agreement was terminated, together with EM Industries, Inc.'s
marketing rights thereunder, in exchange for certain specified royalty payments
to EM Industries, Inc. and shares of SDI common stock. The marketing activities
with respect to such products in the U.S. are now the responsibility of the
Company.

         Since 1992, the Company has entered into research and development
agreements with multiple Corporate Partners that have led to the introduction of
various products to the water quality, industrial testing, agricultural and
other markets. These agreements generally provide that sales and marketing costs
associated with a new product are borne by the Corporate Partner. In addition,
the Company currently sells directly other products that it has independently
developed or acquired.

         The Company believes that its competitiveness has been enhanced through
the combinations of talents, technology and resources resulting from the mergers
and acquisitions described above. The Company has also achieved meaningful
economies of scale, operates from consolidated facilities in Newark, DE and is
now offering its customers the most appropriate test for each specific customer
application.

         Another key strategy that SDI used to develop its business was the
formation in 1991 of TSD BioServices, a joint venture between SDI and a
subsidiary of Taconic Farms of Germantown, NY. Taconic Farms is a privately held
company whose business is the production and sale of mice and rats, primarily to
the research community. In 1996, the joint venture was dissolved and SDI's
interests were distributed into a wholly owned subsidiary, TSD BioServices, Inc.
("TSD"). The mission of TSD is to supply antibodies, especially monoclonal
antibodies, immunochemical reagents and related services to medical diagnostic
and pharmaceutical companies, as well as the research community. TSD's primary
facility occupies approximately 8,000 square feet of space in Newark, DE. On
February 26, 1999, the Company completed the acquisition of HTI Bio-Products,
Inc., a privately held manufacturer of custom and proprietary antibody products
and services located near San Diego, CA ("HTI") (See "Recent Developments").

                                       18
<PAGE>
         The Company believes that its products in the water quality, industrial
testing and agricultural markets are unique and fill potentially large, unmet
needs. The Company also believes that its products and technology currently
being developed have broad application in diverse markets.

         The Company believes that its 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.

         The Company experiences a seasonal pattern to its business. Sales of
industrial and agricultural products are highest during the summer months with
the lower levels of activity occurring during the winter months. Accordingly,
revenues in any particular quarter may not be indicative of revenues for any
subsequent quarter during the year, or for the year. As sales of the Company's
analytical tests for water-soluble polymers (which are generally not affected by
seasonal patterns) and agricultural products to other parts of the world develop
over the next few years, the Company expects its seasonal fluctuations to become
gradually less pronounced.

Recent Developments

         During the second half of 1998, several significant developments
occurred in the market for testing for Genetically Modified Organisms (GMOs) and
the labeling of food products in Europe. Earlier in 1998, the European
Commission adopted rule 1139/98, which requires over 22,000 food processors to
test ingredients for the presence of GMOs and label products accordingly
beginning March 1, 1999. During the third quarter of 1998, the Company devoted
significant resources to educate regulators and industry representatives
concerning the features and benefits of its products, immunoassay-based, protein
test kits to detect the presence of GMOs. This work continued during the fourth
quarter of 1998 and the Company achieved several milestones during the second
half of 1998.

         The Joint Research Centre's Food Products Unit of the Institute for
Health and Consumer Protection (JRC-IHCP, the regulatory authority responsible
for the validation of test methods) reviewed the Company's product plans and
expressed interest in validating protein-based test methods like those proposed
by the Company. Second, to commercially validate its methods, the Company
licensed certain proprietary proteins from leading agricultural biotechnology
companies and conducted data trials with several commercial laboratories
throughout Europe. In addition, the Company participated in a JRC-IHCP sponsored
validation study of its Soya test kit, which involved 38 qualified laboratories
throughout Europe. These trials are common in the food testing industry and are
generally referred to as "Ring Studies". During the fourth quarter, the Company
and these laboratories completed these studies. The JRC-IHCP has informed the
Company that its products have been validated to detect the presence of the
tested traits at the thresholds (concentrations) established in the Ring Study
protocol. The Company has now begun to manufacture and market these products
throughout Europe, focusing its sales efforts on the early adopters and opinion
leaders in the food process industry as described below.

         The Company began to introduce its technology and products to the
leading food processors in Europe during the third quarter of 1998. Prospective
customers have shown interest in the technology's ability to detect the presence
of GMOs above a specified threshold level, its fast time-to-result and its cost
advantages. This work continued during the fourth quarter of 1998. The Company
has formed a product focus group consisting of three of the largest food
companies in the world. The Company expects that this group will be utilized to
refer prospective customers to the Company's technology and products.

         On February 26, 1999, the Company completed the acquisition of HTI. HTI
had 1998 revenues of $5.7 million and pre tax profits of approximately $800
thousand. These results are preliminary and the Company expects to complete an
audit on or before May 15, 1999. HTI, a primary manufacturer of antibodies and
biochemicals, was founded in 1990. HTI's products and services include custom
antibody production, bulk antibody and biochemical products. The Company
believes that these capabilities will afford it the ability to leverage its
manufacturing costs, particularly in its test-strip production for agricultural,
food and water quality product lines. These products utilize large quantities of
polyclonal antibodies that the Company previously purchased from third parties.
The Company believes that HTI's product lines will also enhance the Company's
exisiting capabilities in antibody production by adding extensive polyclonal
products and services to the monoclonal products and services provided by its
TSD BioServices subsidiary ("TSD"). The customers of HTI are complementary to
TSD's and share common characteristics in that they are primarily pharmaceutical
and biotechnology companies developing important medical diagnostics as well as
leading medical research facilities. The Company believes that the combination
and integration of these customer relationships will allow both TSD and HTI to
offer their customers broader product offerings and will help establish these
companies as a single source for all of their customers' antibody and
biochemical requirements. Similarly, the Company believes the integration of
these operations will result in significant cost savings and be accretive to
earnings.


                                       19
<PAGE>
Results of Operations

Year ended December 31, 1998 versus year ended December 31, 1997

         Revenues: Revenues increased $1.3 million in 1998 or 9% over 1997. This
increase is the result of a $1.5 million (12%) increase in product related
revenues, offset by a $164 thousand (10%) decrease in contract and other
revenues. Product related revenues increased to $14.2 million from $12.7 million
in 1998 from 1997. This growth in product revenues is primarily attributable to
increases in sales of products in the agricultural category (tests to detect
traits in genetically engineered plants) of $1.3 million (62%), TSD BioServices
category (custom monoclonal antibody production and purification) of $651
thousand (31%) and sales of other products (includes the sale of a line of
antibodies for $400 thousand to a major customer and the $600 thousand sale of
pre-commercial Macra Lp(a) test kits pursuant to the June 1998 supply agreement
with a major customer, both occurring during the second quarter of 1998) $1.1
million (196%), all increases over the 1997 revenues recorded in these
categories. These increases were partially offset by decreases in the
Industrial/Chemical category $354 thousand (7%), and Water Quality category $1.2
million (41%), when compared to the 1997 revenues recorded in these categories.
The decline in contract and other revenues is principally the result of the
Company's focusing its efforts on the food testing market during the second half
of 1998.

         During the second half of 1998, the Company strategically refocused its
efforts and devoted significant resources to enter the European Market for food
testing to detect the presence of GMOs in agricultural commodities and food
fractions that are used to manufacture finished food products. This focus
resulted in a reduction in contract and other revenues and an increase in
research and development, selling, general and administrative expenses.

         Operating Expenses: Operating expenses increased $2.3 million (18%) in
1998, from $13.0 million in 1997 to $15.3 million in 1998. This increase is
primarily related to an increase in the general business activity that occurred
during the year and described below.

         Manufacturing expenses, which include the costs of products sold,
increased $917 thousand (17%) in 1998 to $6.2 million. Increased costs in
materials, labor and overhead were associated with the mix of products sold in
1998 versus 1997.

         Research and development expenses increased $342 thousand (22%) to $1.9
million in 1998 from $1.6 million in 1997. This increase was due to the higher
costs of labor and materials associated with additional staff required to
develop new, and modify existing, products for the Company's entry into the
European GMO food testing market.

         Selling, general and administrative expenses increased $1.0 million
(17%) to $7.2 million in 1998. Increased costs for public relations, sales
consulting, advertising and travel were recorded as the Company increased its
exposure in the markets it serves. Additional expenses were incurred as efforts
in the second half of 1998 were focused on the Company's entry into the European
market for GMO testing. The Company reorganized its sales and marketing efforts
in the second half of 1998 to focus on this rapidly emerging opportunity. This
major reorganization included closing two sales offices in the industrial sales
group, consolidating certain sales responsibilities to the Company's
headquarters and reassigning other individuals to cover the agricultural market.

         Net Interest and Other Income: Net interest and other income increased
$82 thousand (30%) in 1998 to $356 thousand, from the $274 thousand earned in
1997. This increase is due to an increase in the level of invested balances
maintained throughout the year.

         Net Income: Net income decreased $896 thousand (53%) in 1998 to $781
thousand, from income of $1.7 million reported in 1997. This decrease in net
income is attributable to the increased costs, particularly research and
development and selling, general and administrative expenses, related to the
Company's entry into the European food market which more than offset increases
in revenues, all as described above.

                                       20

<PAGE>
Year ended December 31, 1997 versus year ended December 31, 1996

         Revenues: Revenues increased $8.6 million in 1997 or 147% over 1996.
This increase is attributable to the increase in business activity after the
mergers (Note 3) and the increased sales of products in the Company's emerging
markets. Product revenues increased $9.3 million or 273% due primarily to
increases in total product sales in emerging markets (tests to detect, (i)
proprietary polymers and (ii) traits in genetically engineered plants in
agriculture) to $3.1 million from $845 thousand in 1996. Contract and other
revenues decreased $718 thousand or 29% to $1.7 million in 1997. The 1996 volume
includes approximately $667 thousand in revenues from transactions between EnSys
and SDI prior to the merger. These businesses were integrated during 1997.

         Operating Expenses: Operating expenses decreased $1.4 million or 9.7%
in 1997 to $13.0 million. This decrease is attributable to the inclusion in 1996
of a one-time charge of $8.3 million to write-off research and development costs
acquired in connection with the mergers. Excluding this charge, operating
expenses increased $6.9 million or 112% as a result of increases in
manufacturing costs of $2.5 million or 87%, research and development expenses of
$11 thousand or 0.7% and selling, general and administrative expenses of $4.4
million or 253%. These increases are all attributable to the higher costs of
operation (principally additional personnel and related costs) of the combined
companies.

         Net Interest and Other Income: Net interest and other income increased
$88 thousand in 1997 from $186 thousand in 1996. This increase is attributable
to the increase in invested funds acquired through the mergers, offset by $178
thousand of equity income recorded in 1996 as a result of the TSD BioServices
dissolution (Note 3).

         Net Income: Net income increased $10.1 million in 1997 to $1.7 million
from a loss of $8.4 million. This increase in net income is attributable to the
higher volume of revenues reduced in part by the increased costs and the
one-time write-offs in 1996 all associated with the mergers.

Liquidity

         The Company's working capital, which consists principally of cash, cash
equivalents and short term investments, increased by $755 thousand in 1998 to
$10.2 million at December 31, 1998 from $9.4 million at December 31, 1997. This
increase is attributable to the increases in accounts receivable of $494
thousand (16%), inventories of $308 thousand (20%) and other current assets of
$295 thousand (170%), and by reductions in accrued expenses of $165 thousand
(17%) and other current liabilities of $40 thousand (33%). These were partially
offset by decreases in cash, cash equivalents and short term investments of $364
thousand (6%), and an increase in accounts payable of $183 thousand (30%).

         Under the terms of the agreement to acquire HTI, the Company paid
approximately $8.1 million in cash, issued 556,286 shares of Series B preferred
stock and assumed approximately $100 thousand of long term debt. The preferred
shares convert into common shares on a 1-for-1 basis at any time at the option
of the holder, and at the option of the Company when the closing price of the
Company's stock exceeds $3.50 for a period of 10 days, and carry a cumulative,
annual cash dividend of $0.175 per share and a liquidation preference. The
Company is also obligated to pay a percentage of net sales of certain products
over the next three years, not to exceed $3 million. Approximately $6 million of
acquisition financing has been provided by the Company's commercial bank, with
the balance coming from existing cash on hand.

         For the year ended December 31, 1998, the Company satisfied all of its
cash requirements from cash available and on-hand, and from a financing
agreement with its commercial bank of $323 thousand for specific equipment
purchases and leasehold improvements. At December 31, 1998, the Company had $265
thousand in long-term debt and stockholders' equity of over $13.1 million.

         The Company believes it has, or has access to sufficient assets to meet
its operating requirements for the forseeable future. The Company's ability to
meet its long-term capital requirements will depend on a number of factors
including 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 and the success of the
Company's plan to make future acquisitions. Accordingly, no assurance can be
given that the Company will be able to meet the future liquidity requirements
that may arise from these inherent and similar uncertainties (see Note 16 to the
Consolidated Financial Statements).

                                       21
 
<PAGE>
Year 2000 Issues

The Company is aware of and is evaluating many of the "Year 2000" issues
associated with both information technology ("IT") and non-IT systems which
could cause problems and network failures should the systems fail to recognize
year designations after 1999.

The Company is currently reviewing its own computer, communication, software and
operating systems to determine if they are Year 2000 compliant. The Company has
planned system-wide testing in the first quarter of 1999 for all internal
network hardware and software, all enterprise system software and all user
workstation hardware and software. During the second quarter of 1999, the
Company will test all internal and OEM equipment. Any system failures will be
addressed when detected. The Company expects that absent unforeseen negative
results of its testing, its systems will be Year 2000 compliant no later than
July 31, 1999. Accordingly the Company has not conducted any contingency
planning. The Company relies primarily on third party provided software
purchased and licensed commercially, therefore the Company believes its Year
2000 risks are minimal. As a result its historical and estimated future costs of
remediation are now, and are not expected to become, material.

The Company will continue to contact critical suppliers, collaborators and
partners to determine if their operations, as they relate to the Company, are
Year 2000 compliant. The Company cannot presently estimate the impact of the
failure of such third parties to be Year 2000 compliant.

Although the Company will take all practical measures to prevent problems
related with the Year 2000 programming issues, such problems and failures may
occur which could seriously affect the Company's progress. Because of the
unprecedented nature of such problems, the extent of the effect on the Company's
progress cannot be certain.


                                       22

<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPLEMENTARY DATA

         The following consolidated financial statements of the Company and its
subsidiaries are included as part of this Form 10-K:
<TABLE>
<CAPTION>


                                                                                                                    Page
                                                                                                                    ----
<S>                                                                                                                  <C>    
Report of Independent Public Accountants 1998........................................................................F-1

Report of Independent Public Accountants 1997........................................................................F-2

Consolidated Balance Sheet as of December 31, 1998 and 1997..........................................................F-3


Consolidated Statements of Operations for each of the years
         in the three year period ended December 31, 1998............................................................F-4

Consolidated Statements of Changes in Stockholder's Equity (Deficit) and
         Comprehensive Income (Loss) for each of the years in the three year
         period ended December 31, 1998..............................................................................F-5


Consolidated Statements of Cash Flows for each of the years
         in the three year period ended December 31, 1998............................................................F-6

Notes to Consolidated Financial Statements...........................................................................F-7
</TABLE>



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE


The Company filed a Form 8-K on September 17, 1998, reporting a change in the
Company's auditors.


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The information contained under the caption "Election of a Class of Directors"
and the information contained under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Definitive Proxy Statement is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information contained under the caption "Executive Compensation" in the
Company's Definitive Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information contained under the caption "Stock Ownership of Principal
Stockholders and Management" in the Company's Definitive Proxy Statement is
incorporated herein by reference.

                                       23
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information contained under the caption "Certain Relationships and Related
Transactions" in the Company's Definitive Proxy Statement is incorporated herein
by reference.
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1.    Financial Statements

    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 
<TABLE>
<CAPTION>
                                                                                           Previous
Exhibit                                                                                    Exhibit
Number                                                                                     Number
-------                                                                                    --------
<S>                 <C>                                                                       <C>    

3.1      Fourth Amended and Restated Certificate of Incorporation of the Company          (1)     4.1


3.2      Amended and Restated Bylaws of the Company                                       (1)     4.2

4.1      Reference is made to Exhibits 3.1 and 3.2


4.2      Forms of Warrants to Purchase Common Stock of the Company                        (1)     4.4

10.1     Warrant Agreement dated June 1, 1991 between John Hancock                        (2)    10.5
         Leasing Corporation and the Company, as amended December 19, 1991

10.3     EnSys Environmental Products, Inc. 1993 Stock Incentive Plan*                    (2)   10.17

10.4     Amended and Restated EnSys Environmental Products, Inc. 1995*
         Stock Incentive Plan                                                             (3)

10.5     EnSys Environmental Products, Inc. 401(k) Plan Adoption
         Agreement                                                                        (2)    10.18


10.6     Lease Agreement dated June 1, 1989, between the Company and                      (2)    10.20
         Imperial Center Partnership and Petula Associates, Ltd. for premises
         at 4222 Emperor Boulevard, Morrisville, North Carolina, as
         amended December 22, 1991 and April 7, 1993

10.9     License Agreement by and between the Company and Meridian                        (4)    10.22
         Diagnostics, Inc. dated July 24, 1994

10.10    Asset Purchase Agreement among EnSys, Millipore Corporation,                     (5)      2.1
         and ImmunoSystems, Inc.

</TABLE>

                                       24


<PAGE>
<TABLE>
<CAPTION>
                                                                                           Previous
Exhibit                                                                                    Exhibit
Number                                                                                     Number
-------                                                                                    --------
<S>                 <C>                                                                       <C>    
10.11     Agreement and Plan of Merger by and between EnSys and Strategic                 (1)      2.1
          Diagnostics Inc. dated as of October 11, 1996

10.14     Employment Agreement dated December 30, 1996 by and between                     (6)     10.14
          Richard C. Birkmeyer and the Company*

10.15     Employment Agreement dated December 30, 1996 by and between                     (6)     10.15
          Grover C.Wrenn and the Company*

10.16     Registration Rights Agreement dated December 30, 1996 between                   (6)     10.16
          the Company and the stockholders listed therein

10.18     Industrial Lease dated October 26, 1993, by and between Tober &                 (6)     10.18
          Agnew Properties, Inc. and Strategic Diagnostics Incorporated

10.19     Industrial Lease dated August 9, 1990, by and between Tober &                   (6)     10.19
          Agnew Properties, Inc. and Strategic Diagnostics Incorporated

10.20     Industrial Lease dated June 7, 1991 by and between Tober &                      (6)     10.2
          Agnew Properties, Inc. and TSD BioServices

10.21     Lease agreement dated October 29, 1997 by and between Pencader                  (7)     10.21
          Courtyard, L.P. and Strategic Diagnostics Inc.

10.22     1998 Employee Stock Purchase Plan
         
21.1      Subsidiaries of the Company                                                     (6)     21.1

24.1      Consent of KPMG LLP

24.2      Consent of Arthur Andersen LLP

27        Financial Data Schedule (in electronic format only)
</TABLE>

------------------

(1) Incorporated by reference to the designated exhibit of the EnSys
Registration Statement on Form S-4 ( No. 333-17505) filed on December 9, 1996.

(2) Incorporated by reference to the designated exhibit of the EnSys
Registration Statement on Form S-1 ( No. 33-68440) filed on September 3, 1993.

(3) 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.

(4) Incorporated by reference to the designated exhibit of the EnSys Form 10-K
for the fiscal year ended December 31, 1994.

(5) Incorporated by reference to the designated exhibit of the EnSys Form 10-Q
for the fiscal quarter ended March 31, 1996.

(6) Incorporated by reference to the designated exhibit of the Company's Form
10-K for the fiscal year ended December 31, 1996.

(7) Incorporated by reference to the designated exhibit of the Company's Form
10-K for the fiscal year ended December 31, 1997.

*Management contract or compensatory plan.

(b)    Reports on Form 8-K 

       None.

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




Board of Directors and Stockholders
Strategic Diagnostics Inc.:

We have audited the accompanying consolidated balance sheet of Strategic
Diagnostics Inc. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, changes in stockholders' equity (deficit)
and comprehensive income (loss) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

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

In our opinion, the 1998 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, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.


                                                                KPMG LLP




Philadelphia, Pennsylvania 
January 27, 1999, except for Note 20
which is as of February 26, 1999 



                                       F-1




<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Strategic Diagnostics Inc.:

We have audited the accompanying consolidated balance sheet of Strategic
Diagnostics Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997, and the related consolidated statements of operations, stockholders'
equity (deficit) and comprehensive income (loss) and cash flows for each of the
two years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Strategic
Diagnostics Inc. and subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.


                                                           Arthur Andersen LLP




Philadelphia, Pa.,
January 30, 1998





                                      F-2







<PAGE>


                  STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)


                                      December 31,             December 31,
--------------------------------------------------------------------------------
                                         1998                     1997
--------------------------------------------------------------------------------
 ASSETS
--------------------------------------------------------------------------------
 CURRENT ASSETS:

    Cash and cash equivalents           $1,864                   $2,580
    Short-term investments               3,990                    3,638
    Receivables, net                     3,653                    3,159
    Inventories                          1,855                    1,547
    Other current assets                   469                      174
--------------------------------------------------------------------------------
          Total current assets          11,831                   11,098
--------------------------------------------------------------------------------
 PROPERTY AND EQUIPMENT, net               835                      496
 OTHER ASSETS                              494                      634
 INTANGIBLE ASSETS, net                  1,933                    1,832
--------------------------------------------------------------------------------
          Total assets                 $15,093                  $14,060
--------------------------------------------------------------------------------
 LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
 CURRENT LIABILITIES
    Accounts payable                      $802                     $619
    Accrued expenses                       788                      953
    Deferred revenue                       -                        100
    Current portion of LTD                  83                       23
--------------------------------------------------------------------------------
          Total current liabilities      1,673                    1,695
--------------------------------------------------------------------------------
 Long-term debt                            265                       25
--------------------------------------------------------------------------------
 STOCKHOLDERS' EQUITY

    Preferred stock, $.01 par value,
      17,500,000 shares authorized,
      no shares issued or outstanding       -                        -
    Series A preferred stock, $.01 par
      value, 2,164,362 shares 
      authorized, issued and
      outstanding, liquidation value of
      $6,378 as of December 31, 1998       22                       22
    Common stock, $.01 par value,
      35,000,000 shares authorized,
      13,262,157 and 13,112,949 issued
      and outstanding at December 31, 
      1998 and December 31, 1997,
      respectively                        133                      132
   Additional paid-in capital          23,946                   23,913
   Accumulated deficit                (10,921)                 (11,702)
   Cumulative translation adjustments     (25)                     (25)
--------------------------------------------------------------------------------
      Total stockholders' equity       13,155                   12,340
--------------------------------------------------------------------------------
      Total liabilities and
       stockholders' equity           $15,093                  $14,060
--------------------------------------------------------------------------------


        The accompanying notes are an integral part of these statements.






                                      F-3




<PAGE>


                   STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (in thousands, except share and per share data)
<TABLE>
<CAPTION>
                                                                                        Year Ended December 31,
 ..........................................................................................................................
                                                                           1998                1997             1996
------------------------------------------------------------------  -------------------   ---------------  ---------------
<S>                                                                         <C>                 <C>              <C>
 NET REVENUES:
------------------------------------------------------------------  -------------------   ---------------  ---------------
    Product related                                                       $  14,172         $  12,703        $   3,402
    Contract and other                                                        1,553             1,717            2,435
      ------------------------------------------------------------  -------------------   ---------------  ---------------
       Total net revenues                                                    15,725            14,420            5,837
      ------------------------------------------------------------  -------------------   ---------------  ---------------
 OPERATING EXPENSES:
    Manufacturing cost of sales                                               6,222             5,305            2,839
    Research and development                                                  1,922             1,580            1,569
    Selling, general and administrative                                       7,156             6,132            1,737
    Acquired research and development                                            -                 -             8,266
      ------------------------------------------------------------  -------------------   ---------------  ---------------
       Total operating expenses                                              15,300            13,017           14,411
       -----------------------------------------------------------  -------------------   ---------------   --------------
 OPERATING INCOME (LOSS)                                                        425             1,403           (8,574)

 INTEREST AND OTHER INCOME, NET                                                 356               274              186
------------------------------------------------------------------  -------------------   ---------------  ---------------
 NET INCOME (LOSS)                                                          $   781         $   1,677        $  (8,388)

 Accretion of Redeemable Convertible
     Preferred Stock Liquidation Value                                           -                 -              (635)
------------------------------------------------------------------  -------------------   ---------------  ---------------
 Net Income (Loss) Applicable to
       Common Stockholders                                                       781            1,677           (9,023)
------------------------------------------------------------------  -------------------   ---------------  ---------------
Basic Net Income (Loss) Per Share
    Applicable to Common Stockholders                                       $   0.06        $    0.13        $   (2.12)
------------------------------------------------------------------  -------------------   ---------------  ---------------
Shares Used in Computing Basic
    Per Share Amounts                                                     13,174,000       13,084,000        4,248,000
------------------------------------------------------------------  -------------------   ---------------  ---------------

 Diluted Net Income (Loss) Per share
      Applicable to Common Stockholders                                     $   0.05        $    0.11        $   (2.12)
------------------------------------------------------------------  -------------------   ---------------  ---------------
 Shares Used in Computing Diluted
     Per Share Amounts                                                    16,103,000       15,712,000        4,248,000
------------------------------------------------------------------  -------------------   ---------------  ---------------
</TABLE>

        The accompanying notes are an integral part of these statements.





                                      F-4



<PAGE>



                   STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES


    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND
                           COMPREHENSIVE INCOME (LOSS)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                Series A           Additional                   Cumulative  Deferred
                                               Preferred   Common   Paid-In     Accumulated     Translation  Compen-
                                                 Stock     Stock    Capital       Deficit       Adjustments  sation     Total
----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995                                  $-       $47       $294        $(4,356)            $-       $(49)    $(4,064)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>       <C>        <C>           <C>             <C>        <C>        <C>
Amortization of deferred compensation                                                                            43          43
Accretion of liquidation value                                                       (635)                                 (635)
Acquisition of Ohmicron Corporation                          31      4,017                                                4,048
Acquisition of EnSys Environmental
Products, Inc.                                               53     13,006                                               13,059
Conversion of preferred to Series A                22                6,588                                                6,610
Net loss and comprehensive loss                                                    (8,388)                               (8,388)
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996                                  22       131     23,905        (13,379)             -         (6)     10,673
------------------------------------------------------------------------------------------------------------------------------------
Exercises of stock options, warrants and
other                                                         1          8                                        6          15
Net income and comprehensive income                                                 1,677            (25)                 1,652
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997                                  22       132      23,913       (11,702)           (25)         -      12,340
------------------------------------------------------------------------------------------------------------------------------------
Exercises of stock options, warrants and
other                                                         1          33                                                  34
Net income and comprehensive income                                                   781                                   781
------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998                                 $22      $133     $23,946      $(10,921)          $(25)        $-     $13,155
====================================================================================================================================
</TABLE>



        The accompanying notes are an integral part of these statements.


                                      F-5


 

<PAGE>

                   STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                              Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                                                             1998      1997     1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                           <C>       <C>      <C>
Cash Flows from Operating Activities: 
Net income (loss)                                                                            $781      $1,677   ($8,388)
  Adjustments to reconcile net income (loss) to
  cash provided by (used in) operating activities:
    Depreciation and amortization                                                             614         643       181 
    Acquired research and development write-off                                               -           -       8,266 
    Equity in (income) of TSD BioServices                                                     -           -        (178)
    Amortization of deferred compensation                                                     -             6        43 
(Increase) decrease in: 
   Receivables                                                                               (494)       (825)     (753)
   Inventories                                                                               (308)         10       208 
   Other current assets                                                                      (295)        336      (696)
   Note receivable and other assets                                                           140          81        56 
Increase (decrease) in: 
     Accounts payable                                                                         183        (947)      472 
     Accrued expenses                                                                        (165)     (1,113)      589 
     Deferred revenue                                                                        (100)        (41)     (170)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities                                           356        (173)     (370)

Cash Flows from Investing Activities: 
  Purchase of property and equipment                                                         (674)       (159)      (67)
  Purchase of intangible assets                                                              (380)        -          - 
  Proceeds from EnSys and Ohmicron acquisitions                                               -           -         807
  Short-term investment activity                                                             (352)      2,072       -
  Restricted cash                                                                             -           -          56 
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                                        (1,406)      1,913       796 

Cash Flows from Financing Activities: 
  Proceeds from exercise of incentive stock options                                            34           9        - 
  Repayments on capital lease obligations                                                     (23)        (86)      (17)
  Proceeds from sale of preferred stock, net                                                   -           -        473
  Proceeds from issuance of long-term debt                                                    323          -         -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                                           334         (77)      456 

Net Increase (Decrease) in Cash and Cash Equivalents                                         (716)      1,663       882 

Cash and Cash Equivalents, Beginning of Year                                                2,580         917        35 
------------------------------------------------------------------------------------------------------------------------------------

Cash and Cash Equivalents, End of Year                                                     $1,864      $2,580      $917 
------------------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosure: 
  
  Cash paid for interest                                                                      $20         $36        $3 
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


         The accompanying notes are an integral part of these statements





                                      F-6





<PAGE>


                   STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998
                 (in thousands, except share and per share data)

1. BACKGROUND:

Business

Strategic Diagnostics Inc. (the "Company") develops, manufactures and markets
immunoassay based test kits for rapid and inexpensive detection of a wide
variety of substances in the water quality, industrial and agricultural markets.

Basis of Presentation

The Company is the entity resulting from the combination of Strategic
Diagnostics Inc. ("SDI") Ohmicron Corporation ("Ohmicron") and EnSys
Environmental Products, Inc. ("EnSys").

The historical financial statements presented herein include the consolidated
financial statements of SDI for all periods and the actual results of Ohmicron
from August 30, 1996 (Note 3) and EnSys from December 30, 1996 (Note 3). As used
herein, unless the context requires otherwise, the Company collectively refers
to Strategic Diagnostics Inc. and its subsidiaries for the periods indicated.
All significant intercompany balances and transactions have been eliminated in
consolidation.



2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CERTAIN BALANCE SHEET
   INFORMATION:

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Basic and Diluted Income per Share

The Company has adopted Statement of Financial Standards ("SFAS") No. 128,
"Earnings per Share," which requires dual presentation of basic and diluted
earnings per share ("EPS") for complex capital structures on the face of the
statement of operations. Basic EPS is computed by dividing net income or loss by
the weighted-average number of common shares outstanding during the period.
Diluted EPS is similar to basic EPS except that the effect of converting or
exercising all potentially dilutive securities is also included in the
denominator. The Company's calculation of diluted EPS includes the effect of
converting preferred stock and exercising stock options and warrants into common
shares.

Outstanding options to purchase 30,000 shares of Common stock at $3.25 were
excluded from the computation of diluted earnings per share, as the options'
exercise price was greater than the average market price of the common shares.


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.






                                      F-7



<PAGE>


Accounts Receivable

As of December 31, 1998, 1997 and 1996, the allowance for doubtful accounts was
$97, $120 and $180, respectively. In 1998, 1997 and 1996, approximately $23, $60
and $2 of write-offs were charged to this allowance which was offset by
approximately $114, $0 and $81 charged to earnings in each of the respective
years. If receivables become uncollectible or unbillable, 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, accounts receivable
consisted of the following:

                                      1998             1997           1996
                                   -----------     ------------     --------
 Accounts receivable              $      3,152     $      2,745     $  1,739
 Unbilled accounts receivable              501              414          595
                                  ------------     ------------     --------
                                  $      3,653     $      3,159     $  2,334
                                  ============     ============     ========


Inventories

The Company's inventories, which consist primarily of test kit components and
accessories, are valued at the lower of cost or market. Cost is determined using
the first in, first out method. Realization of the Company's inventories is
dependent upon the successful marketing of its products. At December 31,
inventories consisted of the following:

                                      1998             1997           1996
                                  ------------     -----------      ---------

 Raw materials                    $        700     $       619      $     626
 Work in progress                           93              51            356
 Finished goods                          1,062             877            575
                                  ------------     -----------      ---------
                                  $      1,855     $     1,547      $   1,557
                                  ============     ===========      =========

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization is
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.


Revenue Recognition

Product related revenues which include the sale of immunoassay-based test kits
are generally recognized upon shipment. Included in product related revenues are
also the sale of antibodies and immunochemical reagents which are sold through
longer term development agreements. These revenues are recognized on a
percentage of completion method. Contract revenues recorded under the Company's
collaborative agreements are recognized upon the completion of certain
performance requirements of the contracts. License revenue is recognized upon
transfer of such licenses.

Research and Development

Research and development costs are charged to expense as incurred.


Accounting for Income Taxes

Deferred income tax assets and liabilities are determined based on differences
between the financial statement reporting and tax bases 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 income 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 tax rate changes are enacted.





                                      F-8





<PAGE>


Other Income

Other income of $178 was recorded in 1996, for the Company's equity in the 
income of TSD BioServices (Note 3).

Comprehensive Income

On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income or loss and its components in financial
statements.


3. MERGERS AND ACQUISITIONS:

Merger with EnSys Environmental Products, Inc.

On December 30, 1996, the Company merged with and into EnSys Environmental
Products, Inc. (the "Merger"). The Merger agreement provided that SDI
common and preferred stockholders receive .7392048 shares of EnSys stock
for each share of SDI Common or Preferred Stock. This resulted in the
former SDI stockholders owning 5,780,136 shares of EnSys Common Stock and
2,164,362 shares of EnSys Series A Convertible Preferred Stock or
approximately 52% of the 15,219,532 voting shares outstanding after the
Merger. In addition to the common and preferred stock noted above, current
SDI option and warrant holders received options and warrants to purchase
 .7818026 shares of EnSys Common Stock for each option or warrant held. Upon
consummation of the Merger, SDI option and warrant holders received options
and warrants for the purchase of 383,216 and 599,644 shares, respectively,
of EnSys Common Stock. The difference in exchange ratios between
stockholders and option and warrant holders is due to the stock preferences
received by SDI's preferred stockholders upon exchange of their shares. The
cost of receiving these preferences was shared by all SDI stockholders upon
exchange of their shares, but was not borne by the SDI option and warrant
holders.

The Merger was accounted for as a purchase transaction with SDI as the
acquiring company. Based on the $1.75 per share closing price of EnSys
Common Stock on October 14, 1996, (date of transaction public announcement)
the estimated total purchase price of EnSys was $16,133, which consists of
the following: (i) the $12,731 market value of the outstanding shares of
EnSys Common Stock (7,275,034 shares multiplied by $1.75 per share), (ii)
the $328 fair value of the outstanding options and warrants to purchase
EnSys Common Stock and (iii) estimated transaction costs of approximately
$3,074. Since SDI is the acquirer for accounting purposes, the EnSys
options and warrants are required to be valued for purchase accounting
purposes as if they are additional consideration in the transaction. The
valuation for EnSys options and warrants was provided by an investment
banking firm using a traditional valuation approach. Of the approximately
$3,074 of estimated transaction costs, approximately $457 relates to
severance payments to former EnSys employees, $362 to facility termination
and moving and $36 to employee relocation. In connection with the Merger,
approximately 35 EnSys employees were terminated in December 1996.

In connection with the Merger, all identifiable assets acquired by SDI
including intangible assets were assigned a portion of the cost of the
acquired company based on an independent valuation of EnSys' assets. Such
allocation included the identification and evaluation of each development
project to determine if technological feasibility had been achieved and if
there were any alternative future uses. EnSys' primary research and
development focus at the time of the merger, the "One Step" assay, was
evaluated and it was determined that technological feasibility had not been
achieved. In addition, since alternative uses of this developmental
technology did not exist, the costs of such technology were charged to
expense in accordance with SFAS No. 2. Based on the foregoing purchase
price, the amount allocated to acquired research and development of $4,353
was charged to the statement of operations at December 30, 1996, the
effective date of the Merger. The remaining amount of intangible assets of
approximately $1,167 included approximately $472 for developed technology,
$55 for assembled workforce and $640 for goodwill. The intangible assets
purchased are amortized on a straight-line basis over 7-10 years.





                                      F-9




<PAGE>
Acquisition of Ohmicron Corporation

On August 30, 1996, SDI acquired Ohmicron and certain of its wholly owned
subsidiaries for 2,268,456 shares of common stock. Prior to the
acquisition, Ohmicron spun-off certain assets and liabilities of another of
its wholly-owned subsidiaries, Ohmicron Medical Diagnostics, Inc. The
acquisition of Ohmicron was recorded as a purchase using the fair value of
the SDI common stock issued to Ohmicron. The total purchase price of
approximately $4,503, including transaction and other costs of $533, has
been allocated to the fair market value of the assets acquired and
liabilities assumed. Based on the foregoing purchase price, the amount
allocated to acquired research and development of $3,913 was charged to the
statement of operations at the time of the acquisition. In connection with
the Ohmicron transaction, all identifiable assets acquired including
intangible assets were assigned a portion of the cost of the acquired
company based on an independent valuation of Ohmicron's assets. Such
allocation included the evaluation of each development project identified
to determine if technological feasibility had been achieved and if there
were any alternative future uses. Based on this analysis, it has been
determined that technological feasibility has not been achieved, and that
alternative uses of this developmental technology do not exist. The cost of
such technology has therefore been charged to expense in accordance with
SFAS No. 2, "Accounting for Research and Development Costs." The remaining
amount of intangible assets of approximately $590 included approximately
$384 for developed technology, $103 for assembled workforce and $103 for
goodwill. The intangible assets purchased are amortized on a straight-line
basis over 7-10 years. The fair market value of the common stock issued to
Ohmicron was based on several factors including recent equity transactions,
as well as the subsequently negotiated merger with EnSys.

The redeemable convertible preferred stock was mandatorily redeemable and
received dividends, registration rights and senior liquidation rights to
the common stock (see Note 11). The common stock was valued at $1.75 per
share reflecting a discount from the redeemable convertible preferred stock
due to the difference in preferences between the two classes of stock.


TSD BioServices Dissolution

In October 1996, SDI entered into an agreement with Taconic Farms, Inc.
("Taconic") to dissolve TSD BioServices; a partnership between Taconic and
SDI and to liquidate its assets, in connection with which certain of the
rights and assets were distributed to SDI. Upon dissolution, certain rights
and assets formerly owned by the joint venture were placed in a
wholly-owned subsidiary of SDI. The agreement to dissolve TSD Bio Services
provides that each of the former partners receive rights to perform
services that were considered to be either a core part of that partner's
expertise, or an area in which the partner wanted to increase its market
presence or technical competency. The dissolution agreement also provided
that certain services previously provided by TSD BioServices, such as
ascites production and sales and marketing, would be subcontracted to
Taconic by SDI in the future based on established fees set annually. For
accounting purposes, this transaction was treated as a purchase, with the
consideration provided being SDI's investment of $338, which approximates
the fair market value of the assets received.


Unaudited Pro Forma Combined Results of Operations

The following table summarizes the unaudited pro forma combined results of
operations for the year ended December 31, 1996, assuming that the Merger,
the Ohmicron acquisition and the TSD dissolution had occurred on January 1,
1996:


                                                      Year Ended December 31
                                                      ----------------------
                                                               1996
                                                               ----
                                                            (unaudited)
      Revenues                                               $ 12,700
                                                             ========

      Net Loss                                               $ (5,973)
                                                             ========


      Basic and Diluted Net loss per share                   $  (0.47)
                                                             ========

                                      F-10
<PAGE>

The above pro forma information excludes the $8,266 one-time charge to earnings
for acquired research and development. The shares used in computing pro forma
net loss per share assumes that the Merger with EnSys, the acquisition of
Ohmicron and the TSD BioServices dissolution had occurred January 1, 1996.


Supplemental Disclosure of Cash Flow Information

The following table displays the net non cash assets that were acquired during
1996 as a result of the Merger and the Ohmicron Acquisition:

     Non cash (assets) liabilities:
       Short term investments                                $        (5,710)
       Receivables                                                      (808)
       Inventories                                                    (1,318)
       Property and equipment                                           (443)
       Restricted cash                                                  (126)
       Note receivable                                                  (357)
       Intangibles                                                    (2,135)
       Accounts payable                                                1,483
       Accrued expenses including acquisition costs                    1,128
       Deferred revenue                                                  100
       Capital lease obligations                                         152
                                                             ---------------
                                                                      (8,034)
       Issuance of common stock                                       17,107
       Acquired research and development                              (8,266)

     Net cash acquired in business acquisitions              $           807
                                                             ===============

4. SHORT-TERM INVESTMENTS:

As of December 31, 1998 and 1997, short-term investments consisted primarily of
commercial paper. Contractual maturities of the Company's investments as of
December 31, 1998 are $2,740 in 1999, $174 in 2000, $244 in 2001 and $832 from
2002 and beyond. The Company considers these investments as being
available-for-sale in accordance with SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities are
carried at fair value, based on quoted market prices, with unrealized gains and
losses reported as a separate component of stockholders' equity. As of December
31, 1998 and 1997, unrealized gains were not material to the financial
statements. Interest income and other realized gains were $362, $310, and $11 in
1998, 1997, and 1996, respectively. 

5. PROPERTY AND EQUIPMENT:

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

                                                      1998             1997
                                                 -------------    -------------

  Equipment                                       $      1,518    $      1,071
  Furniture and fixtures                                    66              66
  Leasehold improvements                                   502             288
                                                 -------------    ------------

  Less- Accumulated depreciation and
   amortization                                         (1,251)           (929)
                                                 -------------    ------------

                                                  $        835    $        496
                                                 =============    ============

Depreciation expense was $322, $391, and $91 in 1998, 1997, and 1996
respectively.





                                      F-11


<PAGE>

6. OTHER ASSETS:

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

                                               1998          1997
                                            ----------    ------------

  Restricted cash                           $       -     $        100
  Deferred rent                                    206             192
  Note receivable - non current
   (net of allowance)                              241             276
  Deposits and other                                47              66
                                            ----------    ------------

                                            $      494    $        634
                                            ==========    ============

The Company maintains a note receivable from a former executive of EnSys. The
original loan amount was $350 and is secured by the individual's personal
residence. The loan bears interest at 5.8% per annum. At December 31, 1998, the
outstanding loan balance was approximately $341 of which approximately $6 in
principal is payable annually through the year 2000 with the balance payable in
January 2001.

7. INTANGIBLE ASSETS:
                                       1998             1997               Lives
                                       ----             ----               -----
   Developed Technology              $1,250           $1,250                7
   Goodwill                             743              743                7
   Intellectual and license rights 
   (Note 19)                            380              -                  -
   Other                                208              208           5 - 10
   Less - Accumulated Amoritization    (648)            (369)
                                    -------           ------         
                                     $1,933           $1,832
                                     ======           ======

Amortization of these intangible assets was $279, $278 and $91 in 1998, 1997 and
1996, respectively.

8. ACCRUED EXPENSES:

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


                                                         1998       1997
                                                         ----       ----

     Legal and professional                           $    57     $  131
     Building Rents                                        32        118
     Royalties                                            291        162
     Sales Commissions                                     52         20
     Accrued Purchases                                    185         35
     Marketing Fees                                        84         60
     Accrued taxes, salaries, and other                    87        427
                                                     --------     ------
                                                     $    788     $  953
                                                     ========     ======

9. NOTES PAYABLE:

In October 1994 and April 1995, the holders of the redeemable convertible
preferred stock provided $500 and $1,000, in working capital loans to the
Company. These notes bore interest at 9% and 10% per annum, respectively, and
each became due during 1995. In addition, 87,349 and 223,372 warrants were
issued, respectively, for the purchase of common stock of the Company at an
exercise price of $2.37 per share. The warrant values deemed for accounting
purposes were $23 and $75, respectively, which were recorded as an asset and
amortized over the term of the loans. The warrants have an exercise period of
five years.


In January 1996, the Company converted the $1,500 of Notes Payable and $124 of
accrued interest into 685,952 shares of redeemable convertible preferred stock
(Note 11).



                                      F-12
<PAGE>


10. LONG-TERM DEBT:

The Company entered into two financing agreements with its commercial bank
during 1998, pursuant to the purchase of equipment and specific leasehold
improvements. The maturities on these financing agreements are for 48 and 60
months. These notes are secured with Certificates of Deposit (CD), purchased by
the Company and bear an interest rate of 1% over the purchased CD rate. As of
December 31, 1998, the maturities of long-term debt are listed below:


     1999                                                    $            83
     2000                                                                 80
     2001                                                                 79
     2002                                                                 74
     2003                                                                 32
                                                             ---------------
                                                                         348
     Less- Current portion of long-term debt obligations                 (83)
                                                             ---------------

     Long-term debt                                          $           265
                                                             ===============


Interest expense was $20, $36, and $3 in 1998, 1997, and 1996 respectively.

11. SERIES A PREFERRED STOCK:

In June 1993, the Company sold 1,267,208 shares of redeemable convertible
preferred stock and received proceeds of $3,000 less $47 of transaction costs.
In connection with the 1996 financing, the Company converted the $1,500 of notes
payable and $124 of accrued interest into 685,952 shares of redeemable
convertible preferred stock at $2.37 per share (Note 9) and received an
additional investment of $500 for the purchase of 211,202 shares less
transaction costs of $27. All such shares were redeemable with cumulative
dividends, at the option of the holders, as defined, beginning in 1998.
Dividends have been accreted through the Merger (Note 3).


In connection with the Merger, the redeemable convertible preferred stock plus
cumulative dividends were converted into 2,164,362 shares of a newly issued
class of Series A Preferred Stock ("Series A"). The Series A has no redemption
provisions outside the control of the Company. As a result, the Series A is
classified as a component of stockholders' equity.


Each share of Series A is convertible into one share of common stock at the
option of the holder at any time, or at the option of the Company if the closing
share price of the Company's common stock exceeds $4.50 per share for a period
of 45 business days. The Series A carries an aggregate and per share liquidation
preference of $6,378 and $2.95, respectively, as of December 31, 1998. The
Series A contains no annual dividend provisions and is only redeemable in the
event the Company converts the Series A into securities of a lesser value, as
defined.

12. STOCK OPTIONS AND WARRANTS:

Stock Options

The Company has two stock option plans (the "1993 Plan" and the "1995 Plan")
which authorize the granting of incentive and nonqualified stock options to
officers, key employees, directors and consultants. 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. All previously issued SDI options were converted into the
1995 Plan. A maximum of 1,700,000 shares of common stock are issuable under the
1995 Plan and options to purchase up to 300,000 shares of common stock had been
reserved under the 1993 Plan. 



                                      F-13





<PAGE>

Certain additional options have been granted outside the plans. These options
generally follow the provisions of the 1995 Plan.

Information with respect to the stock options granted under the plans and
options granted separately from the plans is summarized as follows:
<TABLE>
<CAPTION>
                                                                                 Price          Aggregate
                                                                 Number          Range           Proceeds
                                                            --------------- ----------------- ---------------
<S>                                                                <C>            <C>                 <C>
          Balance, December 31, 1995                             397,288       0.19 -   0.64            122
          Options acquired in conjunction
            with the Merger                                      461,023       0.25 -   7.50          1,226
            Granted                                              200,000       2.00 -   2.20            420
            Cancelled                                            (14,072)               0.64             (9)
                                                            ------------    ----------------  -------------

          Balance, December 31, 1996                           1,044,239     $ 0.19 - $ 7.50   $      1,759
            Granted                                              545,000                1.88          1,022
            Cancelled                                           (204,198)      0.19 -   7.50           (576)
            Exercised                                            (25,502)      0.19 -   0.64             (7)
                                                            -------------   ----------------   -------------

          Balance, December 31, 1997                           1,359,539    $ 0.19 - $ 3.25   $       2,198
                                                            ------------    ---------------   -------------
            Granted                                              350,000      2.00 -   2.63             888                        
            Cancelled                                            (22,377)     0.64 -   1.88             (34)
            Exercised                                            (93,172)     0.19 -   1.88             (34)
                                                            ------------    ---------------   -------------
          Balance, December 31, 1998                           1,593,990    $ 0.19 - $ 3.25   $       3,018
                                                            ============    ===============   =============
</TABLE>

As of December 31, 1998, options covering 799,722 shares were exercisable with
an aggregate exercise price of $1,252 and 385,772 shares were available for
future grant under the plans. For options granted, the Company recognizes as
deferred compensation the excess of the deemed value for accounting purposes of
the common stock issuable upon the exercise of options over the aggregate
exercise price of such options. The deferred compensation is amortized over the
vesting period of the options. 
<TABLE>
<CAPTION>
                           
                            Options Outstanding                         Options Exercisable
                      -------------------------------                 ------------------------
                                               Weighted Average                    
                        Shares       -----------------------------                 Wtd. Average                 
   Range of           Outstanding       Remianing         Exercise      Shares       Exercise
Exercise Prices       At 12/31/98    Contractual Life       Price     Exercisable      Price
---------------       -----------    ----------------     --------    -----------   -----------
<S>                      <C>              <C>                <C>         <C>           <C>
$0.19                  200,311         5.6 Years           $0.19       200,311        $0.19
$0.64                   63,679         5.2 Years           $0.64        53,911        $0.64
$1.35 $2.00            811,000         8.1 Years           $1.90       326,500        $1.89
$2.10 $3.20            489,000         7.9 Years           $2.56       189,000        $2.46
$3.25                   30,000         6.1 Years           $3.25        30,000        $3.25
--------------      ----------       ----------------     --------     ---------      ------
$0.19 $3.25          1,593,990         7.6 Years           $1.86       799,722        $1.57
==============      ==========       ================     ========     =========      =====
</TABLE>

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." Effective January 1, 1995, the Company adopted the disclosure
requirement of this pronouncement. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under SFAS 123, the Company's net income (loss) applicable to common
stockholders for 1998, 1997 and 1996 would have been $190, $1,493, and $(9,113)
and diluted net income (loss) per share applicable to common stockholders would
have been $.01, $0.10, and $(2.15), respectively. Because the SFAS 123 method of
accounting has not been applied to options granted prior to January 1, 1995, the
resulting pro forma compensation cost, and thus pro forma net income (loss), may
not be representative of that to be expected in future years.


                                      F-14

<PAGE>


The weighted average fair value at the date of grant for options granted during
1998, 1997 and 1996 is estimated at $1.97, $1.37 and $1.46 per share,
respectively, using the Black-Scholes option-pricing model. The assumptions used
in the Black-Scholes model are as follows: dividend yield of 0%, expected
volatility of 94% in 1998 and 80% in 1997 and 1996, risk-free interest rate of
6.1% in 1998, 6.4% in 1997 and 6.4% in 1996, and an expected option life of 5
years in 1998 and 6 years in 1997 and 1996. 

Warrants

In December 1994, in connection with a prior collaboration agreement, the
Company issued to Conoco a warrant that enables Conoco to purchase 164,179
shares of the Company's common stock for an exercise price of one dollar. In
connection with this exchange, the Company recorded a charge of $105 in 1994 in
the statement of operations reflecting the fair value of the warrant. If Conoco
exercises this warrant, and the Company completes an equity financing with
aggregate proceeds of $7 million or greater, then Conoco has the right to
require the Company to repurchase the warrant at a price equal to 164,179 shares
multiplied by the price per share received in the equity financing. The warrant
expires in November 1999.

In connection with the original issuance of redeemable convertible preferred
stock and notes payable in October 1995 and April 1995 which were subsequently
converted to redeemable convertible stock in January 1996, the Company granted
warrants to purchase a total of 429,992 shares of common stock at an exercise
price of $2.37. Of these warrants, 312,716 were outstanding as of December 31,
1998. The warrants expire five years from the dates of grant.

In addition, at December 31, 1998, the Company maintains 3,530 of outstanding
warrants. These warrants are exercisable at $4.96 per share and expire in 2001.

13. EM COLLABORATIVE AGREEMENT:

In February 1992, SDI entered into an agreement with EM Industries, Inc. (an
affilitate of Merck KGaA, "EM") for the development and manufacture of a product
line of immunoassays capable of identifying and quantifying certain substances
found on the priority pollutant list published by the Environmental Protection
Agency. In connection with this agreement, the Company received $400 in 1996,
for the achievement of certain defined development milestones. In September
1996, the Company acquired the product rights to the DTECH(R) product line from
EM in exchange for a royalty payment based on sales of specified products into
selected markets and 48,048 shares of common stock.

14. SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION

Strategic Diagnostics Inc. develops, manufactures, and markets immunoassay-based
test kits for rapid, cost effective detection of a wide variety of different
analytes in three primary market categories: water quality, industrial testing
and agriculture.

TSD BioServices provides a fully integrated monoclonal antibody development and
large scale manufacturing services to pharmaceutical and medical diagnostic
companies.

   Geographic:

   Revenues                               1998         1997         1996
                                        --------     ---------     -------

   United States                       $ 13,257      $ 12,421      $ 5,375
   Rest of the World                      2,468         1,999          462
                                       --------      --------      -------
   Total                               $ 15,725      $ 14,420      $ 5,837     
                                       ========      ========      =======

There were no individual countries outside of the United States representing
more than 10% of the total revenues of the Company. There are no significant
long-lived assets located outside the United States.









                                      F-15








<PAGE>

         Information about Major Customers:

In 1998, Delta and Pine Land Company accounted for 10% of the Company's
revenues. Delta & Pine Land Company and Rohm and Haas Corp. each accounted for
10% of the Company's 1997 revenues. In 1996, EM Industries and Ensys (Note 3)
accounted for 11% and 19% of the Company's revenues, respectively.

         Reportable Segments:

The 1996 segment information is not comparative due to the mergers and
acquisitions occurring in that year. (Note 3) For reporting purposes a
"pro-rata" share of common costs, including a management fee, is charged to TSD
BioServices by Strategic Diagnostics Inc. 


                                               SDI      TSD      Total
                                               ---      ---      -----
  1998         Revenues                      $12,960  $2,765    $15,725
               Segment Profit                    957    (176)       781
               Segment Assets                 14,731     362     15,093
               Depreciation an
                Amortization                     614      -         614
               Capital Expenditures              674      -         674

  1997         Revenues                      $12,306  $2,114    $14,420
               Segment Profit                  1,719     (42)     1,677
               Segment Assets                 13,919     141     14,060
               Depreciation and 
                Amortization                     643      -         643
               Capital Expenditures              159      -         159



15. TSD BIOSERVICES TRANSACTIONS:

TSD purchased certain supplies, raw materials and services from Taconic and the
Company. In 1996, the Company included in revenues $53 of contract and other
revenues resulting from transactions with TSD. In October 1996, TSD was
dissolved (Note 3).

In 1991, TSD entered into a five-year management agreement with each of its
partners. The agreements provided that the partners could charge TSD BioServices
for work performed on behalf of the partnership by any of the partners'
principals. TSD BioServices partners elected not to charge TSD BioServices for
these and certain other expenses related to the partnership, but rather elected
to absorb such costs in the parent organizations. Such costs were immaterial and
the management agreement was terminated in 1996.


16. 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, 1998, 1997
and 1996, was $598, $466 and $250, respectively. Future commitments under these
non-cancelable leases at December 31 are as follows:

             1999                                     $569
             2000                                      436
             2001                                      383
             2002                                      351
             2003                                      362
             2004 and thereafter                     1,288
                                                     -----
                                                    $3,389
                                                    ======

                                      F-16

<PAGE>

The Company is party to various claims arising in the ordinary course of
business. Although the ultimate outcome of these matters is presently not
determinable, management, after consultation with legal counsel, 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.


17. RETIREMENT SAVINGS PLAN:

In 1992, the Company instituted 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
1998, 1997 and 1996, the Company recognized expense of $77, $76 and $51,
respectively, associated with this plan.

18. INCOME TAXES:

As of December 31, 1998, the Company had federal net operating loss
carryforwards, including those acquired (Note 3), of approximately $15,540,
which begin to expire as follows:

                                    2002             $     489
                                    2003                   489
                                    2004                 1,362
                                    2005                 2,565
                                    2006                 2,603
                                    2007                 2,584
                                    2008                 1,182
                                    2009                 2,081
                                    2010                 2,185
                                                     ---------
                                    Total              $15,540
                                                     =========

The amount of the net operating loss carryforwards which can be utilized in any
one period, if any, will be limited by federal tax regulations since a
cumulative change in ownership of more than 50% has occurred within a three year
period. The benefits of the utilization of acquired net operating losses, if
any, will be recorded as a reduction of the remaining unamoritized intangibles
that were acquired in the transaction in which the utilized net operating losses
were acquired. Any benefits obtained in excess of the remaining related
intangibles will be reported as a reduction in the income tax provision during
the year in which management determines that it is more likely than not that
these benefits will be realized. As of December 31, 1998 approximately $4,400 of
future utilization, if any, of acquired net operating losses will be recorded as
a reduction of the related acquired intangibles.

The net operating loss carryforwards differ from the accumulated deficit
principally due to differences in the recognition of certain research and
development expenses, depreciation and amortization, other non-deductible
reserves and the accretion of preferred stock for financial and federal income
tax reporting.

Significant components of the Company's deferred tax assets as of December 31
are as follows:

                                                        1998            1997
                                                        ----           -----
  Net operating loss carryforwards                     7,288           5,429
  Amortization and depreciation                          699             517
  Non-deductible reserves                                 55             127
  Inventory costs not currently
   deductible                                             63             129
                                                      ------          ------
           Total deferred tax assets                   8,105           6,202
           Valuation allowance                        (8,105)         (6,202)
                                                      -------         -------
           Net deferred tax assets                      -                -    
                                                      =======         =======


                                      F-17

<PAGE>




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:
<TABLE>
<CAPTION>
                                                     1998              1997              1996
                                                     ----              ----              ----
<S>                                                  <C>               <C>               <C>
Statutory tax rate                                  34.0%             34.0%             (34.0)%
State taxes, net of U.S. Federal benefit              .5                -                  .1
Write-off of acquired research and
         development                                   -                -                33.5
Increase in (utilization of) net operating loss
         carryforwards                                 -               (.6)              (3.2)
Changes in net valuation reserve                   (35.4)            (34.9)               3.1
Other, net                                            .9               1.5                 .5 
                                                 -------            ------           ---------
                                                     -   %             -   %                -  %
                                                 =======            ======           ========= 
</TABLE>

Management continually reviews the valuation allowance and will recognize
deferred tax benefits only as reassessment indicates that it is more likely than
not that these benefits will be realized. The total amount of future taxable
income in the U.S. necessary to realize the Company's gross deferred tax assets
is approximately $18,000. Management believes that the recorded valuation
allowance is consistent with the provisions of SFAS 109, "Accounting for Income
Taxes."

19. SALE OF TECHNOLOGY

In July 1998, the Company entered into an agreement to sell its analytical test
to detect concentrations of lipoprotein (a) to a biotechnology company. The
purchaser has an extensive portfolio of diagnostic assays and an established
sales and distribution network targeted to physicians and clinical laboratories.
This agreement follows an exclusive distribution and supply agreement with the
same company that became effective June 30, 1998.

The Company will continue to manufacture and sell the product until the
distributor is prepared to manufacture the product (estimated to be
approximately March 1999). The Company records revenues under the exclusive
distribution and supply agreement as the products are shipped. Thereafter, the
Company will receive a royalty for the life of the product.

At December 31, 1999, under the July 1998 agreement, the Company and the
purchaser will determine the cash purchase price to be paid to the Company for
its right, title and interest in the product. Such purchase price is based on a
multiple of sales volumes achieved during the second half of 1999. In July 1998
the Company purchased the intellectual and licensing rights to the product for
$380. The Company expects to record the sale of the asset during the fourth
quarter of 1999, after the sales price has been determined. All royalties under
the agreements will be recorded in the quarter the products are sold.

20. SUBSEQUENT EVENTS

On February 26, 1999, the Company completed the acquisition of HTI Bio-Products,
Inc., a privately held manufacturer of custom and proprietary antibody products
and services located near San Diego, CA (HTI). Under the terms of the agreement
to acquire HTI, the Company paid approximately $8.1 million in cash, issued
556,286 shares of Series B preferred stock and assumed approximately $100 of
long term debt. The preferred shares convert into common shares on a 1-for-1
basis at any time at the option of the holder, and at the option of the Company
when the closing price of the Company's stock exceeds $3.50 for a period of 10
days, and carry a cumulative, annual cash dividend of $0.175 per share and a
liquidation preference. The Company is also obligated to pay a percentage of net
sales of certain products over the next three years, not to exceed $3 million.
Approximately $6 million of acquisition financing has been provided by the
Company's commercial bank, with the balance coming from existing cash on hand.





                                      F-18




<PAGE>



                                   SIGNATURES

                  Pursuant to the requirements of Section 13 or 15(d) of the
Securities and 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 30, 1999      /s/  Richard C. Birkmeyer          
                                      ------------------------------------------
                                      Richard C. Birkmeyer
                                      President, Chief Executive Officer
                                      (Principal Executive Officer) and Director

Date:             March 30, 1999      /s/  Arthur A. Koch, Jr.           
                                      ------------------------------------------
                                      Arthur A. Koch, Jr.
                                      Vice President - Finance, Chief Operating
                                      Officer, and Chief Financial Officer
                                      (Principal Financial and Accounting
                                      Officer)

                  Pursuant to the requirements of the Securities and 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 30, 1999      /s/  Richard J. Defieux                   
                                      ------------------------------------------
                                      Richard J. Defieux
                                      Director

Date:             March 30, 1999      /s/  Robert E. Finnigan            
                                      ------------------------------------------
                                      Robert E. Finnigan
                                      Director

Date:             March 30, 1999      /s/  Stephen O. Jaeger                    
                                      ------------------------------------------
                                      Stephen O. Jaeger
                                      Director

Date:             March 30, 1999      /s/  Kathleen E. Lamb                     
                                      ------------------------------------------
                                      Kathleen E. Lamb
                                      Director

Date:             March 30, 1999      /s/  Curtis Lee Smith, Jr.         
                                      ------------------------------------------
                                      Curtis Lee Smith, Jr.
                                      Director

Date:             March 30, 1999      /s/  Grover C. Wrenn                     
                                      ------------------------------------------
                                      Grover C. Wrenn
                                      Director