Back to Contents

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

**FORM 10-K**

**ANNUAL REPORT****PURSUANT TO SECTIONS 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**

**(Mark One)** **ANNUAL REPORT PURSUANT TO SECTION 13 OR    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     **For the Fiscal Year Ended December 31,    2005**    **TRANSITION REPORT PURSUANT TO SECTION    13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     **For the Transition Period From __________    to ______________**
**Commission File No. 000-22400**

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

**Delaware****56-1581761**(State or other jurisdiction of    incorporation or organization)(I.R.S. Employer    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 if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes  No 

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  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.

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes  No 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act

Large Accelerated Filer            Accelerated    Filer          Non-Accelerated    Filer 

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

The aggregate market value of the common stock held by non-affiliates of the Registrant was $64,906,132, calculated by using the number of shares outstanding and the closing price of the common stock on June 30, 2005 (the last business day of the Registrant’s most recently completed second fiscal quarter).

As of March 20, 2006 there were 19,967,995 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 2006 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

Back to Contents
**PART I** 1       ITEM    1.          BUSINESS 1   *Overview* 1*Immunoassay Technology* 2*Bioluminescence Technology* 3*Markets and Products* 4*Sales and Marketing Strategy* 10*Competition* 11*Regulatory Approvals* 12*Manufacturing* 13*Research and Development* 14*Proprietary Technology and Patents* 15*Employees* 16ITEM    1A.      RISK FACTORS 16ITEM    1B.       UNRESOLVED STAFF COMMENTS 20ITEM    2.          PROPERTIES 20ITEM            3.          LEGAL    PROCEEDINGS 21ITEM            4.          SUBMISSION    OF MATTERS TO A VOTE OF SECURITY HOLDERS 21       **PART II** 21       ITEM            5.          MARKET FOR REGISTRANT’S            COMMON EQUITY, RELATED STOCKHOLDER                              MATTERSAND ISSUER PURCHASES OF EQUITY SECURITIES 21ITEM            6.          SELECTED    CONSOLIDATED FINANCIAL DATA 22ITEM            7.          MANAGEMENT’S            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                              ANDRESULTS OF OPERATIONS 23*Forward-Looking Statements* 23*Overview* 23*Results of Operations* 26*Year ended December 31, 2005 versus year ended December 31, 2004* 26*Year ended December 31, 2004 versus year ended December 31, 2003* 27*Liquidity and Capital Resources* 30*Off Balance Sheet Arrangements* 32*Contractual Obligations* 32*Critical Accounting Policies* 32ITEM            7A.       QUANTITATIVE AND QUALITATIVE    DISCLOSURES ABOUT MARKET RISK 36ITEM            8.          FINANCIAL    STATEMENTS AND SUPPLEMENTARY DATA 36ITEM            9.          CHANGES            IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING                              ANDFINANCIAL DISCLOSURE 36ITEM    9A.       CONTROLS AND PROCEDURES 36ITEM    9B.        OTHER INFORMATION 37       **PART III** 38       ITEM            10.        DIRECTORS AND    EXECUTIVE OFFICERS OF THE REGISTRANT 38ITEM            11.        EXECUTIVE    COMPENSATION 39ITEM            12.        SECURITY OWNERSHIP            OF CERTAIN BENEFICIAL OWNERS AND                              MANAGEMENTAND RELATED STOCKHOLDER MATTERS 39ITEM            13.        CERTAIN RELATIONSHIPS    AND RELATED TRANSACTIONS 39ITEM            14.        PRINCIPAL ACCOUNTANT    FEES AND SERVICES 39       **PART IV** 40       ITEM            15.          EXHIBITS    AND FINANCIAL STATEMENT SCHEDULES 40
Back to Contents

**PART I**

**Item 1. Business**

**Overview**

Strategic Diagnostics Inc. (“the Company” or “SDI”) is a Delaware corporation formed in 1990.

The Company develops, manufactures and markets antibody products and analytical test kits to a diverse customer base, across multiple industrial and human health markets. By applying its core competency of creating custom antibodies and assay development, the Companyproduces unique, sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customers benefit with quantifiable “return on investment” by reducing time, labor, and/or material costs. All this is accomplished while increasingaccuracy, reliability and actionability of essential test results. The Company is focused on sustaining this competitive advantage by leveraging its expertise in immunology, proteomics, bio-luminescence and other bio-reactive technologies to continue its successful customer-focusedresearch and development efforts.

The Company believes that its competitive position has been enhanced through the combination of talent, technology and resources resulting from the relationships it developed and the acquisitions it concluded during the past ten years. These relationships and acquisitions haveenabled the Company to achieve meaningful economies of scale for the unique products it offers through the utilization of its consolidated facilities in Newark, Delaware, for the manufacture of test kits and antibodies, and its facilities located in Dallas, Texas and Windham, Maine forthe manufacture of antibodies.

The Company currently meets its customers’ needs by providing bio-services and industrial bio-detection services.

**Bio-Services**

SDI is a leader in providing a wide array of custom antibodies and antibody services, including the complete outsourcing of the production of monoclonal and polyclonal antibodies embedded in commercialized products offered by leading diagnostic and pharmaceuticalcompanies. Through its Strategic BioSolutionsTM (SBS) brand, SDI serves the research, human diagnostic and pharmaceutical industries.

The use of antibodies is a proven methodology used in research and diagnostics, and is of particular importance in proteomics, a rapidly growing segment of the genomic science segment which involves the large-scale study of proteins, particularly as to structures and functions.

**Industrial Bio-Detection Services**

SDI detection technologies allow industrial customers to rapidly and cost-effectively identify the presence of pollutants, such as chemical toxins, biological pathogens and other contaminants that can compromise human or environmental safety, and financially impact productionefficiencies. SDI also sells disposables in the form of test strips, sample prep materials and reagents, creating recurring revenue opportunities. Specific industry applications include:
 •**Food and Beverage Manufacturing:**High efficiency testing for the identification of pathogens and toxins in food, water and the manufacturing environment.    •**Water Utilities:**Drinking water tests for chemical toxins, metals, and pathogens. Pollution control tests for effluent toxicity, pesticides, metals and efficiency maintenance in biological processing systems.    •**Environmental Management:**On-site testing systems to increase the speed and accuracy of environmental remediation of soil and ground water pollutants.    •**Agriculture and Agro-science:**The market leader in detection, identity preservation, and quantification testing for genetically modified organisms. Developer of test systems for feed and grain safety including mycotoxins.
 

1

Back to Contents

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

In addition to this annual report on Form 10-K, the Company files periodic and current reports, proxy statements and other information with the SEC. The Company will provide these documents to you, free of charge, if you request copies by sending a letter to the Company’sInvestor Relations Department at the address set forth on the cover of this report. The Company can also be contacted through its internet home page, *www.sdix.com.*You may also read and copy any document the Company files with the SEC at the SEC’s Public Reference Room at 100F Street, NE, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means,including the SEC’s home page on the internet, www.sec.gov.

**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 one minute to several hours as compared to several days to several weeks with many competing laboratory testing methods.    Cost:The price-per-test for immunoassays ranges from $1 to $50, industry wide; the price-per-test for similar laboratory testing can range from $5 to $1,000.    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 varietyof field conditions for testing of diverse sample types.
Immunoassay technology relies on the specific binding characteristics of antibodies. Antibodies are proteins made by cells within the bodies of animals as part of the immune system response to invasion by foreign substances such as bacteria and viruses. An antibody physicallybinds 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 asreagents on large, automated instruments that can analyze hundreds of samples per hour. In contrast, antibodies also can be packaged into single use, disposable

2

Back to Contents

formats such as home pregnancy tests. Immunoassays can be designed to be highly quantitative or yield a simple yes/no result. The type of test format chosen for any given application depends on theneeds of the customer and may include factors such as ease-of-use, cost-per-test, number of samples to be tested, location where the test will be performed and experience of the user.

The Company has expertise and proprietary technology relating to the development and manufacture of five primary immunoassay formats: latex particle filtration, magnetic particle, lateral flow tests, coated-tube and microtiter plate.

Latex particle 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 particle filtration assays, but are more suited to the processing of larger numbers of samples at a single time, can be highly quantitative, and are relativelyinexpensive on a cost-per-test basis. These characteristics make magnetic particle immunoassays an effective measurement tool in both laboratory and certain field applications, especially where highly precise results are required.

Lateral flow immunoassay tests, often referred to as “one-step” membrane tests, require only that the user apply a prepared sample to the membrane strip to obtain the test result—much like pH or Litmus paper tests. The low cost and simplicity of these tests make them ideallysuited 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 laboratoryequipment, 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 Companyto develop a diverse array of immunoassay products designed to meet the analytical needs of multiple, sizable markets.

The products that the Company manufactures and markets using this technology include TraitChekTM, MycoChekTM, RapidChek®, SeedChekTM, FeedCheckTM, RaPID Assay®, EnviroGard®, and D TECH®.

**Bioluminescence Technology**

Bioluminescence technology uses certain strains of luminescent bacteria, which possess attributes that support their use as biosensors for toxicity testing. These strains divert up to 10% of their respiratory energy into a specific metabolic pathway, which converts chemical energyinto visible light.

Bioluminescence technology is based upon exposing a living organism to a test sample for the purpose of determining whether or not a sample is toxic and if so, how toxic. This technology provides a quick and inexpensive way to assess the bioreactivity of various substances.

By using a naturally occurring microorganism that gives off light as a by-product of its respiration, a temperature controlled precision photometer can then measure the change in light output with (sample) and without (control) toxin. The reduction in light output is proportional tothe toxicity (bioreactivity) of the substance tested. A data collection and reduction system can then analyze the results of a dose-response test procedure and print out a report quantifying sample toxicity.

3

Back to Contents

The major attributes of bioluminescence technology can be summarized as follows:
 Sensitivity:Response of the system compares favorably with traditional bioassay procedures, tissue culture tests and other chemical/life interactions.    Standardized:Standardized reagents and test procedures make test/test and lab/lab comparisons possible.    Speed:Samples can be tested in 30 minutes.    Cost:Cost per test is significantly lower than lab testing methods.    Accuracy:Provides a reproducible, quantitative measure of toxicity or bioreactivity.    Flexibility:Bioassay organisms are handled as a chemical reagent. Response is monitored instrumentally and presented as digital output or graphical data. No special operator skills are required.
The Company manufactures and markets its Microtox® and Deltatox® toxicity test systems using this technology.

**Markets and Products**

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

**Geographic and Customer Information**

The following table sets forth sales by geographic region:
   **Twelve Months      Ended December 31,**        **2005** **2004** **2003**        United States $18,368 $16,852 $19,412  Rest of the world  6,477  6,853  6,397        Total $24,845 $23,705 $25,809       
The Company’s basis for identifying sales by country is the ship-to location. There were no individual countries outside of the United States that represented more than 10% of the total revenues of the Company. There are no significant long-lived assets located outside the UnitedStates.

**Food Safety**

The Company’s food safety product line includes enrichment media and rapid tests to detect food pathogens, including *E. Coli*O157:H7, *Listeria*and *Salmonella*. The Company is a leader in tests for targeted traits in genetically engineered plants, tests to detect GeneticallyModified (GM) traits in food ingredients and food fractions, tests to detect naturally occurring fungi in grains (mycotoxins) and tests for and products to detect prohibited animal proteins in animal feed (ruminant feed testing).

*Food Pathogen Testing*

Pathogen specific testing is an increasingly important part of microbiology testing performed in the global food industry. The world-wide market for rapid method pathogen tests is estimated to be between $200 and $300 million according to independent studies and theCompany’s own market research. The market for proprietary enrichment media is estimated to be between $150 and $200 million. According to several independent studies, the market for pathogen tests has been growing at a combined average annual rate of 10% through 2005. Marketresearch also suggests that annual growth of 7% in this segment is expected for the next 3 to five years. Growth in pathogen testing is driven primarily by regulatory changes, industry consolidation, and globalization of the world’s food supply.

Since 2001, the Company has invested in the development and market introduction of products for the detection of pathogenic microorganisms in food. In 2002, the Company introduced its first test method for the

4

Back to Contents

pathogen *E. coli* O157:H7. This product has seen ongoing market acceptance in the United States. In 2005, the Company was notified that its RapidChek *E. coli* 0157:H7 assay had been selected as theassay method of choice for the National School Lunch Program for screening raw and frozen beef for the organism. The National School Lunch Program is a federally assisted meal program thatoperates in over 97,000 public and non-profit private schools and residential childcare institutions. The USDA is responsible for determining that the meat produced for the School Lunch Program issafe. In addition, the RapidChek test for detection of *E. coli* O157:H7 was selected by the Food Safety Inspection Service (FSIS) as an approved methodology for screening of the organism in raw beefsamples. The FSIS section of the USDA conducted a rigorous evaluation of rapid methods that are currently on the market for screening pathogens, including PCR, and automated/manualimmunoassays and benchmarked kit performance against the current USDA traditional cultural method. The RapidChek *E. coli* O157:H7 method was evaluated and determined to be the “best in class”against the other immunological methods tested. RapidChek has been placed on the approved USDA list as one of only two immunoassays that is recognized for use for screening raw beef for *E. coli*O157:H7. The Company believes that the acceptance of its method, by the agencies regulating Food Safety, will increase sales as producers seek to use methods that have been evaluated and acceptedby the regulatory agencies.

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

The Company currently markets a product for the detection of Salmonella. This product has similar features with respect to speed, ease of use, and cost in use, as the Company’s other food pathogen methods. Introduced in 2003, the product has found a limited, but loyal group ofusers among manufacturers of ready to eat (RTE) food products.

During 2006, the company continued to aggressively invest in the development of this product line. In October of 2006, the company filed a patent for technology used in RapidChek® enrichment media. The patent claims technology which increases both the specificity andsensitivity of rapid pathogen tests. This technology will be a component of the Company’s new method for Salmonella testing which is scheduled for introduction in 2006. This same patent makes important claims for composition and methodology associated with the enrichment andcontrol of production organisms in large scale industrial bio-processing applications. The Company intends to develop these application for licensing purposes beginning in 2006.

***Agricultural Testing***

*Genetically Modified Crops.*

Tests for GM traits are generally used to determine whether the sample tested contains GM seeds or grain. The tests may be employed by users desiring to ensure that seed or grain lots are either GM-free or, in other cases, that they contain a specified amount of the GM material inorder to meet certain GM requirements. Among the items tested with the Company’s products are corn, soybeans and cotton.

Crop varieties developed by genetic engineering were first introduced for commercial production in 1996 with about 4 million acres of GM crops grown. Based on the latest report from the International Service for the Acquisition of Agri-Biotech Applications, in 2005 GM cropswere planted on more than 222 million acres worldwide. Globally in 2005, seven principal countries were responsible for 97% of the GM crop area. They include the U.S. at 123 million acres (55% of the global total), Argentina at 42 million acres (19%), Brazil at 23 million acres (10%),Canada at 14 million acres (6%), China at 8 million acres (4%), Paraguay at 4 million acres

5

Back to Contents

(2%) and India at 3 million acres (1%). The Company has distribution arrangements in place with respect to customer operations in each of these GM crop producing countries.

Not all the seed produced by a genetically engineered seed or 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’ test that is used at thepoint of testing to determine if an individual plant contains the new genetic trait. Commercial seed producers use these products to ensure the quality of their products. This type of test also can be used in crops for enforcement purposes to expose unlicensed application of the genetictechnology.

Agricultural biotechnology companies, including Monsanto and Bayer CropScience, are currently developing additional genetically engineered traits in plants. Acceptance of GM crops has increased and the development of new traits has risen, there are many countries that haveadopted strict regulations on biotech crops. In 2004, the European Union adopted strict regulations regarding labeling and traceability of GM food and feed with enforcement beginning in April 2004. The regulatory tolerance for EU-authorized GM traits is 0.9% and 0.5% forunauthorized GM traits that have already received a favorable risk assessment. However, traceability systems must be in place and must demonstrate that any traces of GM traits are adventitious and are technically avoidable. During 2005, the Company introduced tests for thequantification of genetically modified traits in unprocessed and some processed soy. This test extends the capabilities of the Company’s products to meet all three components of identity preservation; the ability to identify the presence or absence of a GM trait, the ability to identify thespecific trait, and the ability to quantify the concentration of the trait present.

The impact of regulations may be stricter testing of grain and grain exports from countries growing genetically modified crops, and an increase in testing to meet these new regulations. Conversely, widespread acceptance of GM crops, may reduce the need for grain testing.

During 2000, a genetic trait used in corn, known as Cry9C, or StarLink®, which had been approved by the U.S. Environmental Protection Agency (USEPA) only for non-food uses, was discovered in food products. Starlink® was the first, and the only genetic trait to have beenintroduced for animal, but not human consumption. The impact of this discovery resulted in the need for growers, handlers, processors, shippers and exporters to test corn for the presence of StarLink®. In addition, the US Department of Agriculture changed its policies to assure that newgrain traits are certified as safe through the entire food chain. The Company’s Bt9 TraitChekTM test was the first GM test validated by the U.S. Department of Agriculture (USDA). The Company worked closely with key grain processors worldwide to provide significant volumes of teststo meet the high market and regulatory demand, selling more than 2 million Bt9 tests in 2001, making it the Company’s largest selling product. With the removal of StarLink® corn from the U.S. grain supply during 2000 and 2001, the Company’s sales of tests to detect StarLink® corndiminished significantly from 2002-2005.

Due to the StarLink® incident described above and consumers’ sensitivity to the issue, there were very few new GM traits introduced into the marketplace in 2001 and 2002. During 2003, there was a renewed interest and introduction of new traits, and the Company has continuedto work closely with the major agricultural biotechnology companies toward development and commercialization of tests in line with their trait commercialization schedules. In 2003, the Company began to recognize broader adoption of testing for traits that had been commercialized inyears prior. Tests for the Cry3Bb insecticidal protein have grown and are expected to grow. In 2005, the Company introduced the first multi-trait corn test strip that can detect both the Cry1Ab and Cry3Bb insecticidal proteins and the CP4EPSPS protein for resistance to the herbicideRoundup®.

The Company has had strong sales efforts in Brazil since 2000. Brazil is a major agricultural country and the leading exporter of soybeans in the world, surpassing the U.S. in 2004 with over 23 million tons exported. Brazil has temporary laws in place making it legal to grow GMcrops. In 2004, 12 million acres of GM soy was planted in Brazil, much of this done illegally from seed acquired via black market from Argentina. Due to the previous GM ban, countries importing non-GM soy products such as China and those from the European Union have increasedtheir imports from Brazil. To assure that their raw commodities are free of GM, testing is done at many grain elevators and crushing facilities throughout Brazil. Brazil is now the leading customer for the Company’s GM soybean test for Roundup Ready® herbicide tolerance.

 

6

Back to Contents

Trends in world food production include the use of second generation genetic technologies to give plants specific nutritional or other high-value consumer characteristics, collectively referred to as output traits. Food companies will be able to provide consumers with value-addedproducts they will demand and food manufacturers will source these specialty products on world markets. The Company believes that it is well positioned to provide the analytical tools to allow food companies to purchase such premium products with confidence, due to its existingrelationships with large agricultural biotechnology companies and the current success of its technology, particularly in the area of GM traits.

**Water Quality**

The Company’s water quality product line includes analytical tests for drinking water, industrial process water and wastewater analysis, and analytical tests for soil and other waste matrices for use at environmental remediation projects, hazardous waste operations and otherapplications.

*Microtox*®.

The Microtox® test system is a unique rapid acute toxicity test that detects a broad range of toxins and chemical agents in water. Microtox® makes toxicity analysis simple and easy to perform and results can be generated in as little as 30 minutes. Microtox® toxicity testingtechnology is used in drinking water, wastewater, environmental remediation and research and industrial applications around the world. With nearly 600 peer-reviewed scientific articles and more than 2,000 instruments sold worldwide, the Company believes that the Microtox® toxicitytest system is the standard for rapid toxicity screening and analysis.

The Company is currently working with drinking water utilities, food processors and other customers as they develop and implement monitoring processes to reduce their risk from contamination of water supplies. In the U.S., approximately 100 drinking water utilities and sixfood processors are currently using Microtox® toxicity testing technology as part of their early warning or emergency response programs to detect contamination of their water supplies. The rapid response of the Microtox® toxicity assay allows users to rapidly detect—and quicklyrespond to—any changes in water quality. It is for this reason that the technology is viewed by many national and international experts as an effective means for detecting toxins in water applications.

The Company also markets a portable version of the Microtox® technology known as Deltatox®. Departments of Health in a number of states, the largest private water utility in the country and USEPA emergency response teams are using Deltatox® technology as part of theiremergency response programs.

The Company believes that, currently in the United States, no other companies have meaningful marketing efforts for rapid bioluminescence based toxicity testing. There are only a few other companies who market a rapid toxicity test that is competitive with Microtox®.However, we are aware of competitive programs outside the U.S.

The USEPA is currently reviewing the technical capabilities of Microtox® to add the method to the approved list of toxicity test methods under the Whole Effluent Toxicity testing program. In June of 2004, the USEPA submitted the addition of Microtox® to the Federal Registerfor NPDES permit compliance testing. This is the regulatory program under which permitted waste dischargers, including the large number of municipal sewage treatment plants, are mandated to test their effluents on a regular basis and comply with regulated toxicity discharge limits.After the 60 day public comment period, the USEPA continued its review of the Microtox® technology and anticipated effects on waste discharge permitting regulations. When and if this method becomes an approved method, that will open up a significant market for Microtox®. Thesize of this testing market is estimated to be between $25-$30 million, however, this action will also likely stimulate the entrance of numerous competitors into this market.

In February 2006, the Company announced that its Microtox® bioassay technology was awarded the Designation and Certification as an “Approved Product for Homeland Security” under the Support Anti-Terrorism by Fostering Effective Technologies Act of 2002 (the SAFETYAct), by the Department of Homeland Security, or DHS. The SAFETY Act legislation was designed to encourage the development and rapid deployment of life-saving anti-terrorism technologies by providing manufacturers or sellers with limited risk of legal liability. It was alsodesigned to harness the nation’s scientific and technological resources to provide federal, state, and local officials with the technology and capabilities to protect the United States from terrorist acts. One area of focus for DHS is catastrophic terrorism threats to the nation’s security thatcould result in

7

Back to Contents

large-scale loss of life and major economic impact. The SAFETY Act fosters research of technologies to counter threats both by evolutionary improvements to current capabilities and development ofrevolutionary, new capabilities. As a biosensor-based method for the detection of toxic compounds, which include toxic industrial chemicals and heavy metals, in water and other matrices, theMicrotox® bioassay technology is ideally suited to meet the anti-terrorism initiative objectives of DHS.

*Pesticides.*

The entrance of pesticides into the water supply as a result of agricultural and residential runoff continues to be a problem. In areas of substantial agricultural activity, drinking water is tested for pesticides to protect drinking water supplies and to comply with federal and stateregulations. The Company’s pesticide test kits are used extensively by water quality researchers, resource managers, drinking water system operators, federal agencies such as the U.S. Geological Survey and Department of Agriculture, state environmental and health departments,drinking water utilities and environmental engineering companies for surface and groundwater monitoring, drinking water source and supply management, soil analysis and chemical fate and transport studies.

The RaPID Assay® test kit marketed by the Company for one of these pesticides—Atrazine—was validated by the USEPA under the Environmental Technology Verification program. The report confirmed the accuracy and reliability of the Company’s RaPID Assay® test formatfor Atrazine and, in our evaluation of the data, is one of only two immunoassay products validated by this program showing acceptable performance for this application.

*Environmental Contaminant Test Products.*

The Company sells different format immunoassay product into the environmental market. 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 itsproducts so as to provide the customer with the best product for its specific application. All of the environmental test kits include components for the extraction of target analytes from the sample matrix (typically soil or water) and subsequent analysis. Sample preparation time is typicallyless than five minutes per sample. All of the Company’s environmental test kits are capable of analyzing multiple samples and some allow analysis of as many as forty samples per hour.

The Company’s key user segments in these applications have been the largest environmental engineering and construction firms, the Department of Defense (including the US Army Corps of Engineers), the Department of Energy, NASA, NOAA, and many other major federaland state regulatory and research agencies. The USEPA and U.S. Army Corps of Engineers are jointly promoting what they call the “Triad Approach,” which uses immunoassay and other field analytical systems to increase the accuracy and reduce costs on environmental projects. Inaddition to these U.S. based agencies, SDI has identified opportunities in foreign nations.

Typical contaminants of concern at contaminated sites include petroleum and fuel-derived products, polycyclic aromatic hydrocarbons (PAHs), polychlorinated biphenyls (PCBs), dioxins, explosives, pesticides, and chlorinated solvents. The Company is currently marketing testkits for all of these contaminant classes, and has been able to expand its product offering through distribution agreements to accommodate new technologies.

The environmental testing market is large, with hundreds of companies providing testing products. Marketing efforts, initiated in the latter part of 2004, pointed us in the direction of seeking new channels of distribution that would deliver better value to the end user. In 2005 weopened new sales channels for these products, supported by new technology, training and application support. That said, the Company believes the overall market for remediation products is declining at approximately 4% per year, due to lower levels of Federal funding to supportremediation projects in this area.

*Ruminant Testing.*

In February 2003, the Company introduced its screening test for the detection of meat and bone meal in animal feed, which is linked to the transmission of BSE, commonly known as mad cow disease. The transmission of mad cow disease is believed to be linked to the use ofrendered meat and bone meal as a protein supplement in animal feed. Meat and bone meal made from cattle has been banned for use in cattle feed since 1997 in both Canada and the U.S., but it can be used legally in feed for poultry, swine and household pets, none of which are known tocontract mad cow disease.

 

8

Back to Contents

Since 2003, publicized cases of “mad cow” have been found in countries including the United States, Canada and Japan. The market and regulatory environment in these countries continues to be in a state of flux. Although feed testing is the only definitive means to certifycompliance, the current industry practice is to rely solely on paper certification. The Company is not investing significant sales effort or additional development given the current regulatory environment.

**Other Assays**

*Toxkit Microbiotests*TM.

In December of 2004, the Company announced the signing of an exclusive distribution agreement with a European supplier of toxicity testing systems, Microbiotests (MBT). Under the terms of the agreement, the Company now markets MBT’s line of rapid maintenance freebioassays in North America. The agreement continues to position SDI as the single source solution for rapid, on-site toxicity and environmental tests. The product line offers customers requiring cultural methods an alternative to expensive and labor intensive protocols, allowing users tosave both time and money while maintaining quality test results.

*MTI Metals*TM.

In September 2004, the Company announced the signing of an exclusive distribution agreement with Monitoring Technologies International (MTI). Under the terms of the agreement, SDI will market and sell in the United States MTI’s PDV-6000 heavy metal analyzer andreagents, which are designed to rapidly detect multiple metal contaminants on-site in water, soil and food matrices. The system has recently been verified by the USEPA’s Advanced Monitoring Systems Center, and validated under the USEPA’s SITE Program, where it met or exceededall requirements for sensitivity and precision. SDI has initially focus its sales efforts in the environmental assessment and remediation market, a market in which it currently has relationships with 22 of the top 25 environmental consulting and engineering firms. Both the MBT and MTIagreements allow SDI to present a more complete solution to its customers involved in environmental management.

**Antibody Products & Services**

The Company, under its Strategic BioSolutionsTM (SBS) brand, develops, manufactures and markets a broad range of monoclonal and polyclonal antibody products and services. Specific expertise includes hybridoma development, cell culture techniques, large-scale ascites andantisera production, large-scale antibody purification, chemical modification of immunogens and antibodies, characterization of antibodies, and a complete array of related services. The Company also manufactures a line of human-serum-based calibrators that are assayed for manyserum protein markers for which the Company manufactures and markets the corresponding antisera products.

These products are sold to a wide range of customers including pharmaceutical, biotechnology and diagnostic companies, and major biomedical research centers in the United States, European Union and Pacific Rim. The Company believes it is one of the largest independentcustom antibody service providers in the world. The Company has many significant commercial antibody supply agreements with major clients in each market segment. The proprietary nature of these agreements preclude public disclosure. Such agreements are typically limited to only aportion of the customers’ needs for such services, and the Company believes there is significant upside potential to expand supply services within customer organizations, as well as add new customers for the products and services provided. The Company believes the size of the customantibody service market is approximately $150 million on an annual basis, and it is highly fragmented. The Company expects to garner more business from companies that currently employ in-house production sources through its continuously improving quality manufacturing methods.SBS became the first custom antibody supplier to implement a proprietary web-access service in 2004 that allows customers to view and manage their projects on a 24/7 basis. Future enhancements to its service offerings could lead to increased market share in the custom antibodyservice market niche and beyond.

The human genome project carried out over the past 15 years has been a major driving factor in the emergence of the study of proteomics. With a new knowledge of genomes (human and other species), the biomedical research community is exploring many new proteins, theirfunctions, and the clues they reveal about human and animal health. The study of gene functionality at the protein level often requires antibodies, which

9

Back to Contents

naturally bind to those proteins. The Company believes that proteomics research, and products developed out of the proteomics effort, offer the Company a unique opportunity to explore new initiativesto build revenues in the antibody product group around proteomics.

In March 2005, the Company announced a strategic initiative to develop a high throughput antibody reagent production service designed to enable rapid discovery and commercialization of products for customers in the proteomics, pharmaceutical, diagnostics and biomedicalresearch industries. The Company estimates the total market opportunity for antibody services available to SDI, through SBS, to be $300 million. Management anticipates that adjacent technologies have the potential to substantially expand this opportunity as the market evolves.

The Company has hired two leading scientists widely recognized for their work in the development of genetic immunization and associated processing technologies for the high throughput production of high purity, high reactivity antibodies to oversee this initiative out of amolecular biology research and production facility in Dallas, Texas.

The high throughput, high efficiency processes SDI is developing are aimed at enabling more rapid discovery by providing faster, cost effective access to very large numbers of high sensitivity and specific antibodies, or families of antibodies, that will collectively advance thecustomer’s research, development and commercialization efforts.

The Company believes that its technology for this genetic antibody service is unique in the US and that this technology will enable research organizations in target market segments to increase their success rate of identifying potential therapeutic or diagnostic protein targets byproviding large numbers of unique antibody reagents generated from customer specified genetic sequences. The exponential increase in genetic information available from all types of living organisms has created a need for large numbers of antibody reagents to detect the proteinsproduced by these genes.

Traditional methods of making antibodies to proteins require that the protein of interest be produced and purified in relatively large quantities prior to injection for in-vivo production of a specific antibody. The Genomic AntibodiesTM process eliminates this requirement. Instead,synthetic DNA, representing the genetic sequence(s) of interest, is introduced directly, via a proprietary process that produces antibodies to the protein encoded by the DNA and produced directly by the immunized cells. The Genomic AntibodiesTM process SDI is developing hasdemonstrated the ability to produce antibodies that are purer, and more reactive to the native protein, than antibodies raised against other immunogens, and easier to produce in large numbers thus facilitating large-scale research involved in drug development and academic research.

In January 2006, the Company announced a positive conclusion to initial customer trials involving the Genomic AntibodiesTM product. These “beta” tests have validated the high throughput, highly optimized production processes for mouse polyclonal antibody reagents for use inresearch and discovery. These antibody reagents are the first products to be released on this important new technology platform.

The Company expects to garner more business from companies that currently employ in-house production sources through its continuously improving quality manufacturing methods. SBS became the first custom antibody supplier to implement a proprietary web-access service in2004 that allows customers to view and manage their projects on a 24/7 basis. Future enhancements to its service offerings could lead to increased market share in the custom antibody service market niche and beyond.

**Sales and Marketing Strategy**

The Company sells products in the food safety, water quality and antibody market categories through a small U.S. direct sales force, a network of over 50 distributors in Canada, Mexico, Latin America, Europe and Asia and its corporate partners. The Company has a direct salesorganization of 13 individuals. The Company also has a European headquarters and sales operation near London, England.

In the U.S., the major route of sale is through a national field sales force in defined sales territories and business units. The field sales force is augmented by an in-house customer service team, which in addition to interfacing between customers and technical support, provideslogistics support to the field sales personnel.

 

10

Back to Contents

The Company is focused on developing and supporting its channels to market to broaden the market opportunities and provide additional predictability and sustainability of revenues. SDI continues to improve the efficiency and effectiveness of the direct sales organization whiletaking advantage of other lower cost channels, which can effectively help the Company reach new customers. The Company is also focusing on its network of quality distributors. With this in mind, the Company added significant channel strength outside the United States with thesigning of a multi-year, exclusive, distribution contract with DuPont Qualicon for the distribution and support of SDI developed and manufactured products. This agreement allows SDI to leverage existing products and reach markets not presently supported internally.

SDI has invested in providing additional support to distributors, who participate in annual global training seminars. SDI evaluates various sales and service models that can contribute to the profitable growth of business. In addition, identifying the most effective channels tomarket will allow the Company to better allocate resources to both new and existing growth opportunities.

**Competition**

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

Competing with the Company for GM testing market share are three companies that offer rapid, immunoassay-based methods. They include EnviroLogix, Inc. and Agdia, Inc., both privately held companies, and Neogen Corp., a publicly-held company. EnviroLogix markets awide range of GM tests and also offer strip tests for the detection of aflatoxin (mycotyoxin) in corn and cotton. Agdia sells a wide line of tests for plant viruses and pathogens. Neogen, though a leader in mycotoxin analysis, has not been able to gain a significant share in the GM testingarena. Neogen has an extensive record of mycotoxin sales and has the largest line of products, applications and approvals.

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. The Company believes none of these competitors have products that compete with all of the Company’s products in thefood safety market. The Company believes that the breadth of its product offerings in the food safety market, the expertise it has accumulated in developing tests for the food safety market and the extensive customer relationships it has assembled throughout the agricultural seed, grainand food processing industries are all significant competitive advantages.

In food pathogen testing, the Company is the new entrant to the market and faces a wider base of competition. The world-wide market for pathogen tests is estimated to be between $200 and $300 million annually and as such has drawn competitive products. The Company’sRapidChek®*E. coli*O157 including H7, *Salmonella,*and *Listeria*tests compete globally with numerous competitive rapid testing systems. Instrument-based tests are offered by bioMerieux SA and DuPont Qualicon among others. Competitive lateral flow tests are offered by NeogenCorp., BioControl Systems, Inc., and others. In addition, traditional lab culture methods offer indirect competition. The Company hopes to gain market share from competitive methods and with new users due to key product advantages such as speed of result, ease-of-use, accuracy, andan overall lower cost-in-use.

The Company believes there are no meaningful direct competitors for the Company’s Microtox® product line in the United States. In Europe and other parts of the world, the Company competes against Checklight, Ltd., an Israeli-based company, and one other instrument basedtest method produced by Dr. Bruno Lange GmbH & CO, an affiliate of The Danaher Corporation, which has greater technical and marketing resources than the Company. The Company believes its products have a number of competitive advantages including the comprehensivescreening for general toxicity and competes effectively on superior features and functions. With the addition of the Toxkit Microbiotests, the Company believes that there is no other company that can provide the complete solution offering of the Company.

With the environmental contaminant test products, the Company currently receives the greatest competition from fixed-environmental laboratories. Traditional analytical methods for environmental contamination are often utilized for confirmation and closure of environmentalsites. For metals analysis, a number of companies compete

11

Back to Contents

directly against the PDV-6000 analyzer and reagents with XRF technologies. The Company believes that the PDV-6000 can provide a number of advantages allowing for greater benefits to currentcompany customers.

In the antibody product line, competitors include large pharmaceutical, research and diagnostics organizations, some which have significantly greater revenues than the Company. These companies may produce these products internally and purchase similar products from SBS.Additionally, there are a number of smaller companies that offer competing products. The Company believes that the scale of its operations and the breadth of its product lines, among other things, are significant competitive advantages.

Competitors in the market as third party providers of custom antibody production include Covance (public), Harlan (private), Lampire (private) and Scantibodies (private). Many SBS’ competitors include small companies, or small operating divisions of larger companies, usingsimilar antibody production methods.

**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. For analysis of water and wastewater, the Safe Drinking Water Act, the Clean Water Actand the NPDES permitting program acceptance under the Clean Water Act also will be significant to the Company’s business. As the utility of the Company’s Microtox® products continues to be widely recognized in drinking water security applications, regulations and mandatesassociated with Homeland Security programs may also have an impact on the Company’s business. Collectively, these programs regulate the management, disposal and clean-up of hazardous substances and protect the nation’s ground and surface water and drinking water supplies. Inaddition, 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 those in Europe, havecounterparts to the U.S. legislation.

The Company believes that the validation and acceptance of its products by regulatory agencies, though not required for the use of its products in most cases, is a significant factor in gaining market acceptance. There are two main areas in which the Company is seeking regulatoryacceptance for its products: environmental contaminant testing methods by the federal and state environmental protection agencies and water testing methods by the federal and state agencies. The EPA and some state agencies have evaluated certain of the Company’s analytical methodsand accepted their use for certain remediation and monitoring activities.

The Company received AAALAC (Association for the Assessment and Accreditation of Laboratory Animal Care) accreditation at its Delaware facility in 1993 and at its Maine facility in 2000. The Company volunteers to participate in the AAALAC’s program, in addition tocomplying with the local, state and federal laws that regulate animal research. The Company maintains these accreditations through regular inspections and reviews. The Company also holds approval from the OLAW (Office of Laboratory Animal Welfare) and the National Institutes ofHealth, further validating the stewardship of the Company in proper laboratory animal care.

During 2004, the European Union implemented Regulation 1774 governing the shipment of products derived from ruminant animals. The Company worked with regulators to obtain the necessary facility registrations to comply with these new guidelines and product shipments tothe European Union are moving normally.

*Environmental Contaminant Testing Methods.*EPA SW-846 is the compendium of analytical and test methods published by the EPA’s Office of Solid Waste (OSW). SW-846 is a guidance document listing those analytical methods that have been validated by the EPA for a statedpurpose. Some states also recognize the use of SW-846 methods under their hazardous waste programs. SW-846 methods are technically only applicable to regulatory programs under RCRA, however, other federal, state and local environmental programs, including CERCLA andTSCA, often refer to and rely on SW-846 methods for purposes of remediation and monitoring.

The Company currently has more than 30 SW-846 validated methods and has submitted applications to achieve validation on others, including tests for dioxins.

*Other Testing Methods.*Tests for bacterial food pathogens, mycotoxins, genetically engineered traits in plants, and water treatment polymers are currently unregulated. However, agencies such as the EPA, the FDA and the Food Safety and Inspection Service of the U.S.Department of Agriculture are engaged in testing and, together

12

Back to Contents

with the AOAC Research Institute, maintain compilations of official methods for use in testing in certain market segments. Some of these organizations also issue procedures and guidelines forvalidating new methods. Although not required, official methods adopted by these agencies sometimes have the impact of regulations because commercial facilities tend to follow the practice of theagency.

**Manufacturing**

The Company manufactures test kits for the detection of a wide array of analytes in five immunoassay formats: one step lateral flow tests, coated-tubes, latex particle filtration, magnetic particles and microtiter plates, and in one bioluminescence format: Microtox® toxicity testsystem. In addition to test kits, the Company supplies ancillary equipment and supplies including test evaluation instruments, reagents, sample media, spectrophotometers, pipettes, balances and timers.

The key manufacturing processes are conjugation chemistries, antibody formulations, standard preparation, microbiological and immunoassay processes and in-process testing, filling and dispensing, lateral flow strip production, kit assembly, quality control, packaging andshipping. The technical manufacturing group produces critical reagents from its laboratories in Newark, Delaware and the sub-assemblies and finished kits are manufactured and shipped worldwide out of the Company’s headquarters facility in Newark, Delaware. Biological materials areprimarily 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 theCompany’s products and are subject to specific supply agreements. The Company believes that the raw materials, instruments and equipment used in the manufacture of its products are sufficiently available for the Company’s current and foreseeable manufacturing needs.

The Company manufactures its products in accordance with FDA’s Good Manufacturing Practices guidelines and has implemented data-driven problem solving and statistical process controls to continuously improve quality and performance. The Company utilizes a formal salesand operations planning process and an integrated Manufacturing Resource Planning (MRP) tool to control all elements of the supply chain and manufacturing processes; including raw material procurement, inventory management, capacity planning and production scheduling, work-in-process tracking, order processing, shipping and customer invoicing. The Company believes the existing facilities and equipment are sufficient to support a significantly larger manufacturing base. Industrial bio-detection services manufacturing operations are currently running one shift.

The Company also supplies a wide array of custom antibody products and services to the in-vitro diagnostic, academic and medical research industries. Antibodies are developed and produced using animals or cell culture methods. Laboratories are maintained to prepareimmunogens, perform chemical conjugations, purify antibodies, fragment antibodies, and perform a range of quality control procedures. The cell culture laboratories support the development of hybridomas and manufacture of monoclonal antibodies. The cell culture laboratories alsoprovide services to enhance the productivity of cell lines, establish FDA-compliant Master Cell Banks, and store cell lines in secure fail-safe cryogenic systems.

Many customers in the diagnostic, pharmaceutical and biotechnology market segments visit our antibody manufacturing facilities to perform audits of the quality management system to verify the Company’s ability to supply their antibodies, which are critical reagents in thesetests. During 2005, the Company hosted 25 such audits and met the standards of each customer to continue as their supplier of critical reagents.

Animal facilities house specific-pathogen-free animals that are tested routinely to assure they are maintained under the highest health standards. Both the polyclonal production facilities in Windham, Maine and the monoclonal facility in Newark, Delaware are accredited byAAALAC. Current capacity utilization in antibody production is approximately 70%, and there is additional land and zoning clearance on the 64-acre site in Windham, Maine to expand operations.

In 2005, the Company established a research and manufacturing center in Dallas, Texas. This facility is designed for gene building and protein chemistry. The Dallas operation is the technical component of the Genomic AntibodiesTM product offering. The Genomic AntibodiesTMoffering is supported by a robust high

13

Back to Contents

throughput operation that is initiated in Dallas and completed in either Maine or Delaware depending upon the end product.

**Research and Development**

The Company engages in substantial research and development activities involving development of products and services for its target markets. In the three years ended December 31, 2005, 2004 and 2003, the Company incurred approximately $3.03 million, $2.16 million and$2.20 million, respectively, in research and development expenditures.. Research and development expenses in support of the Company’s food pathogen and agriculture offerings held steady in 2005 relative to the prior year, while significant new expenditures were made in developingits proprietary Genomic AntibodiesTM technology platform and upgrading the Company’s proprietary MicrotoxTM equipment software.

The Company’s primary laboratory facilities located in Newark, Delaware were designed and built specifically for conducting research and development relating to antibody and immunoassay technology. These facilities include state-of-the art, cGMP, AAALAC approved,antibody development and large-scale production facilities. The Company has assembled a scientific staff with extensive experience in the development and production of monoclonal and polyclonal antibodies, immunogens and assay reagents.

In 2005, the Company hired two leading scientists widely recognized for their work in the development of genetic immunization, and associated processing technologies for the high throughput production of high purity, high reactivity antibodies to oversee our GenomicAntibodiesTM initiative out of a research and production facility in Dallas, Texas.

The Company’s product development scientists are experienced in developing tests in a variety of different immunoassay formats, including rapid, on-site tests. Research and development personnel have complementary skills in several advanced research disciplines, includingmolecular biology, synthetic organic chemistry, protein chemistry, biochemistry, immunology, immunochemistry and microbiology. In addition to the technical expertise resident within the research and development staff, the Company’s antibody manufacturing expertise provides theCompany, as well as its outside customers, with large-scale cGMP production, bioprocessing, purification and quality control of antibodies and reagents.

The Company’s research and development activities are focused on developing proprietary technology and 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 assaydevelopment services primarily for large chemical, diagnostic and pharmaceutical companies and the development of rapid test kits in the food, water quality and agricultural sectors based on immunoassay technology.

To the extent the Company believes that improvements to existing products significantly enhance competitiveness, expand a market or improve market penetration, the Company funds such efforts. In the markets where the Company has chosen to compete, rapid tests are highlyvalued and the Company is actively engaged in developing proprietary technology to better meet these needs and enhance the Company’s overall performance. The Company has extensive expertise, facilities and equipment relating to the development and manufacture of one-step lateralflow tests, and is working aggressively to further develop this technology.

The Company’s research and development organization consists of approximately 16 individuals, 9 of whom hold advanced academic degrees. Approximately one-third of the Company’s employees are involved in technical job functions.

14

Back to Contents

**Proprietary Technology and Patents**

The Company’s products are based on the use of proprietary reagents, technology and test systems developed by Company scientists or acquired externally. Accordingly, the Company has implemented a number of procedures to safeguard the proprietary nature of its technology.The Company requires its employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting relationship with the Company and all employees are required to assign to the Company all rights to any inventions made during theiremployment or relating to the Company’s activities. Additionally, the Company seeks to protect its technology and processes through the patent process for its test kit business. The Company currently holds 30 issued U.S. patents, including three U.S. patents licensed for exclusive useby the Company, and six U.S. patent applications are pending.
**U.S. Patent** **Title**   4,999,286  Sulfate reducing bacteria determination and control 5,200,346  Aldicarb immunoassay by sulfone equivalents 5,426,035  Method for compensating toxicity test data 5,427,955  Photochemical determination of organic compounds (license) 5,429,952  Marking of products to establish identity and source (license) 5,449,611  Polyaromatic hydrocarbon (PAH) immunoassay method, its components and a kit for use inperforming the same 5,484,709  Immunoassay method for detecting an immunologically non-remarkable compound 5,541,079  Monoclonal and polyclonal antibodies and test method for determination oforganophosphates (license) 5,547,877  Methods for the rapid detection of toxic halogenated hydrocarbons and kits useful inperforming the same 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 inperforming 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 forperforming the same 5,691,148  A petroleum immunoassay method, its components and a kit for performing the same 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 5,891,657  Immunoassay standards for volatile analytes with benzene rings 5,919,645  Method for the direct determination of the toxicity of particulate solids 5,994,145  Reagents, methods and kits for detecting TCE and PCE 6,096,563  Dual particle immunoassay method & kit 6,146,903  Determination method 6,190,922  Substrate supported liquid extraction 6,376,195  Indirect label assay device for detecting small molecules and method of use thereof 6,420,530  Determination method 6,524,810  Method of making bioluminescent assay reagent based on non-viable E. coli 6,663,833  Integrated Assay Device and Methods of Production and Use 6,750,328  Antibodies for detection of water treatment polymers 6,911,534  Method for determination of water treatment polymers 
The Company believes that low-cost, easy-to-use, rapid tests have the potential to be significant products in multiple large markets and, therefore, has licensed rights to patents relating to immunochromatographic devices. The Company has one pending patent application for tests thatcan detect genetically modified crops and two applications that deal with tests for the detection of animal proteins in animal feed. In the field of food pathogen testing, the Company has one application that relates to isolation of pathogenic microorganisms from food and

15

Back to Contents

one that relates to proprietary microbiological media formulations. One of the Company’s applications involves compositions and methods for improved microbiological detection and productionmethods.

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 Companycannot 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 tradesecrets, know-how and continuing technical innovation to maintain competitiveness for its products and services. The Company has developed a number of proprietary technologies which it has chosen not to patent, including stabilization systems for reagents, chemical syntheses forconjugates, immunogens and analyte analogs, and strategies relating to antibody development. Regarding the latter, the Company’s extensive expertise has enabled it to develop antibodies and products that are unique to the industry including antibodies to pathogenic foodmicroorganisms, transgenic plant proteins, mycotoxins, water treatment polymers and environmental contaminates. In addition, the Company has developed and continues to develop proprietary media formulations designed to enrich the selective growth of pathogenic foodmicroorganisms.

**Employees**

As of December 31, 2005, the Company employed 140 full time and three part time employees. The workforce was supplemented by seven agency provided contractors. All of the Company’s employees have executed agreements with the Company agreeing not to disclose theCompany’s proprietary information and assigning to the Company all rights to inventions made during their employment. Key personnel have signed agreements prohibiting them from competing with the Company. None of the Company’s employees are covered by collectivebargaining agreements. The Company believes that its relations with its employees are good.

**Item 1A. Risk Factors**

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

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

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

Significant competitive factors include:
 •timing and scope of regulatory approval;    •product availability;    •awareness and acceptance of our products and their application;    •channels to market;    •marketing and sales capabilities;    •product attributes relative to its cost;    •price; and    •exclusivity, through patent protection or otherwise.
*Our research, development and commercialization efforts may not succeed or our competitors may develop and commercialize more effective or successful diagnostic products.*

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

 

16

Back to Contents

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

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

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

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

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

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

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

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

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

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

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

17

Back to Contents

retain and motivate skilled employees, and on the ability of its officers and key employees to manage growth successfully.

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

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

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

Although no third party claims of infringement are outstanding against the Company, others may hold proprietary rights that will prevent our product candidates from being marketed unless we can obtain a license to those proprietary rights. Any patent related legal action againstour collaborators or us claiming damages and seeking to enjoin commercial activities relating to our products and processes could subject us to potential liability for damages and require us to obtain a license to continue to manufacture or market the affected products and processes. Wecannot predict whether we would prevail in any of these actions or that any license required under any of these patents would be made available on commercially acceptable terms, if at all. If we become involved in litigation, it could consume substantial managerial and financialresources.

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

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

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

18

Back to Contents

*If our Company does not produce future taxable income, our ability to realize the benefits of deferred tax assets could be impaired.*

As of December 31, 2005, the Company had federal net operating loss carryforwards, including those acquired in the Company’s past acquisitions, of approximately $18,873, which, if not utilized, begin to expire as follows:
 **Year** **Amount of****NOL (in****thousands)**     2007 $946  2008  2,565  2009  3,297  2010  5,109  2017  760  2018  1,327  2019  550  2020  66  2021  51  2022  2,253  2024  1,824  2025  125      Total $18,873     
Based on the best information available to the Company today, the Company expects to have sufficient future taxable income to utilize such NOLs prior to the expiration of the net operating loss carry forwards.

The Tax Reform Act of 1986 (the Act) limits the annual use of net operating loss and research and development tax credit carryforwards (after certain ownership changes, as defined by the Act). The application of these limits could significantly restrict our ability to utilizecarryforwards. Of our total net operating loss carryforwards, $14,794 is subject to limitations, since a cumulative change in ownership of more than 50% has occurred within a three year period with respect to those net operating loss carryforwards. Because United States tax laws limitthe time period during which these carryforwards may be applied against future taxes, we may not be able to take full advantage of these attributes for Federal income tax purposes if we do not have future taxable income against which to use the carryforwards before they expire.

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

Our results of operations may fluctuate significantly in the future as a result of a number of factors, many of which are outside of our control. These factors include, but are not limited to:
 •unanticipated events associated with regulatory changes;    •general economic conditions;    •seasonality;    •acceptance of our products;    •the success of products competitive with ours;    •expenses associated with development and protection of intellectual property matters;    •establishing or maintaining commercial scale manufacturing capabilities;    •the timing of expenses related to commercialization of new products;    •the timing and success in building our distribution channels;
The results of our operations may fluctuate significantly from quarter to quarter and may not meet expectations of securities analysts and investors. This may cause our stock price to be volatile.

 

19

Back to Contents

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

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

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

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

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

The international nature of our business subjects us and our representatives, agents and distributors to the laws and regulations of the jurisdictions in which they operate, and in which our products are sold. The types of risks that we face in international operations include, but arenot limited to:
 •the imposition of governmental controls;    •logistical difficulties in managing international operations; and    •fluctuations in foreign currency exchange rates.
Our international sales and operations may be limited or disrupted if we cannot successfully meet the challenges of operating internationally.

**Item 1B. Unresolved Staff Comments**

None.

**Item 2. Properties**

The Company is headquartered in Newark, Delaware, and occupies approximately 29,000 square feet of space under an operating lease expiring in December 2007. The Company also leases approximately 26,000 square feet of manufacturing and research space, in Newark,Delaware, under an operating lease expiring in December 2007. The Company owns and occupies approximately 75,000 square feet of manufacturing, research and animal facility space and approximately 64 acres of farmland in Windham, Maine. The Company leases approximately1,900 square feet of manufacturing and research space in Dallas, Texas under an operating lease expiring in January 2007. The Company leases regional sales offices near London, England expiring in June 2011. The Company believes that its equipment and facilities are adequate for itspresent purposes.

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

20

Back to Contents

**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, 2005.

**PART II**

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

The Company’s Common Stock is traded on The Nasdaq 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 without retail mark-up, mark-down orcommission and may not necessarily represent actual transactions:
   **Common Stock****Price Range**  **Fiscal Year Ended** **High** **Low**       December 31, 2005:        Fourth Quarter $4.06 $3.05  Third Quarter  4.26  3.20  Second Quarter  3.58  2.32  First Quarter  3.70  2.85               December 31, 2004:        Fourth Quarter $4.42 $2.05  Third Quarter  4.16  2.06  Second Quarter  4.75  3.81  First Quarter  5.48  3.60 
On March 20, 2006, there were approximately 19,700 holders (335 holders of record) of the common stock of the Company. The Company has never paid any cash dividends on its common stock and pursuant to the Company’s financing agreement with PNC Bank, Delaware, theCompany’s commercial bank, no dividends or distributions may be paid on account of its common stock.

21

Back to Contents

**Item 6. Selected Consolidated Financial Data**
  **Year Ended December 31,**   **2005** **2004** **2003** **2002** **2001**          **(in thousands, except share and per share data)** Revenues:                Product related **$****24,845** $23,705 $25,692 $22,968 $28,610 Contract and other  **—**  —  117  517  874        Total revenues  **24,845**  23,705  25,809  23,485  29,484        Operating expenses:                Manufacturing  **11,416**  10,779  14,807  12,784  14,916 Research and development  **3,034**  2,157  2,203  2,784  2,505 Selling, general and     administrative  **9,722**  9,211  10,046  10,277  10,290        Total operating expenses  **24,172**  22,147  27,056  25,845  27,711        Operating income (loss)  **673**  1,558  (1,247) (2,360) 1,773 Interest income (expense), net  **207**  53  (40) (50) (33)Gain on sale of assets  **—**  –  —  374  76        Income (loss) before taxes  **880**  1,611  (1,287) (2,036) 1,816 Income tax expense (benefit)  **296**  232  (634) (986) 574        Net income (loss) **$****584** $1,379 $(653)$(1,050)$1,242 Preferred stock dividends  **—**  —  —  —  20        Net income (loss) applicable to common stockholders **$****584** $1,379 $(653)$(1,050)$1,222        Basic net income (loss) per share applicable to common stockholders **$****0.03** $0.07 $(0.03)$(0.06)$0.07        Shares used in computing basic net income (loss) per share applicable to common stockholders  **19,741,000**  19,242,000  18,999,000  18,419,000  17,008,000        Diluted net income (loss) per share applicable to common stockholders **$****0.03** $0.07 $(0.03)$(0.06)$0.07        Shares used in computing diluted net income (loss) per share applicable to common stockholders  **19,870,000**  19,494,000  18,999,000  18,419,000  17,642,000                           **Year Ended December 31,**   **2005** **2004** **2003** **2002** **2001**        BALANCE SHEET DATA:                Cash and cash equivalents **$****10,009** $8,096 $5,158 $2,098 $2,379 Working capital  **15,552**  13,525  11,567  12,039  11,714 Total assets  **36,661**  34,873  33,073  32,889  31,996 Long-term debt  **562**  773  983  1,212  1,174 Stockholders’ equity  **33,778**  31,766  29,876  29,778  26,633  
22

Back to Contents

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

**Forward Looking Statements**

This annual report contains certain forward-looking statements reflecting the current expectations of Strategic Diagnostics Inc. and its subsidiaries (the “Company” or “SDI”). These statements include, among others, statements regarding: the Company’s intentions with respectto future spending on research and development; the development, market acceptance and sales of tests for food-borne pathogens and related growth media; the size and nature of demand in the markets for the Company’s products and related effects on operating results; the need forwater quality and toxicity tests; anticipated increases in sales of the Company’s Microtox® toxicity screening systems; the ability to reduce seasonal and other fluctuations in its sales; approval and validation by third parties of the Company’s food pathogen tests; the performance of theCompany’s testing products; the amount of the Company’s contract revenue, sales of the Company’s antibodies; anticipated increases in gross margins, timing of new product introductions and other information that may be predictive of future operating results; the Company’s ability toreduce operating expenses; and the Company’s ability to improve operating results thus enabling it to meet future loan covenants. In addition, when used in this annual report, the words “anticipate,” “enable,” “estimate,” “intend,” “expect,” “believe,” “potential,” “may,” “will,”“should,” “project” and similar expressions as they relate to the Company are intended to identify said forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipatedat this time. Such risks and uncertainties include, without limitation, changes in demand for products, delays in product development, delays in market acceptance of new products, retention of customers, attraction and retention of management and key employees, adequate supply of rawmaterials, inability to obtain or delays in obtaining third party approvals, or required government approvals, the ability to meet increased market demand, competition, protection of intellectual property, non-infringement of intellectual property, seasonality, the ability to obtain financingand other factors more fully described in the Company’s public filings with the U.S. Securities and Exchange Commission.

**Restatement of Prior Years Consolidated Financial Statements**

Following a series of discussions with the SEC, the Company determined on December 15, 2005 that it would change its method of accounting for revenue on certain custom antibody arrangements. Accordingly, the Company’s financial statements for the years ended December31, 2004 and 2003 have been restated. The Company changed its revenue recognition policy for custom antibody projects to utilize a methodology whereby revenue is recognized when a project’s specifications have been met and the related antibodies have been shipped, rather than onthe percentage-of-completion methodology the Company had used since 1996.

**Overview**

The Company is a leading provider of antibody products and analytical test kits for a broad range of food, water, agricultural, industrial, environmental and scientific applications.

The Company believes that its competitive position has been enhanced through the combination of talent, technology and resources resulting from the relationships it developed and the acquisitions it concluded during the past five years. These relationships and acquisitions haveenabled the Company to achieve meaningful economies of scale for the unique products it offers through the utilization of its consolidated facilities in Newark, Delaware, for the manufacture of test kits and antibodies and its facilities located in Windham, Maine and Dallas, Texas for themanufacture of antibodies.

The Company believes that by applying its core competency of creating custom antibodies to assay development, the Company produces unique, sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customersbenefit with quantifiable “return on investment” by reducing time, labor and/or material costs. All this is accomplished while increasing accuracy, reliability and actionability of essential test results. The Company is focused on sustaining this competitive advantage by leveraging itsexpertise in immunology, proteomics, bio-luminescence and other bio-reactive technologies to continue its successful customer-focused research and development efforts. The Company believes that an established product base, quality manufacturing expertise, experienced sales andmarketing

23

Back to Contents

organization, established network of distributors, corporate partner relationships and proven research and development expertise will be critical elements of its potential future success.

See PART I, Item 1. Business for a more complete discussion of the Company’s line of business, principal products, market opportunities and competition.

*2005 Accomplishments*

In 2005, the Company continued the transition from having too many products and a fragmented marketing strategy to becoming a focused company, with proven, proprietary technologies tied directly to a customer’s needs. The transition is most evident in the GenomicAntibodyTM initiative and food pathogen detection products, where significant progress is being made.

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

The Company continued to develop multiple channels to market, and manage the return on sales investment. The Company entered into an exclusive distribution agreement with DuPont Qualicon for the sale of its food pathogen products outside the United States. The Companyincreased distribution for its environmental products in Eastern Europe and China where there is growing demand for environmental stewardship.

The Company opened a new laboratory and production facility for molecular biology in March 2005 in support of its Genomic AntibodiesTM development effort. This lab has successfully developed a new platform for the high throughput production of polyclonal antibodies usingonly gene sequence information. The Company continued to develop its STARs program (Schedule Tracking and Antibody Reporting), a web based tool that allows its customers full access to information about custom antibody production and services. The core antibody products of theCompany saw accelerated growth during the year, and introduction of new products and services in 2006 is anticipated to support this trend.

The Company believes it is on the right path, and as the deployment of new initiatives is accelerated, building on the Company’s leadership position in food pathogens and expanding its unique positioning in the emerging area of genomic antibodies, the Company anticipates thatthe revenue lost to market changes in its legacy businesses will be replaced and the Company will develop a stronger, more predictable, revenue base.

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

*Corporate and Growth Initiatives:*

The following provides an update on the business development activities related to the Genomic AntibodiesTM initiative and the new Salmonella product in the food pathogen area, which utilizes a patent-pending enrichment media technology.

***Genomic Antibodies***TM: The Company announced an initiative to develop technology for the high throughput production of genetic antibodies early in 2005, opened a new facility for molecular biology, and hired two scientists that had been leading the development of thistechnology. In January 2006, the Company announced the commercial introduction of the lead product: mouse polyclonal antibodies, and the establishment of a new website, www.genomicantibodies.com.

In the same announcement, it was reported that beta tests had been successfully completed and validated the high throughput production processes for mouse polyclonal antibody reagents. Some of the other findings from these beta tests and the work that has taken place since theproduct’s commercial launch follow:
 •The technology completely eliminates a customer’s need to prepare and provide an antigen.
 

24

Back to Contents
 •An antibody that recognizes the user’s target has been successfully produced, in the assay format the user chooses, 80% of the time.    •The process is successfully producing antibodies to some of the most difficult research targets including trans-membrane proteins, membrane associated proteins, and other highly conserved proteins.    •A reagent is delivered to a customer in 76 days or less. This represents a saving of as much as 50 percent when compared to the time required for delivery of antibody developed using traditional methods.
The antibody product group is strategically important to delivering growth, and to clearly transforming the Company into a biotech company with much greater opportunities to access the human health market with proteomic tools and solutions. With a relatively modestinvestment, and great speed, the Company produced a platform technology with potential for new and greater value creation.

***Salmonella Product:***The new test for the detection of Salmonella entered prototype evaluations in the first quarter of 2006. This test incorporates several new and proprietary technology advancements, and to date all planned prototype studies have been successfully completedwith outstanding results. This work has set the stage for entering beta test evaluations of the full method in the second quarter of 2006, along with AOAC validation. The Company remains on schedule for a full commercial launch in July of this year.

One of the technologies that made the new Salmonella product possible is the subject of a patent filed by the Company during the fourth quarter of 2005. The patent claims the use of bacteria phage for the growth and detection of a target bacterium in an environment that iscontaminated by competing and cross reacting bacteria. This new technology solves the problem of singling out the harmful pathogen among many other bacteria by creating an optimized environment for rapid growth of the targeted pathogen while dramatically suppressing othercompeting bacteria or bacteria that can interfere with the fidelity of the test method. This technology will be the subject of three papers accepted for presentation at the International Association for Food Protection annual meeting this coming August. As the Company experienced withits Listeria test, superior accuracy, ease of use and lower cost in use should lead to rapid market acceptance.

**Other Initiatives:**

***Industrial Bio-Processing:***The same technology used in the Salmonella product has application in other bio-processing environments, including industrial bio-processing. There are many large scale industrial processes where a manufacturer is attempting to manage the yield of aproduction organism in an environment contaminated by competing bacteria. These are applications like ethanol production, amino acid production, bio plastics, and others. The Company claims such application in our patent. The Company is currently working to demonstrate theapplication of these technologies in various industrial applications.

***Water Security:***The Company is planning to increase spending associated with marketing efforts in support of the water quality products, specifically the Microtox® and Deltatox® technologies. This investment follows the recent announcement that both platforms have receiveddesignation as an anti-terror technology by the Department of Homeland Security. SAFETY Act designation allows users a safe harbor from liability associated with the use of the technology in the prevention, response or recovery from a terrorist action. The Company believes that thispoint alone focuses new attention on the preventative value of the technology.

The Company has a robust new product pipeline with technology that provides sustainable differentiation to address larger markets. Sales and marketing professionals are being hired in anticipation of new product launches and the opportunities identified. The Company continuesto be focused on key customers and prospects in target markets: food, drinking water, pharma, IVD, biotech. Continuously improving the efficiency of our manufacturing and supply chain processes and improving the overall quality of our products and service remains critical to success.

*Economic and Industry-Wide Factors*
 •As industry continues to look for ways to reduce costs, the Company believes there will be a continual shift from testing that requires highly trained personnel, expensive equipment and lengthy turnaround times for test results, to more rapid, accurate and cost-effectivetesting which can be performed by less highly trained personnel and completed in minutes or hours.
 

25

Back to Contents
 •The global market for food pathogen testing continues to increase due to the globalization of food supply, the establishment of harmonized quality standards, the consumer’s desire for fresher, more ready-to-eat foods and foods from diverse geographies, and increasingregulatory and media scrutiny.    •The trend of increasing acceptance of GM crops and the introduction of new traits may drive additional demand for the Company’s products in order to maintain identity preservation and tracking.    •Currently, the research tools portion of the biomarker and drug target discovery market is estimated to be between $600 million and $1 billion dollars, and is expected to grow at a CAGR of more than 15% over the next 10 years to exceed $3.5 billion dollars.
*Seasonality*

Sales levels for certain agricultural products may be impacted by seasonal demand trends. The demand for these test kits is typically higher in the first and third quarters due to harvesting patterns.

**Results of Operations**

*Year ended December 31, 2005 versus year ended December 31, 2004*

Revenues: Revenues for the year ended December 31, 2005 increased 4.8% to $24.85 million, compared to $23.71 million for the same period in 2004. The following table sets out revenues by product category.

 
   **Year Ended****December 31,**        **2005** **2004** **Increase    (Decrease)** **Percent    Change**           **(in thousands, except percentages)**  Water quality  5,139  5,911  (772) -13.1% Food safety  8,981  7,634  1,347  17.6% Antibody  10,725  10,160  565  5.6%        Net revenues $24,845 $23,705 $1,140  4.8%       
*Water and Environmental Products*

Water and environmental products revenue decreased 13.1% to $5.14 million for the year ended December 31, 2005, compared to $5.91 million for 2004 and decreased 24.2% to $1.19 million for the fourth quarter of 2005, compared to $1.57 million for the same quarter in 2004.

The Company continues to look for ways to develop new channels to market, add new products and add sales professionals that will have a positive impact on revenues. The effort expended in 2005 did not offset the current business environment, which has seen ongoing reductionin large scale environmental remediation projects, and slow adoption of toxicity testing in water security applications.

*Food Safety Products*

For the year ended December 31, 2005, food safety revenues were $8.98 million, compared to $7.63 million for 2004, an increase of 17.6%. Food safety revenues were $2.30 million in the fourth quarter of 2005, compared to $2.24 million in the fourth quarter of 2004, an increaseof 2.7%. These increases were driven by food pathogen test sales in both the fourth quarter of 2005 and the year ended December 31, 2005, which were up 84.0% and 107.3%, respectively, compared to the same periods of 2004.

The Company began selling tests for food pathogens in 2002. Growth in this area has been entirely organic and for the 2005 year exceeded $3.26 million, compared to $1.57 million in 2004. The Company believes that the launch of its new RapidChek® method for Salmonella,expected in the third quarter of 2006, will contribute to accelerating sales as the Company will be able to offer outstanding methods for all three regulated pathogens in the same format.

Since 2001, sales of the Company’s product for the StarLink® trait have dropped from $5.35 million to less than $925,000 in 2005. The Company expects sales of this product to ultimately cease entirely.

26

Back to Contents

*Antibody Products*

Antibody revenues increased 5.6% to $10.73 million in the year ended December 31, 2005, compared to $10.16 million for 2005, but decreased 5.5% to $2.40 million for the fourth quarter of 2005, compared to $2.54 million for the same quarter in 2004. The decline in the fourthquarter was primarily due to a cyclical reduction in demand for bulk antibodies, as well as a reduction in new projects for custom monoclonal antibody production.

In 2004, the Company recorded revenue totaling approximately $360,000 associated with the sale of previously written off inventories that represented the Company’s discontinued catalog in bulk polyclonal antibodies.

The customer base in the antibody product group remains stable, and the Company believes that the year over year increase in revenues, excluding the effect of the written off inventory sales, is representative of the organic growth in the ongoing business. The Company expectsthe core antibody products to grow at a similar rate in 2006 with additional sales contributed by our Genomic AntibodiesTM program.

*Other Areas*

Gross profit for the year ended December 31, 2005 totaled $13.43 million, as compared to $12.93 million for 2004. Gross margins were 54.1% for 2005 and 54.5% for 2004.

For the year ended December 31, 2005, operating expenses increased 9.1% to $24.17 million, compared to $22.15 million in the same period in 2004, partially due to research expenses incurred of $590,000 related to the Company’s investment in the commercialization of newtechnologies and high throughput production of antibodies and the investment in a software upgrade for the Microtox® equipment totaling $398,000.

For the year ended December 31, 2005, research and development spending was $3.03 million, or 12.2% of net revenues, compared to $2.16 million, or 9.1% of net revenues, for 2004.

Selling, general and administrative expenses were $9.72 million for the year ended December 31, 2005, compared to $9.21 million for 2004. In 2005, the Company recorded approximately $275,000 of costs related to the previously announced restatement of prior years’ financialstatements as a result of a determination by the Company, following discussions with the U.S. Securities and Exchange Commission, to revise its revenue recognition policy for custom antibody projects.

Pre-tax income totaled $880,000 for the year ended December 31, 2005, compared to $1.61 million for 2004. Net income for the year ended December 31, 2005 was $584,000, or $0.03 per diluted share, compared to $1.38 million, or $0.07 per diluted share, for 2004. Dilutedshares totaling 19.9 million and 19.5 million were used in the computations for 2005 and 2004, respectively.

*Interest, net:*The Company recorded interest income of $207,000 during 2005 compared to interest income of $53,000 during 2004 primarily due to higher levels of invested cash when comparing 2005 to 2004.

*Income taxes:*The Company’s annual effective tax rate of 33.6% for 2005 primarily reflects the federal statutory rate of 34%, foreign net operating losses not previously benefited of 5.5% and research and development credits of 11.0%.

*Year ended December 31, 2004 versus year ended December 31, 2003*

Revenues: Net revenues decreased $2.1 million or 8.2% in 2004 over 2003. The following table sets out revenues by product category.

 
   **Year Ended****December 31,**        **2004** **2003** **Increase    (Decrease)** **Percent    Change**           **(in thousands, except percentages)**  Water quality  5,911  6,717  (806) -12.0% Food safety  7,634  7,382  252  3.4% Antibody  10,160  11,593  (1,433) -12.4% Contract and other  —  117  (117) -100.0%        Net revenues $23,705 $25,809 $(2,104) -8.2%       
 

27

Back to Contents

*Water and Environmental Products*

Revenue decreased by 12.0% to $5.9 million for the year ended December 31, 2004, compared to $6.7 million in the year ended December 31, 2003. In the aggregate, the year over year decline relates primarily to a decrease in the number of remediation projects and correlateduse of on-site testing in the U.S. Alternatively, in Europe, water quality revenues grew 21% in fiscal 2004. Also, contributing to the decline was pricing pressure from direct competitors and lab-based testing services and the Company’s efforts to discontinue production and sales of lowmargin products, including several “build-to-order” test kits.

In December 2004, the Company was awarded a contract to supply the United Nations Environmental Programme (UNEP) with on-site testing systems for site investigations in Iraq. The $100,000 order is the first for SDI with the UNEP, which provides environmental expertiseand guidance throughout the world. Also, in December 2004, the Company signed a distribution agreement with MicroBioTests, Inc. (MBT), a European supplier of complementary test kits. Under the agreement, SDI becomes the exclusive distributor for the ToxkitTM product lines ofMBT in the United States and Canada. The product line offers our customers requiring cultural methods an alternative to expensive and labor intensive protocols, allowing users to save both time and money while maintaining quality test results. The addition of several new toxicitymodels complement the Company’s Microtox® platform.

*Food Safety Products*

Food safety revenues increased by 3.4% to $7.6 million for the year ended December 31, 2004, as compared to $7.4 million in the prior year.

Food pathogen test sales in the fourth quarter were up 125% compared to the same quarter of 2003 and 27% over the third quarter of 2004, the continuation of the positive trend, which saw sales increase 91% and 46% for the third and second quarters of 2004, respectively,compared to the corresponding 2003 periods. The increase was led by sales of test kits for E. coli, Salmonella and Listeria, which grew by 77%. The Company launched its Listeria test kit in June 2004, and it has become the fastest growing product in the Company’s food pathogen lineof products.

Sales of the Company’s products to detect genetically modified (GM) traits, other than StarLinkTM, were essentially flat in 2004 when compared to 2003. The 2004 sales levels reflect the Company’s execution of a sizeable sale associated with new tests for soybean trait detectionin the Brazilian market, which has been offset by declining sales in the U.S. due to changes in customer sampling requirements for statistical analysis which has reduced order size. Sales of the Company’s test kits to detect StarLink®were approximately $1.1 million and $1.6 million, in2004 and 2003, respectively.

*Antibody Products:*

Antibody revenues decreased 12.4% for 2004 compared to 2003. The Company experienced a steep decline in revenues in the first half of 2004 that was associated with several large, one time customer projects in 2003 and the discontinuation of low margin business. Included inantibody revenues for 2004 was $389,000 associated with inventories written off during 2003.

*Other Areas*

Contract and other revenue declined as the Company continued to place greater emphasis on devoting its research and development resources to internal projects, particularly in the food safety category.

*Operating Expenses:*Operating expenses for 2004 were $22.1 million, versus $27.1 million in the prior year, a decrease of 18.1% that reflects the Company taking a non-cash charge of $3.0 million in connection with the write-down of certain inventories during 2003. Selling,general and administrative expenses declined $835,000 in 2004 compared to 2003. Excluding the impact of the $3.0 million inventory write-down in 2003, manufacturing expenses declined $1.0 million during 2004, reflecting the benefit of the Company’s ongoing efforts onmanufacturing process improvement and supply chain management.

Gross profit (defined as total revenues less manufacturing costs) increased $1.9 million to $12.9 million during 2004 primarily due to the $3.0 million non-cash charge discussed above. Gross margin improved from 42.6% in 2003 to 54.5% in 2004. The improvement in grossmargin is attributable to both the $3.0 million non-

28

Back to Contents

cash charge in 2003 and $389,000 of revenue in 2004 discussed above, and a reduction in manufacturing expenses of $1.0 million during 2004, reflecting the benefit of the Company’s ongoing effortson manufacturing process improvement and supply chain management.

Research and development expenses were essentially unchanged at $2.2 million during 2004 and 2003 reflecting the Company’s continuing development efforts in the food safety and water toxicity product lines.

Selling, general and administrative expenses declined $835,000 in 2004 compared to 2003. Included in the selling, general and administrative expenses for 2003 was a $605,000 provision for severance and related expenses associated with the Company’s termination of its formerCEO in May 2003 and COO in late December 2003. During 2004, the Company also benefited from the recovery of a $100,000 receivable it had written-off in 2001.

As a result of the matters discussed above, pre-tax income totaled $1.6 million for the 2004 year compared to a pre-tax loss of $1.3 million for 2003. Net income for the year ended December 31, 2004 was $1.4 million, or $0.07 per diluted share, compared to a net loss of$653,000, or negative $0.03 per diluted share, in 2003.

*Interest, net:*The Company recorded interest income of $53,000 during 2004 compared to interest expense of $40,000 during 2003 primarily due to the lower average debt levels and higher levels of invested cash when comparing 2004 to 2003.

*Income taxes:*The Company’s annual effective tax rate of 14.4% for 2004 primarily reflects the federal statutory rate of 34%, foreign net operating losses not previously benefited of 14.3% and research and development credits of 5.1%.

*Non-GAAP Financial Measures*

Excluding the non-cash inventory write-down of $3.0 million and the $605,000 provision for severance and related costs, both tax effected at the statutory rate of 39%, the net income for 2003 would have been $1.5 million, or $.08 per diluted share.

The Company added back the items below because management believes they are outside of our normal operations. The Company believes the inclusion of such non-GAAP measures helps investors to gain a better understanding of our core operating results, consistent with howmanagement measures the Company’s performance, especially when comparing such results to previous periods, including 2002 when the Company had a net loss of $1.1 million.

In 2004, the Company recorded revenues totaling $360,000 associated with the inventories written off in 2003.

 
   **Twelve Months Ended****December 31, 2004****(in thousands, except****per share data)**      Net income $1,379  Less: Revenue associated with inventory previously written off, net of related     tax effect at 14%  (319) Add: Costs related to revenue recorded above, net of tax effect at 14%  39      As adjusted net income $1,099      Earnings (loss) per share:     Basic—as reported $0.07      Basic—as adjusted $0.06      Diluted—as reported $0.07      Diluted—as adjusted $0.06     
29

Back to Contents

 
   **Twelve Months Ended****December 31, 2003****(in thousands, except****per share data)**      Net loss $(653) Add: Inventory write-down of $3.0 million, net of related tax effect at 39%  1,830  Add: Severance costs of $605,000, net of related tax effect at 39%  369      Pro forma net income $1,546      Earnings (loss) per share:     Basic—as reported $(0.03)     Basic—pro forma $0.08      Diluted—as reported $(0.03)     Diluted—pro forma $0.08     
**Liquidity and Capital Resources**

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

The following is a summary of selected cash flow information:
   **Year Ended****December 31,**    **2005** **2004**         **(in thousands)**  Net cash provided by operating activities $2,119 $3,425  Net cash used in investing activities  (1,234) (604) Net cash provided by financing activities  1,152  50  Effect of exchange rate changes on cash  (124) 67       Net increase in cash and cash equivalents $1,913 $2,938      
The net cash provided by operating activities of $2.1 million and $3.4 million for 2005 and 2004, respectively, was primarily the result of the earnings before interest, taxes, depreciation and amortization (EBITDA) for the period of $1.6 million and $2.5 million, respectively. See“Non-GAAP Financial Measures” below.

Net cash used in investing activities in 2005 of $1.2 million was driven by the capital expenditures for the period. This compares to net cash used in investing activities of $604,000 for 2004, which was driven by net capital expenditures for the period of $453,000 and $200,000 forthe purchase of a technology license. The capital expenditures for 2005 primarily relate to investments in equipment and a parcel of land adjacent to our antibody manufacturing facility in Maine, while capital expenditures for 2004 primarily related to upgrading office infrastructure andinvestments in manufacturing equipment.

Net cash provided by financing activities of $1.2 million for 2005 and $50,000 for 2004 was primarily driven by proceeds from the exercise of stock options, which was partially offset by net repayments of outstanding debt.

The Company’s working capital (current assets less current liabilities) increased $2.1 million to $15.6 million at December 31, 2005 from $13.5 million at December 31, 2004, primarily due to the increase of $1.9 million in cash and cash equivalents generated during the 2005period. Outstanding debt decreased $211,000 from $984,000 at December 31, 2004 to $773,000 on December 31, 2005, due to scheduled repayments.

On May 5, 2000, the Company entered into a financing agreement with a commercial bank. This agreement provides for up to a $5.0 million revolving line of credit, none of which was outstanding and approximately $2.4 million of which was available at December 31, 2005,based on eligible assets.

 

30

Back to Contents

The revolving line of credit bears a variable interest rate of between 1.75% and 2.75% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA, and is subject to a borrowing base determined by the Company’s eligible accounts receivable. The Company’sannual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was approximately 5.94% at December 31, 2005.

On December 13, 2001, the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1.5 million in financing, $773,000 of which was outstanding at December 31,2005, and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of between 2% and 3% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA. Payments are due monthly, with equalamortization of principal payments plus interest. The Company’s annual effective rate of interest on this loan at December 31, 2005, was approximately 6.19%.

Under the terms of the above financing, the Company is required to meet certain quarterly financial covenants that include a ratio of EBITDA to current maturities of debt plus interest and cash paid for taxes greater than 1.50 and a ratio of funded debt to EBITDA not to exceed3.25. At December 31, 2005, the Company met all of its financial covenants with respect to this indebtedness. As a result of the delay in filing Form 10-Q as of and for the quarter ended September 30, 2005, the Company was not in compliance with its timely filing covenant. On February15, 2006, the Company obtained a waiver from the bank for the covenant as of September 30, 2005.

For the year ended December 31, 2005, the Company satisfied all of its cash requirements from the net cash provided by operating activities, cash available and on-hand and from the financing agreements described above. At December 31, 2005, the Company had $562,000 inlong-term debt and stockholders’ equity of $33.79 million. Although the Company has no material commitments for capital expenditures at December 31, 2005, it does anticipate that it may spend approximately $1.09 million in 2006 to upgrade or expand certain manufacturing, researchand development and office equipment and systems that will drive productivity or generate cost savings, and also to introduce automation into certain manufacturing processes that are currently labor intensive.

*Non-GAAP Financial Measures*

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

The calculation of the Company’s EBITDA measure (as discussed above), and the reconciliation of the Company’s EBITDA measure to net cash provided by operating activities for years ended December 31, 2005 and 2004, respectively, is as follows (amounts in thousands):
   **Twelve Months Ended****December 31,**    **2005** **2004**         **(in thousands)**  Net cash provided by operating activities $2,119 $3,425  Changes in assets and liabilities:        Receivables  135  (271) Inventories  (6) (189) Other current assets  (5) (135) Other assets  1  (1) Accounts payable  404  (80) Accrued expenses  (184) (40) Deferred revenue  (207) —  Net change in deferred income tax  18  (46) Loss on disposal of fixed assets  (228) —  Stock compensation expense  (243) (152) Interest income, net  (207) (53)      EBITDA $1,597 $2,458      
 

31

Back to Contents

**Off-Balance Sheet Arrangements**

As of December 31, 2005, the Company did not have any off-balance sheet arrangements as defined in Item 304(a)(4)(ii) of Regulation S-K.

**Contractual Obligations**

The Company is committed to making cash payments in the future on two types of contracts: our long-term indebtedness and leases. The Company has no off-balance sheet debt or other such unrecorded obligations. Below is a schedule of the future payments that the Companywas obligated to make based on agreements in place as of December 31, 2005.
   **Payments Due by Year**    **2006** **2007** **2008** **2009** **2010** **2011 and****Beyond** **Total**              **(in thousands)**  Long-term debt (1)  $211  211  211  140  —  —  773  Operating leases (2)  $620  595  60  45  37  37  1,394            Total contractual cash obligations  $831  806  271  185  37  37  2,167            (1)See discussion in Note 5 of the Notes to the Consolidated Financial Statements for additional information on long-term debt.  (2)See discussion of operating leases in Note 8 of the Notes to the Consolidated Financial Statements.
Based upon its cash on hand, credit    facilities, current product sales and the anticipated sales of new products,    the Company believes it has, or has access to, sufficient resources to meet  its operating requirements. 

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

**Critical Accounting Policies**

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

Valuation of Accounts Receivable – Accounts receivable as of December 31, 2005 and December 31, 2004, were net of an allowance for doubtful accounts of $117,000 and $186,000, respectively. The recorded allowance is continually evaluated based on current marketconditions, an analysis of customer-specific facts and circumstances, and the size and composition of the overall portfolio. If receivables become uncollectible, these write-offs are charged against the allowance.

 

32

Back to Contents

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

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

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

Deferred Taxes – In assessing the realizablity of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation offuture taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of existing temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based uponhistorical taxable income and projections for future taxable income over the periods in which the deferred tax items are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuationallowances at December 31, 2005.

At December 31, 2005, management concluded that no valuation allowance is necessary for federal deferred tax assets after considering the positive and negative factors. In making this determination, the Company considered the following positive factors:
 •cumulative income before taxes of $1.2 million for the three year period 2003 to 2005;    •the strong operating performance over the past five years after adjusting for specific non-recurring transactions such as restructuring activities and the decision to exit the catalog antibody product line during the year ended December 31, 2003;    •past and anticipated new product launches; and,    •The operating efficiencies gained and to be gained from automating labor intensive manufacturing processes and improvements to supply chain management.
The Company also considered the following negative factors:
 •losses before taxes of $1.3 million in 2003 without removing the effect of $3.6 million of expenses that management believes are outside of normal operations.    •the 2005 income before taxes was lower than 2005 expectations at the beginning of the year; and,    •federal net operating loss carry forwards begin to expire in 2007.
At December 31, 2005, management has concluded that a full valuation allowance is necessary for deferred tax assets in certain state jurisdictions. For the state jurisdictions, management has considered the same positive and negative evidence as utilized for the federal deferredtax assets described above. The Company has also considered the substantial reduction of its presence in North Carolina and Pennsylvania since the time when the net operating losses were incurred in those jurisdictions as additional negative evidence.

At December 31, 2005, management considered positive and negative indicators in concluding that a substantial valuation allowance was necessary for foreign deferred tax assets. The positive indicators included the contribution to income before taxes by the foreign operations inthe United Kingdom (“UK”) for 2005 and 2004, and the expected income before taxes in the UK for 2006. The negative indicators include a history of substantial net operating losses in the UK, the lack of income before taxes until 2004, and limitations with regard to estimating incomein the UK beyond 2005 resulting from the hiring of a UK Director of Distribution late in 2004 and the rebuilding of the UK distributor network.

 

33

Back to Contents

As of December 31, 2005, the Company had federal net operating loss carryforwards, including those acquired in the Company’s past acquisitions, of approximately $18.9 million, which, if not utilized, begin to expire as follows:
 **Year** **Amount of****NOL (in****thousands)**     2007 $946  2008  2,565  2009  3,297  2010  5,109  2017  760  2018  1,327  2019  550  2020  66  2021  51  2022  2,253  2024  1,824  2025  125      Total $18,873     
Based on the best information available to the Company today, the Company expects to have sufficient future taxable income to utilize such NOLs prior to the expiration of the net operating loss carry forwards.

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

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

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

Contract revenues are recognized upon the completion of contractual milestones.

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

**New Accounting Standards and Disclosures**

In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting (SFAS) No. 151, *“Inventory Costs—an amendment of ARB No. 43, Chapter 4.”*This Statement amends the guidance in ARB No. 43, Chapter 4, *Inventory Pricing,*toclarify the accounting for abnormal

34

Back to Contents

amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. TheCompany does not believe that the adoption of SFAS No. 151 will have a significant impact on its results of operations and financial position.

In December 2004, FASB issued SFAS No. 153, *“Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29.”*This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets that do not have commercialsubstance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. TheCompany does not believe that the adoption of SFAS No. 153 will have an impact on its results of operations and financial position.

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment.” SFAS 123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance.SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions). The Company intends to adopt SFAS 123(R) using the modified prospective basis on January 1, 2006. On December 27,2005, the Board of Directors of the Company approved the accelerated vesting, effective as of December 31, 2005, of all unvested stock options granted to employees and non-employee directors from 2002 through 2005 under the Company’s 2000 Stock Incentive Plan, as well asoptions granted to the Company’s Chief Executive Officer under his original employment agreement. The acceleration of vesting of these options will reduce non-cash compensation expense that would have been recorded in the Company’s income statement in future periods inanticipation of the adoption of Financial Accounting Standards Board Statement 123(R) in January 2006. The Board’s decision was based on such factors as: 48% of the options were “out of the money”; the options generally vested over the next three years; and, the Company hasdecided to rely on restricted stock as opposed to options in future incentive compensation awards. Accordingly, the Company does not believe that the adoption of SFAS No. 123(R) will have an impact on its results of operations and financial position. Further, we are unable to estimate the future impact of stock-based compensation expense because it is affected by our stock price, the number of stock-based awards our Board of Directors may grant in 2006, the number of shares our employees purchase under our stock purchase plan, as well as a number of complexand subjective valuation assumptions and the related tax effect. These valuation assumptions include, but are not limited to, the volatility of the Company’s stock and employee stock option exercise behaviors.

In March 2005, the FASB issued Interpretation 47, *“Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143. Interpretation 47*clarifies that the term *conditional asset retirement obligation*as used in FASB Statement No. 143,*Accounting for Asset Retirement Obligations,*refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the assetretirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. This Interpretation is effective for the Company on December 31, 2005. The adoptionof Interpretation 47 did not have an impact on the Company’s results of operations and financial position.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS 154 replaces APB Opinion 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in InterimFinancial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS 154 is effective for all accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.

For further information related to new accounting standards and disclosures, see Note 1 of the Notes to Consolidated Financial Statements.

 

35

Back to Contents

**Item 7A. Quantitative and Qualitative Disclosures about Market Risk**

The Company has exposure to changing    interest rates, and is currently not engaged in hedging activities. Interest    on $773,000 of outstanding indebtedness is at a variable rate of between    2% to 3% over the published London Interbank Offered Rate (LIBOR), based    upon theCompany’s ratio of funded debt to EBITDA, and was 3% over LIBOR on averagefor the year. At the Company’s current level of indebtedness, each 1% changein the variable interest rate will have an effect of approximately $8,000 onthe Company’s annual interest expense charges.

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

**Item 8. Financial Statements and Supplementary Data**

The following consolidated financial statements and supplemental quarterly financial data of the Company and its subsidiary are included as part of this Form 10-K:
  **Page**    Report of Independent Registered Public Accounting Firm  F-1 Consolidated Balance Sheets as of December 31, 2005 and 2004  F-2 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2005  F-3 Consolidated Statements of Stockholders’ Equity and Comprehensive Income for each of the years in the three-year period ended December 31, 2005  F-4 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2005  F-5 Notes to Consolidated Financial Statements  F-6 
**Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure**

None

**Item 9A. Controls and Procedures**

(a) Evaluation of Disclosure Controls and Procedures

Following a series of discussions    with the U.S. Securities and Exchange Commission, the Company determined    on December 15, 2005 that it would change its method of accounting for revenue    on certain custom antibody arrangements. The Company changed its revenue     recognition policy for custom antibody projects to utilize a methodology    whereby revenue is recognized when a project’s specifications have been    met and the related antibodies have been shipped, rather than on the percentage-of-completion    methodology the Company had used since  1996. In addition, the Company corrected    an error in the 2005 interim consolidated financial statements for the March    31, and June 30 quarters relating to the determination as to whether the    Company had established the technological feasibility of a software development    project.

As a result of the ongoing consideration of the appropriate accounting methodology leading up to the December 15, 2005 determination, the Company did not file its Form 10-Q for the third quarter of 2005 by the required filing date.

The Company has amended its annual report on Form 10-K for the year ended December 31, 2004 to restate its consolidated financial statements for the years ended December 31, 2002, 2003 and 2004 and the related disclosures, and has amended its interim reports on Form 10-Qfor the three month periods ended March 31, 2005 and 2004, and the three and six month periods ended June 30, 2005 and 2004, and the related disclosures. The consolidated interim financial statements for the three and nine month periods ended September 30, 2004 have also beenrestated.

 

36

Back to Contents

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Act of 1934, as amended, as of the end of the periodcovered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were  therefore, as of December 31, 2005, not effective to provide reasonable assurance that the information requiredto be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by us in the reports we file orsubmit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding requireddisclosure.

(b) Change in Internal Control over Financial Reporting

No change in the Company’s internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

Subsequent to September 30, 2005, management has instituted additional annual review procedures for revenue recognition and software capitalization accounting policies to ensure that we continually evaluate such policies and their compliance with generally acceptedaccounting principles.

**Item 9B. Other Information**

None

37

Back to Contents

**PART III**

**Item 10. Directors and Executive Officers of the Registrant**

The information contained under the captions “Election of a Class of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics,” and “Report of the Audit Committee” in the Company’s Definitive Proxy Statement is incorporated herein byreference.

Identification of Executive Officers and Certain Significant Employees

The executive officers of the Company, their positions with the Company, their ages and a brief biography for each are as follows:
**Name** **Age** **Position**    Matthew H. Knight  49  President and Chief Executive Officer James W. Stave, Ph.D.  51  VP—Research and Development and Chief Technical Officer Anthony J. Simonetta  58  VP—Finance, Chief Financial Officer and Corporate Secretary Richard M. Rumble  47  VP—Sales and Marketing Richard W. Foster  51  VP—Sales (through March 25, 2005) 
**Matthew H. Knight,**age 49, joined SDI in September 2003 as President and CEO, and also serves as a Director. Prior to joining SDI, Mr. Knight spent 23 years at Nalco Chemical Company. He began his career in field sales in 1980, and advanced through a series of sales andmarketing management positions over the next 15 years. In 1996, Mr. Knight became General Manager of Nalco’s European operating group serving the water management needs of manufacturers, including the food, beverage and pharmaceutical industries. In 1998, he was promoted toGeneral Manager of Nalco’s largest water treatment business unit and in 2000 he was promoted to Group Vice President and President of the company’s Industrial Division. Mr. Knight also served as Group Vice President, Sales Force Optimization, focused on development of sales andsales management processes for Nalco’s global sales force. Mr. Knight is a graduate of Miami University of Ohio, with a B.A. in Chemistry.

**James W. Stave,**age 51, joined SDI in March 1991 as a research group leader. Subsequently, Dr. Stave was promoted to director of Research and Development. In October 1993, Dr. Stave was promoted to Vice President—Research and Development and Chief TechnicalOfficer. 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.

**Anthony J. Simonetta,** age 58, joined the Company in January 2005 as Vice President—Finance, Chief Financial Officer and Corporate Secretary. Mr. Simonetta worked for 28 years with KPMG, ascending to the role of partner in the Philadelphia office. During his last threeyears with KPMG, Mr. Simonetta managed the Philadelphia business advisory practice group, consulting with numerous KPMG clients on business development tactics and strategies. Prior to this assignment, Mr. Simonetta was an audit partner, serving both public and private clients inthe development and execution of financial audit plans. He left KPMG in 2002 and was consulting with non-KPMG clients on business development strategy and execution. Mr. Simonetta is a graduate of Hofstra University. Mr. Simonetta also serves as Chairman of the Board for TheCenter for Autistic Children in Philadelphia.

**Richard M. Rumble,** age 47, joined SDI in December 2004 as Vice President of Marketing. Prior to joining SDI, Mr. Rumble spent 23 years in the Medical Device industry. He began his career in 1983 with 3M Canada, joining the company in the capacity of Professional ServiceSupervisor, Microbiology Products, Over the next 14 years, Mr. Rumble progressed through a number of positions of increased responsibility in both domestic and international sales and marketing roles. In 1996 Mr. Rumble left 3M to assume the position of President and CEO,MediVators Corporation, a company dedicated to the development, manufacture and marketing of products used in the reprocessing of flexible endoscopes. Prior to Joining SDI, Mr. Rumble held the position of Vice President and General Manager, Healthcare Sterilization Products forSTERIS Corporation the world leader in sterile processing systems. Mr. Rumble is a graduate of the University of Western Ontario with B.Sc. in Biology and Immunology.

 

38

Back to Contents

**Richard W. Foster,** age 51, joined the Company in March 2004 as Vice President—Sales. Mr. Foster began his sales career with Curtin Matheson. Over the next 21 years Mr. Foster advanced through a series of sales and marketing positions of increasing responsibility.Following the acquisition of Curtin Matheson by Fisher Scientific, Mr. Foster became Vice President of Sales and Marketing for Fisher Diagnostics. In 1999, he joined Absorption Systems as Vice President of Sales and Marketing, where he built a consultative sales organization sellingoutsourcing services to the pharmaceutical industry. Mr. Foster received a B.S. in Biology from Western Michigan University.
**Item 11. Executive Compensation**
The information contained under the captions “Executive Compensation” and “Report of the Compensation Committee” in the Company’s Definitive Proxy Statement is incorporated herein by reference.
**Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters**
The information contained under the caption “Stock Ownership of Principal Stockholders and Management” in the Company’s Definitive Proxy Statement is incorporated herein by reference.
**Equity Compensation**
The table below presents certain information concerning securities issuable in connection with equity compensation plans that have been approved by the Company’s shareholders and that have not been approved by the Company’s shareholders.
**PlanCategory** **Number          of      securities to be      issued upon      exercise of      outstanding options, warrants          and rights      (a)** **Weighted-average    exercise price of outstanding options, warrants and rights     (b)** **Number of securities remaining available for issuance under equity compensation plans (excluding securities reflected in column a)    (c)**     Equitycompensationplanapproved bysecurityholders  1,360,500 $3.61  791,235 Equitycompensationnotapproved bysecurityholders  300,000 $4.00  —      Total  1,660,500 $3.68  791,235       
The 300,000 shares underlying options granted under equity compensation not approved by security holders were granted in connection with the Company’s hiring, on September 2, 2003, of its new President and Chief Executive Officer, Matthew H. Knight. The grant to Mr.Knight is a ten year non-qualified stock option grant at an exercise price of $4.00 per share, the closing market price on September 2, 2003.
**Item 13. Certain Relationships and Related Transactions**
The information contained under the caption “Related Party Transactions” in the Company’s Definitive Proxy Statement is incorporated herein by reference.
**Item 14. Principal Accountant Fees and Services**
The information contained under the captions “Other Matters—Independent Auditors” and “Policy on Audit Committee Pre-approval of Audit and Permissible Non-audit Services of Independent Auditor” in the Company’s Definitive Proxy Statement is incorporated herein byreference.

39

Back to Contents

**PART IV**

**Item 15. Exhibits and Financial Statement Schedules**

**1. Financial Statements**

(a) See the Consolidated Financial Statements which begin on page F-1 of this Report

**2. Financial Statement Schedules**

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

**3. Exhibits**

 
         **Previous** **Exhibit**        **Exhibit** **Number**  **Description**  **Reference**  **Number**               2.1  Agreement and Plan of Merger among the Company, AZURAcquisition Corp. and AZUR Environmental dated May 4, 2001  (1)      3.1  Fourth Amended and Restated Certificate of Incorporation of the Company  (2)  4.1   3.2  Certificate of Powers, Designations, Preferences and Rights of the Series C Convertible PreferredStock of the Company filed with the Secretary of the State of Delaware on September 27, 2001  (1)      3.3  Amended and Restated Bylaws of the Company  (2)  4.2   4.1  Reference is made to Exhibits 3.1, 3.2 and 3.3         4.2  Forms of Warrants to Purchase Common Stock of the Company  (2)  4.4 10.1  Stock Purchase Agreement among the Company and its outside directors and certain of theiraffiliates dated August 16, 2002  (12)    10.2  Demand Registration Agreement among the Company and its outside directors and certain of theiraffiliates dated August 16, 2002  (12)    10.3  EnSys Environmental Products, Inc. 1993 Stock Incentive Plan*  (3)  10.17 10.4  Amended and Restated EnSys Environmental Products, Inc. 1995 Stock Incentive Plan*  (4)    10.5  EnSys Environmental Products, Inc. 401(k) Plan AdoptionAgreement  (3)  10.18 10.11  Agreement and Plan of Merger by and between EnSysand Strategic Diagnostics Inc. dated as of October 11, 1996  (2)  2.1 10.15  Employment Agreement dated December 30, 1996 by andbetween Grover C. Wrenn and the Company*  (7)  10.15 10.18  Industrial Lease dated October 26, 1993, by and between Tober & Agnew Properties, Inc. andStrategic Diagnostics Incorporated  (6)  10.18 10.21  Lease agreement dated October 29, 1997 by and betweenPencader Courtyard, L.P. and Strategic Diagnostics Inc.  (7)  10.21 10.22  1998 Employee Stock Purchase Plan  (11)    10.27  Loan Agreement between the Company and PNC Bank,Delaware, dated May 5, 2000  (10)  10.1 10.28  Line of Credit Note between the Company and PNC Bank,Delaware, dated May 5, 2000  (10)  10.2 10.29  Term Note between the Company and PNC Bank, Delaware,dated May 5, 2000  (10)  10.3 10.30  Employment Agreement dated September 2, 2003, by andbetween Matthew H. Knight and the Company*  (13)  10.1 
40

Back to Contents

 
         **Previous** **Exhibit**        **Exhibit** **Number**  **Description**  **Reference**  **Number**        10.31  Nonqualified Stock Option Agreement dated September 2, 2003, by and between Matthew H.Knight and the Company*  (13)  10.2 10.32  Restricted Stock Grant Agreement dated September 2, 2003, by and between Matthew H. Knightand the Company*  (13)  10.3 10.33  Employment Agreement dated January 1, 1997 by and between James W. Stave and the Company*  (14)  10.33 10.34  Exclusive Distribution and Supply Agreement, dated as of May 4, 2005, by and between theRegistrant and the DuPont Qualicondivision of E.I. du Pont de Nemours  (15) (16)  10.1 10.35  Strategic Diagnostics Inc. Change of Control SeveranceAgreement*  (17)  10.1 21.1  Subsidiaries of the Company       31.1  Certifications of the Chief Executive Officer of StrategicDiagnostics Inc. required by Rule 13a-14(a) under the SecuritiesExchange Act of 1934       31.2  Certifications of the Chief Financial Officer of StrategicDiagnostics Inc. required by Rule 13a-14(a) under the Securities Exchange Act of 1934       32.1  Certification of Matthew H. Knight pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of Sarbanes-Oxley Act of 2002       32.2  Certification of Anthony J. Simonetta pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 ofSarbanes-Oxley Act of 2002                   (1)Incorporated by reference to the designated exhibit of the Company’s 10-Q for the fiscal quarter ended September 30, 2001  (2)Incorporated by reference to the designated exhibit of the EnSys Registration Statement on Form S-4 (No. 333-17505) filed on December 9, 1996  (3)Incorporated by reference to the designated exhibit of the EnSys Registration Statement on Form S-1 (No. 33-68440) filed on September 3, 1993  (4)Incorporated by reference to Appendix F to the Joint Proxy Statement/Prospectus contained in the EnSys Registration Statement on Form S-4 (No. 333-17505) filed on December 9, 1996  (5)Incorporated by reference to the designated exhibit of the EnSys Form 10-K for the fiscal year ended December 31, 1994  (6)Incorporated by reference to the designated exhibit of the EnSys Form 10-Q for the fiscal quarter ended March 31, 1996  (7)Incorporated by reference to the designated exhibit of the Company’s Form 10-K for the fiscal year ended December 31, 1996  (8)Incorporated by reference to the designated exhibit of the Company’s Form 10-K for the fiscal year ended December 31, 1997  (9)Incorporated by reference to the identically numbered exhibit contained in the Company’s Form 8-K filed on May 26, 1999  (10)Incorporated by reference to the identically numbered exhibit contained in the Company’s Form 8-K filed on March 15, 1999
 

41

Back to Contents
(11)Incorporated by reference to the designated exhibit of the Company’s Registration Statement on Form S-8 (No. 333- 68107) filed on November 30, 1998  (12)Incorporated by reference to the designated exhibit of the Company’s 10-Q for the fiscal quarter ended September 30, 2002  (13)Incorporated by reference to the designated exhibit of the Company’s Form 10-Q for the fiscal quarter ended September 30, 2003.  (14)Incorporated by reference to the designated exhibit of the Company’s Form 10-K for the fiscal year ended December 31, 2004  (15)Confidential treatment has been requested as to certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.  (16)Incorporated by reference to the designated exhibit of the Company’s Form 10-Q for the fiscal quarter ended June 30, 2005, as amended.  (17)Incorporated by reference to the designated exhibit of the Company’s Form 10-Q for the fiscal quarter ended September 30, 2005.  *Management contract or compensatory plan.
42

Back to Contents

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and StockholdersStrategic Diagnostics Inc.:

We have audited the accompanying consolidated balance sheets of Strategic Diagnostics Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of theyears in the three-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. 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 overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Strategic Diagnostics Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each ofthe years in the three-year period ended December 31, 2005 in conformity with U.S. generally accepted accounting principles.

     

/s/ KPMG LLP

     

Philadelphia, PennsylvaniaMarch 24, 2006

F-1

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****(in thousands, except share and per share data)**

 
  **December** **31,** **December** **31,**       **2005** **2004**     ASSETS       Current Assets:       Cash and cash equivalents **$****10,009** $8,096 Receivables, net  **3,242**  3,107 Inventories  **3,212**  3,218 Deferred tax asset  **1,048**  1,071 Other current assets  **362**  367     Total current assets  **17,873**  15,859     Property and equipment, net  **3,884**  3,605 Other assets  **3**  2 Deferred tax asset  **8,101**  8,415 Intangible assets, net  **6,800**  6,992     Total assets **$****36,661** $34,873     LIABILITIES AND STOCKHOLDERS’ EQUITY       Current Liabilities:       Accounts payable **$****464** $868 Accrued expenses  **1,439**  1,255 Deferred revenue  **207**  — Current portion of long term debt  **211**  211     Total current liabilities  **2,321**  2,334     Long-term debt  **562**  773     Stockholders’ Equity:       Preferred stock, $.01 par value, 20,920,648 shares authorized, no shares issued or outstanding  **—**  — Common stock, $.01 par value, 35,000,000 shares authorized, 19,916,635 and 19,379,602 issued and outstanding at December 31, 2005 and December 31, 2004, respectively  **200**  194 Additional paid-in capital  **38,249**  36,596 Accumulated deficit  **(4,374****)** (4,958)Deferred compensation  **(313****)** (206)Cumulative translation adjustments  **16**  140     Total stockholders’ equity  **33,778**  31,766     Total liabilities and stockholders’ equity **$****36,661** $34,873     
The accompanying notes are an integral part of these statements

 

F-2

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF OPERATIONS****(in thousands, except share and per share data)**
  **Year Ended December** **31,**      **2005** **2004** **2003**      Revenues:          Product related **$****24,845** $23,705 $25,692 Contract and other  **—**  —  117      Total revenues  **24,845**  23,705  25,809      Operating expenses:          Manufacturing  **11,416**  10,779  14,807 Research and development  **3,034**  2,157  2,203 Selling, general and administrative  **9,722**  9,211  10,046      Total operating expenses  **24,172**  22,147  27,056      Operating income (loss)  **673**  1,558  (1,247)Interest income (expense), net  **207**  53  (40)     Income (loss) before taxes  **880**  1,611  (1,287)Income tax expense (benefit)  **296**  232  (634)     Net income (loss) **$****584** $1,379 $ (653)     Basic net income (loss) per share applicable to commonstockholders **$****0.03** $0.07 $ (0.03)     Shares used in computing basic net income (loss) per shareapplicable to common stockholders  **19,741,000**  19,242,000  18,999,000      Diluted net income (loss) per share applicable to commonstockholders **$****0.03** $0.07 $(0.03)     Shares used in computing diluted net income (loss) per shareapplicable to common stockholders  **19,870,000**  19,494,000  18,999,000      
The accompanying notes are an integral part of these statements.

 

F-3

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY****AND COMPREHENSIVE INCOME****(in thousands)**

 
      **Additional**     **Cumulative**      **Preferred** **Common** **Paid-In** **Accumulated** **Deferred** **Translation**      **Stock** **Stock** **Capital** **Deficit** **Compensation** **Adjustments** **Total**          Balance December 31, 2002      —  190  35,312  (5,684) —  (40) 29,778          Comprehensive income:                      Net loss  —  —  —  (653) —  —  (653)Currency translation adjustment  —  —  —  —  —  113  113          Total comprehensive loss                    (540)                           Exercises of stock options  —  1  289  —  —  —  290 Employee stock purchase plan  —  —  14  —  —  —  14 Issuance of restricted stock awards  —  1  391  —  (392) —  — Deferred compensation amortization  —  —  —  —  62  —  62 Tax benefit of stock option exercises  —  —  134  —  —  —  134 Tax benefit of restricted stock awards  —  —  —  —  138  —  138          Balance December 31, 2003  —  192  36,140  (6,337) (192) 73  29,876          Comprehensive income:                      Net income  —  —  —  1,379  —  —  1,379 Currency translation adjustment  —  —  —  —  —  67  67          Total comprehensive income                    1,446                            Exercises of stock options  —  —  242  —  —  —  242 Employee stock purchase plan  —  —  18  —  —  —  18 Issuance of restricted stock awards  —  2  150  —  (152) —  — Deferred compensation amortization  —  —  —  —  145  —  145 Tax benefit of stock option exercises  —  —  46  —  —  —  46 Tax benefit of restricted stock awards  —  —  —  —  (7) —  (7)         Balance December 31, 2004  —  194  36,596  (4,958) (206) 140  31,766          Comprehensive income:                      Net income  —  —  —  584  —  —  584 Currency translation adjustment  —  —  —  —  —  (124) (124)         Total comprehensive income                    460                            Exercises of stock options  —  5  1,330  —  —  —  1,335 Employee stock purchase plan  —  —  37  —  —  —  37 Issuance of restricted stock awards  —  1  213  —  (214) —  — Deferred compensation amortization  —  —  —  —  238  —  238 Tax benefit of stock option exercises  —  —  73  —  —  —  73 Tax benefit of restricted stock awards  —  —  —  —  (131) —  (131)         Balance December 31, 2005 $— $200 $38,249 $(4,374)$(313)$16 $33,778          
The accompanying notes are an integral part of these statements.

 

F-4

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****CONSOLIDATED STATEMENTS OF CASH FLOWS****(in thousands)**

 
  **Twelve Months****Ended December** **31,**      **2005** **2004** **2003**      Cash Flows from Operating Activities:          Net income (loss) $584 $1,379 $(653)Adjustments to reconcile net income to net cash provided by (used in)operating activities:          Depreciation and amortization  924  900  831 Stock compensation expense  243  152  62 Deferred income taxes (benefit)  278  278  (609)Loss on disposal of fixed assets  228  —  — (Increase) decrease in:          Receivables  (135) 271  (65)Inventories  6  189  3,242 Other current assets  5  135  (3)Other assets  (1) 1  37 Increase (decrease) in:          Accounts payable  (404) 80  (236)Accrued expenses  184  40  550 Deferred revenue  207  —  —      Net cash provided by operating activities  2,119  3,425  3,156      Cash Flows from Investing Activities:          Purchase of property and equipment  (1,217) (453) (214)Purchase of patent license  (17) (200) (70)Proceeds from sale / disposal of assets  —  49  —      Net cash used in investing activities  (1,234) (604) (284)     Cash Flows from Financing Activities:          Proceeds from exercise of stock options  1,335  242  290 Proceeds from employee stock purchase plan  28  18  14 Proceeds from issuance of long and short term debt  —  551  372 Repayments on financing obligations  (211) (761) (601)     Net cash provided by financing activities  1,152  50  75      Effect of exchange rate changes on cash  (124) 67  113 Net increase in Cash and Cash Equivalents  1,913  2,938  3,060 Cash and Cash Equivalents, Beginning of Year  8,096  5,158  2,098      Cash and Cash Equivalents, End of Year $10,009 $8,096 $5,158      Supplemental Cash Flow Disclosure:          Cash paid (refunded) for taxes, net $(27)$6 $4 Cash paid for interest  48  50  65 
    The accompanying notes are an integral part of these statements

 

F-5

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**
**1.****SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND CERTAIN BALANCE SHEET INFORMATION:**
*Business*

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

*Basis of Presentation*

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

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

*Accounts Receivable*

As of December 31, 2005, 2004 and 2003, the allowance for doubtful accounts was $117, $186 and $103, respectively. If receivables become uncollectible, the Company’s policy is to charge these write-offs against the allowance. The Company continually reviews therealizablity of its receivables and charges current period earnings for the amount deemed unrealizable. At December 31, 2005 and 2004 net accounts receivable were $3,242 and $3,107, respectively.

A summary of the activity in the allowance for doubtful, accounts for the years ended December 31, 2005, 2004 and 2003 is as follows:
  **2005** **2004** **2003**      Balance, January 1 $186 $103 $294      Additions-charged to costs and expenses  (44) 140  8 Deductions-written off as uncollectable  (25) (57) (199)     Balance, December 31 $117 $186 $103      
*Inventories*

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

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

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

 

F-6

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

At December 31, inventories consisted of the following:
  **2005** **2004**     Raw materials $1,181 $1,410 Work in progress  498  633 Finished goods  1,533  1,175     Net inventories $3,212 $3,218     
*Property and Equipment*

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

*Impairment of Goodwill and Long-Lived Assets*

Long-lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assetsto be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in theamount by which the carrying amount of the asset exceeds the fair value of the asset. Goodwill and intangible assets not subject to amortization are tested annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might beimpaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value.

*Revenue Recognition*

Revenues composed of sales of immunoassay-based test kits and certain antibodies and immunochemical reagents are recognized upon the shipment of the product and transfer of title or when related services are provided. Revenues associated with such products or services arerecognized when persuasive evidence of an order exists, shipment of product has occurred or services have been provided, the price is fixed or determinable and, collectibility is reasonably assured. Management is required to make judgments based on actual experience about whether ornot collectibility is reasonably assured.

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

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

*Stock-Based Compensation*

The Company applies the intrinsic-value-based method to account for its fixed-plan stock options. Compensation expense is recorded on the date of grant only if the current market price of the underlying stock, at that date, exceeded the exercise price. The Company has elected tocontinue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123,

F-7

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

“Accounting for Stock-Based Compensation”. Under the Company’s employee share option plans, the Company grants employee and outside directors stock options at an exercise price equal to thefair market value at the date of grant. No compensation expense is recorded with respect to such stock option grants. Compensation expense with respect to stock awards granted is measured basedupon the fair value of such awards and is charged to expense over the vesting period.

The following table illustrates the effect on net income (loss) and earnings (loss) per share if the fair value based method had been applied to all outstanding and unvested awards in each period.
  **Twelve Months****Ended December** **31,**   **2005** **2004** **2003**      Net income (loss) $584 $1,379 $(653)Add: Stock-based employee compensation expense included inreported net income (loss), net of related tax effects  160  125  34 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects  (1,350) (559) (579)     Pro forma net income (loss) $(606)$945 $(1,198)     Earnings (loss) per share:          Basic — as reported $0.03 $0.07 $(0.03)     Basic — pro forma $(0.03)$0.05 $(0.06)     Diluted — as reported $0.03 $0.07 $(0.03)     Diluted —pro forma $(0.03)$0.05 $(0.06)     
The weighted average fair value at the date of grant for options granted during 2005, 2004 and 2003 is estimated at $2.09, $2.51 and $3.30 per share, respectively, using the Black-Scholes pricing model. The assumptions used in the Black-Scholes model are as follows: dividendyield of 0%, expected volatility of 85% in 2005, 88% in 2004 and 90% in 2003, risk-free interest rate of 3.93% in 2005, 3.44% in 2004 and 2.74% in 2003, and an expected option life of 5 years in 2005, 2004 and in 2003.

*Research and Development*

Research and development costs are charged to expense as incurred. From time to time the Company makes acquisitions, which may include in-process research and development, which is expensed when acquired.

*Accounting for Income Taxes*

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

*Basic and Diluted Income (Loss) per Share*

Basic earnings (loss) per share (EPS) is computed by dividing net income or loss available for common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is

F-8

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

similar to basic EPS, except that the dilutive effect of converting or exercising all potentially dilutive securities is also included in the denominator. The Company’s calculation of diluted EPS includesthe dilutive effect of exercising stock options into common shares. Basic loss per share excludes potentially dilutive securities.

Listed below are the basic and diluted share calculations for the years ended December 31, 2005, 2004 and 2003:
  **2005** **2004** **2003**      Average common shares outstanding  19,741,223  19,242,172  18,998,522 Shares used in computing basic net income (loss) per share  19,741,223  19,242,172  18,998,522      Stock options  127,733  251,580  —      Shares used in computing diluted net income (loss) per share  19,868,956  19,493,752  18,998,522      
In 2003, the effect of approximately 524,000 equivalent shares related to stock options was excluded from the diluted shares calculation, because they were anti-dilutive.

*Foreign Currency Translation*

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

*Comprehensive Income*

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

*Use of Estimates*

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

*Statements of Cash Flows*

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

*New Accounting Pronouncements*

In November 2004, the FASB issued Statement of Financial Accounting (SFAS) No. 151, *“Inventory Costs—an amendment of ARB No. 43, Chapter 4.”*This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe that the adoption of SFAS 151 will have a significant impacton its results of operations and financial position.

 

F-9

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

In December 2004, the FASB issued SFAS No. 153, *“Exchanges of Nonmonetary Assets—an amendment of APB Opinion No. 29.”*This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets that do not have commercialsubstance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. TheCompany does not believe that the adoption of SFAS 153 will have an impact on its results of operations and financial position.

In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment”. SFAS 123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance.SFAS 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements (with limited exceptions). The Company intends to adopt SFAS 123(R) using the modified prospective basis on January 1, 2006. On December 27,2005, the Board of Directors of the Company approved the accelerated vesting, effective as of December 31, 2005, of all unvested stock options granted to employees and non-employee directors from 2002 through 2005 under the Company’s 2000 Stock Incentive Plan, as well asoptions granted to the Company’s Chief Executive Officer under his original employment agreement. The acceleration of vesting of these options will reduce non-cash compensation expense that would have been recorded in the Company’s income statement in future periods inanticipation of the adoption of Financial Accounting Standards Board Statement 123(R) in January 2006. The Board’s decision was based on such factors as: 48% of the options were “out of the money”;the options generally vested over the next three years; and, the Company hasdecided to rely on restricted stock as opposed to options in future incentivecompensation awards. Accordingly, the Company does not believe that the adoptionof SFAS No. 123(R) will have an impact on its results of operations and financialposition. Further, we are unable to estimate thefuture impact of  stock-based compensation expense because it is affected byour stock price, the number of stock-based awards our Board of Directors maygrant in 2006, the number of shares our employees purchase under our stock purchaseplan, as well as a number of complex and subjective valuation assumptions andthe related tax effect. These valuation assumptions include, but are not limitedto, the volatility of the Company stock and employee stock option exercise behaviors.

In March 2005, the FASB issued Interpretation 47, *“Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143. Interpretation 47*clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143,*Accounting for Asset Retirement Obligations,*refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the assetretirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Thus, the timing and (or) method of settlement may be conditional on a future event. This Interpretation is effective for the Company on December 31, 2005. The adoptionof Interpretation 47 did not have an impact on the Company’s results of operations and financial position.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS 154 replaces APB Opinion 20, Accounting Changes, and SFAS 3, Reporting Accounting Changes in InterimFinancial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS 154 is effective for all accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.

F-10

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**
**2.****PROPERTY AND EQUIPMENT:**
As of December 31, property and equipment consisted of the following:

 
  **2005** **2004**     Equipment $4,233 $4,241 Building improvements  3,036  2,904 Furniture and fixtures  103  107 Land  1,129  360 Leasehold improvements  876  861     Total property and equipment  9,377  8,473 Less — accumulated depreciation and amortization  (5,493) (4,868)    Net property and equipment $3,884 $3,605     
Depreciation expense was $710, $735 and $652 in 2005, 2004 and 2003, respectively.

**3. INTANGIBLE ASSETS:**

As of December 31, intangible assets consisted of the following:
  **2005** **2004** **Lives**      Goodwill $5,168 $5,168  N/A Other  3,017  3,000  2-20 Less — accumulated amortization  (1,385) (1,176)          Net intangible assets $6,800 $6,992           
The Company’s goodwill principally relates to the 1999 acquisitions of HTI BioProducts, Inc. and Atlantic Antibodies, whose products are a component of the antibody product group, and the 2001 acquisition of Azur Environmental, whose products are a component of the waterquality product group. The Company continues to sell the products acquired through these acquisitions at substantial margins.

The other intangible assets principally relate to intellectual and property rights acquired from MCI. The technology acquired from MCI primarily relates to proprietary growth media used by the Company in conjunction with the Company’s *E. coli*and *Salmonella*test kits, andalso technology used in the Company’s ruminant feed test kit. The Company launched sales of these products during the year ended December 31, 2003 and expects continued launches of new products in the future based upon this intellectual property.

Amortization of these intangible assets is on a straight line basis over their useful lives and was $214, $165 and $179 in 2005, 2004 and 2003, respectively. The following table is a schedule of the expected amortization expense in each of the next five years:
**Year** **Amount**   2006 $208 2007  201 2008  198 2009  143 2010  119    
**4. ACCRUED EXPENSES:**

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

 

F-11

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**
  **2005** **2004**     Royalties $167 $105 Compensation  552  634 Professional fees  420  88 Purchases  146  357 Other  154  71     Total accrued expenses $1,439 $1,255     
**5. LONG-TERM DEBT:**

On May 5, 2000, the Company entered into a financing agreement with a commercial bank. This agreement provides for up to a $5,000 revolving line of credit, none of which was outstanding and approximately $2,394 of which was available at December 31, 2005, based oneligible assets. The revolving line of credit bears a variable interest rate of between 1.75% and 2.75% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA, and is subject to a borrowing base determined by the Company’s eligible accounts receivable. TheCompany’s annual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was approximately 5.94% at December 31, 2005.

On December 13, 2001, the Company entered into an agreement with a commercial bank to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1,500 in financing, $773 of which was outstanding at December 31, 2005,and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of between 2% and 3% over LIBOR depending upon the ratio of the Company’s funded debt to EBITDA, as defined. Payments are due monthly, with equalamortization of principal payments plus interest. The Company’s annual effective rate of interest on this loan at December 31, 2005, was approximately 6.19%.

Under the terms of the above financing, the Company is required to meet certain quarterly financial covenants that include a ratio of EBITDA to current maturities of debt plus interest and cash paid for taxes greater than 1.50 and a ratio of funded debt to EBITDA not to exceed3.25. At December 31, 2005, the Company met all of its financial covenants with respect to this indebtedness. As a result of the delay in filing Form 10-Q as of and for the quarter ended September 30, 2005, the Company was not in compliance with its timely filing covenant. OnFebruary 15, 2006, the Company obtained a waiver from the bank for the covenant as of September 30, 2005.

As of December 31, 2005, the outstanding balance on all of the Company’s commercial bank debt was $773. This indebtedness is secured by substantially all of the Company’s assets.

The following table is a schedule of the principal payments required under the Company’s long-term indebtedness:
2006  211 2007  211 2008  211 2009  140       773 Less — current portion of long-term debt obligations  (211)   Long-term debt $562    
Interest expense was $47, $50 and $65 in 2005, 2004 and 2003, respectively.

 

F-12

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**
**6.****STOCK OPTIONS AND AWARD PLANS:**
Under various plans, executives, key employees and outside directors receive awards of options to purchase common stock. The Company has a stock option plan (the “2000 Plan”) which authorizes the granting of incentive and nonqualified stock options. Incentive stock optionsare granted at not less than 100% of fair market value at the date of grant (110% for stockholders owning more than 10% of the Company’s common stock). Nonqualified stock options are granted at not less than 85% of fair market value at the date of grant. A maximum of 4,000,000shares of common stock are issuable under the 2000 Plan. Certain additional options have been granted outside the 2000 Plan. These options generally follow the provisions of the 2000 Plan.

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

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

Information with respect to the stock options granted under the 2000 Plan and options granted separately from the 2000 Plan is summarized as follows:
  **Number****of Shares** **Price Range** **Aggregate****Proceeds**      Balance, December 31, 2002  1,941,681  $0.19 — $7.63 $6,481      Granted  434,000  $3.45 — $4.20 $1,707 Exercised  (163,283) $0.19 — $2.00 $(290)     Balance, December 31, 2003  2,212,398  $0.19 — $7.63 $7,898      Granted  198,000  $2.61 — $4.12 $706 Cancelled  (129,139) $0.64 — $7.63 $(1,009)Exercised  (182,032) $0.19 — $3.46 $(244)     Balance, December 31, 2004  2,099,227  $0.19 — $6.94 $7,351      Granted  166,500  $2.51 — $3.35 $505 Cancelled  (105,067) $3.05 — $4.69 $(1,335)Exercised  (500,160) $0.19 — $3.65 $(415)     Balance, December 31, 2005  1,660,500  $1.88 — $6.94 $6,106      
 

F-13

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

 

As of December 31, 2005, options covering 1,466,548 shares were exercisable with a weighted average exercise price of $3.36 per share, and 928,534 shares were available for future grant under the 2000 Plan. For options granted at less than fair market value, the Companyrecognizes compensation expense, which is amortized over the vesting period of the options. Of the 434,000 granted during 2003, 300,000 were granted outside of the 2000 Plan.

The following table provides additional information about the Company’s stock options outstanding at December 31, 2005:
  **Options Outstanding** **Options Exercisable**   **Options** **Weighted Average**   **Wtd. Average** **Range of** **Outstanding** **Remaining** **Exercise** **Options** **Exercise** **Exercise Prices** **At 12/31/05** **Contractual Life** **Price** **Exercisable** **Price**       $1.88 — $2.65  297,000  4.0 Years $2.19  297,000 $2.19 $2.88 — $4.69  1,212,250  6.8 Years $3.72  1,212,250 $3.72 $5.17 — $6.94  151,250  5.5 Years $6.23  151,250 $6.23              $1.88 — $6.94  1,660,500  6.0 Years $3.68  1,660,500 $3.68       
The weighted average fair value at the date of grant for options granted during 2005, 2004 and 2003 is estimated at $2.09, $2.51 and $3.30 per share, respectively, using the Black-Scholes pricing model. The assumptions used in the Black-Scholes model are as follows: dividendyield of 0%, expected volatility of 85% in 2005, 88% in 2004 and 90% in 2003, risk-free interest rate of 3.93% in 2005, 3.44% in 2004 and 2.74% in 2003, and an expected option life of 5 years in 2005, 2004 and in 2003.

During the years ended December 31, 2005 and 2004, a total of 77,296 and 46,116 restricted stock units, respectively, were granted. A restricted stock unit is the right to receive shares. The value of the restricted stock units granted (based on the market price for the stock at thedate of grant) during the years ended December 31, 2005 and 2004, totaled $261 and $152, respectively. Units granted are generally scheduled to vest over periods of two to five years. The cost of the grant is charged to operations over the vesting period. The total unvested number ofunits at December 31, 2005, was 121,013.
**7.****SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION:**
Financial Accounting Standards Board Statement No. 131, “Disclosure about Segments of an Enterprise and Related Information” (“SFAS 131”) requires that companies report separately in the financial statements certain financial and descriptive information about operatingsegments profit or loss, certain specific revenue and expense items and segment assets. Additionally, companies are required to report information about the revenue derived from their products and service groups, about geographic areas in which the Company earns revenue and holdsassets, and about major customers.

F-14

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

**Geographic:**

The following table sets forth revenues by geographic region:
  **Twelve Months****Ended December** **31,**   **2005** **2004** **2003**      United States $18,368 $16,852 $19,412 Rest of the world  6,477  6,853  6,397      Total $24,845 $23,705 $25,809      
The Company’s basis for identifying sales by country is the ship-to location. There were no individual countries outside of the United States that represented more than 10% of the total revenues of the Company. There are no significant long-lived assets located outside the UnitedStates.

**Products and Services:**

The following table sets out revenues by product category.
  **Twelve Months Ended December** **31,**   **2005** **2004** **2003**      Water quality $5,139 $5,911 $6,717 Food safety  8,981  7,634  7,382 Antibody  10,725  10,160  11,593 Contract and other  0  0  117      Net revenues $24,845 $23,705 $25,809      
**8. COMMITMENTS AND CONTINGENCIES:**

The Company leases its office and manufacturing facilities and other equipment under operating leases. Rent expense for the years ended December 31, 2005, 2004 and 2003, was $710, $691and $722, respectively. Future commitments under non-cancelable leases at December31 are as follows:
2006 $620 2007  595 2008  60 2009  45 2010  37 2011 and thereafter  37      $1,394    
The Company’s subsidiary, AZUR Environmental Limited, is the lessee for two real property leases located in the United Kingdom. In 2001, the landlord of the two properties gave AZUR Environmental Limited its consent to allow AZUR to assign the lease and its relatedobligations to a third party. As inducement to the landlord to grant the assignment, AZUR was required to guarantee performance under the original lease terms if the third party fails to perform. Both lease terms expire in November 2016 and provide for annual principal rent payments ofapproximately $300 in the aggregate. The Company believes that based on its assessment of the

F-15

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**
-
current financial strength of the third party, no liability is required to be recorded with regard to the guarantee or lease obligation, and no amounts have been included in the non-cancelable lease tableabove.

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

**9. RETIREMENT SAVINGS PLAN:**

The Company maintains a retirement savings plan qualified under Section 401(k) of the Internal Revenue Code. The plan allows for eligible employees to contribute a portion of their gross wages to the plan. The Company matches employees’ contributions on a 50% basis up to6% of gross wages. In 2005, 2004 and 2003, the Company recognized expense of $153, $136 and $165, respectively, associated with this plan.

**10. INCOME TAXES:**

The components of income (loss) before tax expense (benefit) as of December 31 are as follows:
  **2005** **2004** **2003**      United States $719 $1,236 $(1,332)Rest of the world  161  375  45      Total $880 $1,611 $(1,287)     
The income tax expense (benefit) consists of the following:
  **2005** **2004** **2003**      Federal      current $(—)$(69)$7                    deferred  179  468  (496)        179  399  (489)     State          current  18  23  (32)                     deferred  99  (90) (113)        117  (67) (145)     Foreign     current  —  —  —                    deferred  —  (100) —         —  (100) —      Total $296 $232 $(634)      
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:
  **2005** **2004** **2003**      Statutory tax rate  34.0% 34.0% (34.0%)State taxes, net of U.S. Federal benefit  8.8% (2.8%) (7.4%)Foreign NOL not previously recorded  (5.5%) (14.3%) (1.2%)Research and development credits  (11.0%) (5.1%) (7.7%)Other, net  7.3% 2.6% 1.0%     Total  33.6% 14.4% (49.3%)     
 

F-16

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

Significant components of the Company’s deferred tax assets as of December 31 are as follows:
  **2005** **2004**     Net operating loss carryforwards $9,213 $9,797 Credit carryforwards  556  435 Amortization and depreciation  1,217  1,376 Deferred compensation  41  167 Non-deductible reserves  33  180 Inventory costs not currently deductible  258  177     Total deferred tax assets  11,318  12,132 Valuation allowance  (2,169) (2,646)    Net deferred tax assets $9,149 $9,486     
In assessing the realizablity of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxableincome during the period in which those temporary differences become deductible. Management considers the scheduled reversal of existing temporary differences, projected future taxable income and tax planning strategies in making this assessment. Based upon historical taxableincome and projections for future taxable income over the periods in which the deferred tax items are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of the existing valuation allowances atDecember 31, 2005.

At December 31, 2005, management concluded that no valuation allowance is necessary for federal deferred tax assets after considering the positive and negative factors. In making this determination, the Company considered the following positive factors:
 •cumulative income before taxes of $1.2 million for the three year period from 2003 to 2005;    •the strong operating performance over the past five years after adjusting for specific non-recurring transactions such as restructuring activities and the decision to exit the catalog antibody product line during the year ended December 31, 2003;    •past and anticipated new product launches; and,    •the operating efficiencies gained and to be gained from automating labor intensive manufacturing processes and improvements to supply chain management.
The Company also considered the following negative factors:
 •losses before taxes of $1.3 million in 2003 without removing the effect of $3.6 million of expenses that management believes are outside of normal operations.    •the 2005 income before taxes was lower than 2005 expectations at the beginning of the year; and,    •federal net operating loss carry forwards begin to expire in 2007.
At December 31, 2005, management has concluded that a full valuation allowance is necessary for deferred tax assets in certain state jurisdictions. For the state jurisdictions, management has considered the same positive and negative evidence as utilized for the federal deferredtax assets described above. The Company has also considered the substantial reduction of its presence in North Carolina and Pennsylvania since the time when the net operating losses were incurred in those jurisdictions as additional negative evidence.

 

F-17

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

At December 31, 2005, management considered positive and negative indicators in concluding that a substantial valuation allowance was necessary for foreign deferred tax assets. The positive indicators included the contribution to income before taxes by the foreign operationsin the United Kingdom (“UK”) for 2005 and 2004, and the expected income before taxes in the UK for 2006. The negative indicators included a history of substantial net operating losses in the UK, the lack of income before taxes until 2004, and limitations with regard to estimatingincome in the UK beyond 2005 resulting from the hiring of a UK Director of Distribution late in 2004 and the rebuilding of the UK distributor network.

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 limitations under federal and state taxregulations for acquired net operating loss carryforwards.

As of December 31, 2005, the Company had federal net operating loss carryforwards, including those acquired, of approximately $18,873, which begin to expire as follows:
**Year** **Amount of****NOL (in****thousands)**   2007 $946 2008  2,565 2009  3,297 2010  5,109 2017  760 2018  1,327 2019  550 2020  66 2021  51 2022  2,253 2024  1,824 2025  125    Total $18,873    
Based on the best information available to the Company today, the Company expects to have sufficient future taxable income to utilize such NOLs prior to the expiration of the net operating loss carry forwards.

Of the total net operating loss carryforward, $14,794 is subject to federal tax regulations concerning limitations as to utilization of net operating loss carryforwards since a cumulative change in ownership of more than 50% has occurred within a three year period with respect tothose net operating loss carryforwards. The Company does not expect net operating loss carryforwards to expire unused.

F-18

Back to Contents

**STRATEGIC DIAGNOSTICS INC. AND SUBSIDIARIES****NOTESTO CONSOLIDATED FINANCIAL STATEMENTS — Continued**

**DECEMBER 31, 2005****(in thousands, except share and per share data)**

**11. QUARTERLY FINANCIAL DATA (unaudited):**
  **Three Months Ended,**   **March 31** **June 30** **September 30** **December 31**         **(In thousands except per share data)** **2005**             Revenues $6,677 $6,178 $6,094 $5,896 Gross profit (1)  3,860  3,280  3,332  2,957 Net income (loss)  419  138  319  (292)Basic earnings (loss) per share  0.02  0.01  0.02  (0.01)Diluted earnings (loss) per share  0.02  0.01  0.02  (0.01)                  **2004**             Revenues $6,212 $5,550 $5,583 $6,360 Gross profit (1)  3,595  2,863  3,000  3,467 Net income  337  161  297  584 Basic earnings per share  0.02  0.01  0.02  0.03 Diluted earnings per share  0.02  0.01  0.02  0.03                (1)Gross profit is revenues less manufacturing expenses.
Sales levels for certain agricultural products may be impacted by seasonal demand trends. The demand for these test kits is typically higher in the first and third quarters due to harvesting patterns.

F-19

Back to Contents

**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 31, 2006  /s/ MATTHEW H. KNIGHT       **Matthew H. Knight****President, Chief Executive Officer****(Principal Executive Officer) and Director**          Date:     March 31, 2006  /s/ ANTHONY J. SIMONETTA       **Anthony J. Simonetta****Vice President—Finance 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 31, 2006  /s/ MORTON COLLINS       **Morton Collins****Director**          Date:     March 31, 2006  /s/ RICHARD J. DEFIEUX       **Richard J. Defieux****Director**          Date:     March 31, 2006  /s/ HERBERT LOTMAN       **Herbert Lotman****Director**          Date:     March 31, 2006  /s/ TIMOTHY S. RAMEY       **Timothy S. Ramey****Director**          Date:     March 31, 2006  /s/ STEPHEN L. WAECHTER       **Stephen L. Waechter****Director**          Date:     March 31, 2006  /s/ GROVER C. WRENN       **Grover C. Wrenn****Director**