Summary of STRATEGIC DIAGNOSTICS INC/DE/

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements reflecting the current expectations of Strategic Diagnostics Inc. and its subsidiaries (the "Company" or "SDI"). In addition, when used in this quarterly report, the words "anticipate," "enable," "estimate," "intend," "expect," "believe," "potential," "may," "will," "should," "project" and similar expressions as they relate to the Company are intended to identify said forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated at this time. Such risks and uncertainties include, without limitation, changes in demand for products, delays in product development, delays in market acceptance of new products, retention of customers, attraction and retention of management and key employees, adequate supply of raw materials, inability to obtain or delays in obtaining third party approvals or required government approvals, the ability to meet increased market demand, competition, protection of intellectual property, non-infringement of intellectual property, seasonality, the ability to obtain financing and other factors more fully described in the Company's public filings with the U.S. Securities and Exchange Commission, including, without limitation, the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

Background

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

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

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

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

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

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

The Company believes it is making progress in most of its business efforts. As the deployment of new initiatives is accelerated, building on the Company's leadership position in food pathogens and expanding its strong positioning in the emerging area of genomic antibodies, the Company anticipates that the revenue lost to market changes in its legacy businesses will be replaced and the Company will develop a stronger, more predictable revenue base.

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

Results of Operations

Three Months Ended June 30, 2009 versus Three Months Ended June 30, 2008

Revenues for the second quarter of 2009 increased 4% to $6.9 million, compared to $6.6 million for the same period in 2008. The increase in revenues in the second quarter of 2009 was primarily the result of a 16% increase in sales of life science products, partially offset by a 5% decline in sales of kit products.

Life Science Products

Life science revenues increased 16% to $3.3 million for the second quarter of 2009, compared to $2.9 million for the same quarter in 2008. The Company recorded increases across all of its product offerings. Sales of products utilizing its GAT ™ platform increased 45% to $434,000, bulk antibody sales increased 33% to $738,000, sales of custom polyclonal products increased 7% to $1.4 million and sales of custom monoclonal products increased 2% to $699,000. This increase in life science revenues was primarily the result of growing demand for the Company's GAT TM products.

Kit Products

Kit product revenues decreased 5% to $3.5 million in second quarter of 2009 as compared to $3.7 million in the second quarter of 2008, as described below.

Sales of food pathogen products increased 1% to $1.4 million in the second quarter of 2009 as compared to the second quarter of 2008. Ag-GMO product sales decreased 10% to $597,000, in the second quarter of 2009 as compared to the second quarter of 2008 primarily attributable to decreased demand for the Company's testing products in Brazil and reduced demand for products that detect the StarlinkTM trait in grains. Water and environmental products revenue decreased 8% to $1.5 million in the second quarter of 2009 as compared to the second quarter of 2008 primarily attributable to lower sales of water testing equipment into China.

Gross profits (defined as total revenues less manufacturing costs) for the second quarter of 2009 were $3.6 million compared to $3.4 million for the same period in 2008. Gross margins were 53% and 52% for the second quarters of 2009 and 2008, respectively. The increase in margins was primarily attributable to increased production volumes in the antibody business which created a lower per unit cost of sale.

Operating expenses for the second quarter of 2009 decreased 8% to $7.6 million, compared to $8.2 million for the second quarter of 2008. This decrease was primarily attributable to a 15% decrease in selling, general and administrative costs, and an 11% decrease in research and development costs, partially offset by a 1% increase in manufacturing costs, all as described below.

Research and development spending was $820,000, or 12% of revenues, in the second quarter of 2009, compared to $921,000, or 14% of revenues, in the second quarter of 2008. This decrease was primarily due to decreased spending and effort on development of the Company's proprietary SEQer™ antibodies, which are produced by the Company's GAT ™ platform and are being sold through the Company's antibody catalog.

Selling, general and administrative expenses were $3.5 million for the second quarter of 2009, compared to $4.1 million for the same quarter in 2008. The decrease is primarily associated with the absence of severance charges incurred in the 2008 period for the Company's former Chief Executive Officer.

The Company had no net interest income in the second quarter of 2009 compared to $37,000 in the second quarter of 2008. The decrease was primarily due to lower interest rates received on decreased levels of invested cash and cash equivalents during the second quarter of 2009.

The Company's effective income tax rate was 3% for the three month period ended June 30, 2009 and approximately 33% for the three month period ended June 30, 2008. This decrease is primarily due to the full valuation allowance placed against U.S. federal and state deferred tax assets as of June 30, 2009.

Net loss in the second quarter of 2009 was $734,000, or $0.04 per diluted share, compared to a net loss of $1.1million, or $0.05 per diluted share, for the same period in 2008. Diluted shares utilized in these computations were 20.1 million and 20.4 million for the second quarters of 2009 and 2008, respectively.

Six Months Ended June 30, 2009 versus Six Months Ended June 30, 2008

Revenues for the six months ended June 30, 2009 were $13.8 million, which are comparable to the same period in 2008.

Life Science Products

Life Science revenues increased 5% to $7.0 million for the six months ended June 30, 2009, compared to $6.7 million for the same period in 2008. Sales of products utilizing the Company's GAT ™ platform increased 46% to $784,000, bulk antibody sales increased 24% to $1.9 million and sales of custom polyclonal products remained flat at $2.7 million. Sales of custom monoclonal products decreased 23% to $1.4 million. This increase in life science revenues was primarily the result of growing demand for the Company's GAT TM products.

Kit Products

Kit product revenues decreased 4% to $6.7 million in the six months ended June 30, 2009 as compared to $7.0 million for the same period in 2008, as described below.

Sales of food pathogen products increased 4% to $2.8 million in the 2009 period as compared to the 2008 period. Ag-GMO product sales decreased 22% to $1.2 million for the 2009 period as compared to the 2008 period primarily attributable to decreased demand for the Company's testing products in Brazil and reduced demand for products that detect the StarlinkTM trait in grains. Water and environmental products revenue decreased 4% to $2.6 million for the first six months of 2009 as compared to the first six months of 2008 primarily attributable to lower sales of water testing equipment into China.

Gross profits (defined as total revenues less manufacturing costs) and gross margins remained the same for the first six months of 2009 and 2008, at $7.4 million and 54%, respectively.

Operating expenses for the six months ended June 30, 2009 decreased 3% to $15.0 million, compared to $15.5 million for the six months ended June 30, 2008. This decrease was primarily attributable to a 20% decrease in research and development costs and a 1% decrease in selling, general and administrative costs all as described below.

Research and development spending was $1.5 million, or 11% of net revenues, in the first six months of 2009, compared to $1.9 million, or 14% of net revenues, in the first six months of 2008. This decrease was primarily due to decreased spending and effort on development of the Company's proprietary SEQer™ antibodies, which are produced by the Company's GAT ™ platform and are being sold through the Company's antibody catalog.

Selling, general and administrative expenses were $7.2 million for the six months ended June 30, 2009, compared to $7.3 million for the six months ended June 30, 2008. The decrease is primarily associated with the reduction of severance charges incurred in the 2008 period for the Company's former Chief Executive Officer, partially offset by higher costs for incentives and professional fees.

The Company recorded $5,000 in net interest income in the six months ended June 30, 2009 compared to $99,000 in the six months ended June 30, 2008. The decrease was primarily due to lower interest rates received on decreased levels of invested cash and cash equivalents during the 2009 period.

The Company's effective income tax rate was 0% for the six month period ended June 30, 2009 and approximately 33% for the six month period ended June 30, 2008. This decrease is primarily due to the full valuation allowance placed against U.S. federal and state deferred tax assets as of June 30, 2009.

Net loss in the six months ended June 30, 2009 was $1.3 million, or $0.06 per diluted share, compared to a net loss of $1.1million, or $0.05 per diluted share, for the six months ended June 30, 2008. Diluted shares utilized in these computations were 20.1 million and 20.4 million for the 2009 and 2008 periods, respectively.

Liquidity and Capital Resources

The net cash used in operating activities of $470,000 for the first six months of 2009 compares to net cash used in operating activities of $833,000 for the first six months of 2008. The net cash used in operating activities for the 2009 period was primarily the result of the net loss recorded in the period, increases in other current assets and decreases in accrued expenses and accounts payable. The net cash used in operating activities for the 2008 period was primarily the result of the net loss recorded in the period, deferred income tax provision and an increase in other current assets.

Net cash used in investing activities of $419,000 for the first six months of 2009 related to the capital expenditures for the period. This compares to net cash used in investing activities of $536,000 for the first six months of 2008. The capital expenditures for the 2009 period were primarily related to computer and electronic equipment. The capital expenditures for the 2008 period were primarily related to purchases of laboratory equipment.

Net cash used in financing activities of $3.0 million in the first six months of 2009 was primarily attributable to the Company's requirement to have $2.7 million in restricted cash in connection with the May 15, 2009 amendment to the Company's Credit Agreement, which is described below, as well as scheduled debt payments. Net cash used in financing activities of $266,000 for the first six months of 2008 was primarily the result of scheduled debt repayments.

The Company's working capital (current assets less current liabilities) was $14.7 million at June 30, 2009 compared to $14.2 million at December 31, 2008.

On May 5, 2000, the Company entered into a financing agreement with a commercial bank which was amended on May 15, 2009 (as amended, the "Credit Agreement"). The Credit Agreement provided for up to a $1 million revolving line of credit, none of which was outstanding at June 30, 2009. The revolving line of credit bore a variable interest rate of between 150 basis points and 250 basis points over the one month LIBOR rate depending upon the ratio of the Company's funded debt to EBITDA. The Company's annual effective rate of interest on this line of credit, taking into account the variable interest rate and LIBOR, was 2.82% at June 30, 2009.

On December 13, 2001, the Company received a term loan under the Credit Agreement to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $1.5 million in financing, $53,000 of which was outstanding at June 30, 2009, and is repayable over seven years, with principal payments that began on October 1, 2002. The loan bears a variable interest rate of 100 basis points less than the current Prime Interest Rate. Payments are due monthly, with equal amortization of principal payments plus interest. The Company's annual effective rate of interest on this loan at June 30, 2009 was 2.25%.

On August 21, 2007, the Company received a term loan under the Credit Agreement to finance the construction of new facilities at its Windham, Maine location. This agreement provided for up to $2 million in financing, $1.3 million of which was outstanding at June 30, 2009, and is repayable over five years, with principal payments that began on October 1, 2007. The loan bears a fixed interest rate of 5.96% with equal amortization of principal payments plus interest.

As of June 30, 2009, the outstanding balance on all of the Company's commercial bank debt was $1.4 million. This indebtedness and the Company's $1 million unused line of credit is secured by $2.7 million in restricted cash as required by the May 15, 2009 amendment to the Company's Credit Agreement.

Under the Credit Agreement, the Company was required to meet certain quarterly financial covenants that included maintaining a minimum tangible net worth of not less than $18.5 million and EBITDA of not less than $100,000 for the quarter ended June 30, 2009.

The Company did not meet its financial covenants with respect to its indebtedness at June 30, 2009. The Company received a waiver of the financial covenants relating to the above financing from its commercial bank as of June 30, 2009.

On August 12, 2009, the Credit Agreement was amended to eliminate the revolving line of credit, remove the financial covenants requiring minimum EBITDA and tangible net worth amounts, and reduce the restricted cash requirement from $2.7 million to $1.25 million.

For the six months ended June 30, 2009, the Company satisfied all of its cash requirements from cash available and on-hand. At June 30, 2009, the Company had $1.4 million in debt and $20.5 million in stockholders' equity.

Based upon its cash and cash equivalents 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 through the next 12 months. The Company's ability to meet its long-term capital needs will depend on a number of factors, including compliance with existing and new loan covenants, the success of its current and future products, the focus and direction of its research and development programs, 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 future liquidity requirements that may arise from these inherent and similar uncertainties.