UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

OR

Commission File Number: 000-50786

STRATAGENE CORPORATION

(858) 535-5400
(Registrant’s telephone number, including area code)

No Change
(Former name, former address and former fiscal year, if changed since last report)

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

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

STRATAGENE CORPORATION

Quarterly Report on Form 10-Q
Table of Contents

     Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not applicable.

2

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

STRATAGENE CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited consolidated financial statements.

3

STRATAGENE CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited consolidated financial statements.

4

STRATAGENE CORPORATION AND SUBSIDIARIES

(Continued)          

5

STRATAGENE CORPORATION AND SUBSIDIARIES

(Concluded)          

See accompanying notes to unaudited consolidated financial statements.

6

STRATAGENE CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005

1. Basis of Presentation

     The consolidated financial statements of Stratagene Corporation and its subsidiaries (“Stratagene” or the “Company”) for the three months ended March 31, 2005 and 2004 are unaudited. These financial statements include all adjustments that, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company as of March 31, 2005 and the consolidated results of operations and cash flows of the Company for the three months ended March 31, 2005 and 2004.

     The financial information of the Company has been presented on a consolidated basis, and includes the results of operations of Hycor Biomedical Inc. and subsidiaries (“Hycor”) since Hycor was acquired by the Company on June 2, 2004. The financial information also includes the results of operations of BioCrest Holdings, LLC (“BCH”), whose assets were acquired by the Company on June 2, 2004. Prior to the acquisition, BCH was under common control with Stratagene, and substantially all of the BCH membership units were held by certain Stratagene shareholders. The acquisition of the BCH assets has been presented as a change in reporting entity. Accordingly, the financial statements of Stratagene and BCH are presented on a consolidated basis for all periods.

     Intercompany balances and transactions have been eliminated as appropriate in the consolidation of Stratagene.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes. Actual results could differ from those estimates.

     These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements but reflect all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

     The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

7

2. Proforma Financial Information

     The results of operations of Hycor have been included in the accompanying consolidated financial statements of Stratagene from the date of acquisition. However, the following unaudited pro forma information assumes that the June 2, 2004 Hycor merger occurred on January 1, 2004. These unaudited pro forma results have been prepared for comparative purposes only and are not indicative of the results of operations that would have actually resulted had the acquisition been in effect as of the periods indicated above, or of future results of operations. The unaudited pro forma results for the three months ended March 31, 2004 are as follows:

     The unaudited pro forma information presented above the three months ended March 31, 2004 has been adjusted for charges for material, nonrecurring items that include the following:

	•	removing interest income on shareholder loans that were paid off upon the closing of the merger;
	•	removing interest expense on subordinated debt that converted to common stock upon the closing of the merger;
	•	recording amortization expense on acquired other intangible assets;
	•	recording amortization expense on unearned stock-based compensation for assumed stock options;
	•	reducing the CEO’s salary pursuant to a new employment agreement effective on the merger date;
	•	removing Hycor’s merger related costs incurred in the periods presented; and
	•	recording the tax provision adjustment to the pro forma statement of operations at the statutory rate of 36%.

3. Earnings Per Share (“EPS”)

     Basic EPS is based on the weighted-average number of shares outstanding during the periods, while diluted EPS additionally includes the dilutive effects of the Company’s outstanding options computed using the treasury stock method. The number of shares used in computing EPS is as follows:

     Options outstanding totaling 2,691,728 and 1,368,994 for the three month periods ended March 31, 2005 and 2004, respectively, were excluded from the calculations of earnings per common share, as their effect would have been antidilutive.

8

4. Accounting for Stock-Based Compensation

     The Company accounts for its stock-based compensation in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, as amended, and Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation.

     Pro forma information regarding net income is required by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-based Compensation, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. The value for Stratagene employee stock options was estimated at the dates of grant using the minimum value method of SFAS No. 123 from the inception date of the applicable stock option plan through June 2, 2004 and fair value for all option grants made subsequent to that date using the Black-Scholes pricing model. Fair value for Hycor employee stock options assumed by Stratagene in the Hycor merger was estimated at the dates of grant using the Black-Scholes pricing model for all option grants. For options granted that have multiple cliff vesting periods, the Company amortizes compensation cost using the graded vesting method prescribed by FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option and Award Plans. The following weighted average assumptions were used for the three month periods ended March 31, 2005 and for the full year ended December 31, 2004, respectively:

     If the computed fair values of the stock options granted in 2004 and 2003 had been amortized to expense over the vesting period of the awards, pro forma net income would have been as follows:

     The acceleration of certain outstanding employee stock options in the first quarter of 2005 impacted the proforma stock-based compensation expense determined under SFAS No. 123 presented in the table above. On March 31, 2005, the Compensation Committee of the Board of Directors of the Company accelerated the vesting of certain unvested non-qualified stock options previously awarded to the executive officers and other employees under the Company’s Amended and Restated Year 2000 Stock Option Plan that had an exercise price greater than or equal to $8.05, the closing price of the Company’s common stock on the date preceding the Compensation Committee’s action. Options to purchase approximately 1.2 million shares of common stock (of which approximately 905,000 shares are subject to options held by executive officers) were subject to this acceleration. Options held by non-employee directors and advisory board members and “incentive stock options” were not included in the acceleration.

9

     Because these options had exercise prices at or in excess of the fair market value of the Company’s common stock at the time they were accelerated, and were not fully achieving their original objectives of incentive compensation and employee retention, the Company believes that the acceleration had a positive effect on employee morale, retention and perception of option value. The acceleration will eliminate any future compensation expense the Company would otherwise recognize in its income statement with respect to these options with the implementation of SFAS No. 123(R), Share-Based Payment, which becomes effective for the Company’s first quarterly reporting period in 2006. The future expense that is eliminated beginning in 2006 as a result of the acceleration of the vesting of these options is approximately $1.6 million, or approximately $1.0 million net of tax, of which approximately $1.2 million, or $775,000 net of tax, is attributable to options held by executive officers.

     Charges for options granted to non-employees have been determined in accordance with SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, as the estimated fair value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measured. The fair value for these options is based on the Black-Scholes pricing model using the assumptions described above. The Company recognized $48,017 and $5,390 of stock-based compensation expense for the three months ended March 31, 2005 and 2004, respectively. The expense was recorded in research and development expense and the total deferred charges for options granted to non-employees are periodically re-measured as the underlying options vest and are included in additional paid-in capital in the financial statements.

5. Balance Sheet Information

     Inventories

     Inventories are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. Inventories consist of the following:

     Intangible Assets and Goodwill

     The following sets forth the Company’s intangible assets by major asset class:

     Amortizable patents and other includes costs incurred in connection with patent applications, which consist principally of legal fees. Amortizable intangible assets, non-amortizable intangible assets and goodwill were established in connection with the merger with Hycor.

     Amortization expense totaled approximately $313,000 and $102,000 for the three months ended March 31, 2005 and 2004, respectively.

10

     Accrued Expenses and Other Liabilities

     Accrued expenses and other liabilities consist of the following:

6. Stockholders’ Equity

The following table summarizes equity transactions during the three months ended March 31, 2005:

7. Comprehensive Income

     Components of comprehensive income, net of income taxes, were as follows:

8. Commitments and Contingencies

     Royalty Payments — Accrued expenses and other liabilities at March 31, 2005 and December 31, 2004 include $4.8 million and $4.1 million, respectively, of accrued royalties due to an unrelated third party license holder for estimated royalties due from the second quarter of 2003 through the respective balance sheet date. The Company has accrued royalties under this patent license agreement based on an estimate of the amounts payable in accordance with the terms of the patent license agreement. The Company’s calculations of royalty payments are subject to review by the license holder. Beginning in the second half of 2003, such royalty payments have been withheld by the Company while the Company evaluates a possible overpayment of royalties paid in prior periods. However, no assurances can be made that the Company will recover any of the overpayments. Stratagene’s financial position or

11

results of operations could be materially affected if the parties subsequently determine that the royalty calculation differs significantly from the amounts recorded by Stratagene. The patent underlying this royalty obligation expired in the United States in March 2005. The corresponding foreign patents will expire in 2006 and 2007. Following the expiration of these PCR process patents, Stratagene will no longer be required to pay royalties on future product sales related to such patents. Accordingly, Stratagene expects that the expiration of the subject United States patent in March 2005 will result in an approximately $300,000 per quarter reduction in royalty expense beginning in the second quarter of 2005. In addition, upon the expiration of the corresponding foreign patents, Stratagene expects an additional $300,000 reduction in royalty expense beginning in the second quarter of 2006. The Company anticipates that this decrease in royalty expense will be partially offset by decreases in the average unit selling price of products using the patented technology following the expiration of the patents.

     Legal — Stratagene is a party to litigation in the ordinary course of business. Due to the uncertainties inherent in litigation, no assurances can be given as to the outcome of these proceedings. If any of these matters were resolved in a manner unfavorable to Stratagene, its business, financial condition and results of operations could be materially harmed. Additionally, favorable outcomes or gain contingencies that may result from these matters, if any, are not recognized until they are realized. Information on the most significant of these matters follows.

     Invitrogen Corporation

     In June 2000, Stratagene was sued by Invitrogen Corporation (formerly Life Technologies, Inc.) in the United States District Court for the District of Maryland. The complaint alleges that Stratagene willfully infringed United States patent no. 6,063,608 (and United States patent nos. 5,244,797 and 5,405,776) for making, using and selling products derived from, using or containing RNase H minus reverse transcriptase enzymes. Invitrogen’s motion for a preliminary injunction was denied and the case was stayed pending a trial in a related action involving Invitrogen and a third party regarding the same patents. Invitrogen appealed the denial of an injunction and the stay to the Federal Circuit Court of Appeals. In February 2002, the Federal Circuit Court of Appeals affirmed the district court’s decision. In September 2003, Invitrogen filed a consent to judgment in the related action that the asserted patents were invalid. Accordingly, the case against Stratagene remains administratively stayed pending Invitrogen’s appeal with respect to the related matter.

     In addition, in March 2001, Stratagene was sued by Invitrogen in the United States District Court for the Western District of Texas. Invitrogen alleges (1) that Stratagene willfully infringed United States patent no. 4,981,797 for making, using and selling competent E. coli cell products and (2) damages of up to approximately $22.0 million. In November 2001, the district court granted Stratagene’s motion for summary judgment, finding that the ‘797 patent was not infringed by Stratagene. Invitrogen appealed the judgment to the Federal Circuit Court of Appeals which, in May 2003, reversed the district court’s decision in part and remanded the case for further proceedings. In January 2004, in response to a pending summary judgment motion, the district court ruled that Invitrogen’s ‘797 patent was invalid under 35 U.S.C. § 102(b). More specifically, the district court found that Invitrogen had used the patented process claimed in the ‘797 patent for commercial purposes for more than one year prior to the filing date of the patent. Having found the ‘797 patent invalid, the district court indicated there was no need for a trial. Invitrogen is currently appealing the district court’s ruling. Oral argument before the Federal Circuit Court of Appeals occurred on May 2, 2005, and the parties have not yet received the court’s ruling.

     In November 2001, Stratagene filed a complaint in the United States District Court for the District of Maryland charging Invitrogen with willful infringement and inducing others to infringe United States patent no. 5,556,772 for making, using, selling and offering for sale certain polymerase blend products. Stratagene seeks a permanent injunction against continued infringement as well as monetary damages (compensatory and enhanced) and recovery of its attorneys’ fees and costs. Given the nature of patent litigation, at the present time Stratagene is unable to quantify the amount of remuneration it will ultimately seek in this proceeding or the likelihood of recovering any portion of such remuneration once quantified. No trial date is currently set for this case.

  Takara Bio

     In November 2002, Stratagene filed a complaint in the United States District Court for the District of Maryland charging Takara Bio with willful infringement and inducing others to infringe United States patent no. 5,556,772 for making, using, selling and offering for sale certain polymerase blend products. Stratagene seeks a permanent injunction, monetary damages (compensatory and enhanced) and recovery of its attorneys’ fees and costs. Given the nature of patent litigation, at the present time Stratagene is unable to quantify the amount of remuneration it will ultimately seek in this proceeding or the likelihood of recovering any portion of such remuneration once quantified.

12

Takara filed a counterclaim in a separate action in the United States District Court for the Southern District of California. By its counterclaim, Takara seeks joint ownership of Stratagene’s ‘772 patent. In June 2003, Stratagene successfully moved to transfer the California action to Maryland. In August 2003, the Maryland district court denied Takara’s motion to dismiss or transfer the complaint, and the cases have been consolidated for pretrial and trial. The parties entered into a joint stipulation, effective as of March 24, 2005, to stay the proceedings to continue to pursue settlement of this action. No trial date is currently set for this case.

  Third Wave Technologies

     In September 2004, Stratagene was sued by Third Wave Technologies, Inc. in the United States District Court for the Western District of Wisconsin. The complaint alleges that Stratagene infringes United States patent nos. 6,348,314 and 6,090,543, and has induced or contributed to infringement of the patents-in-suit, by making, using, importing, offering for sale or selling assays employing cleavage of nucleic acids. Third Wave seeks a preliminary and permanent injunction, monetary damages (compensatory and enhanced), and recovery of its attorneys’ fees and costs. In October 2004, Stratagene filed its answer to the complaint responding that it does not infringe a valid or enforceable claim of either patent. Stratagene has also asserted affirmative defenses, including invalidity and unenforceability, and counterclaims of invalidity and non-infringement. Stratagene is seeking an award of its fees and costs incurred in defending itself in this action. Trial is currently scheduled for August 2005.

     On May 6, 2005, Stratagene filed a complaint in the United States District Court for the District of Delaware charging Third Wave Technologies with willful infringement and inducing others to infringe United States patent nos. 6,528,254 and 6,548,250 for making, using, selling and offering for sale certain of its Invader^® products. Stratagene seeks a permanent injunction against continued infringement as well as monetary damages (compensatory and enhanced) and recovery of its attorneys’ fees and costs. Given the nature of patent litigation, at the present time Stratagene is unable to quantify the amount of remuneration it will ultimately seek in this proceeding or the likelihood of recovering any portion of such remuneration once quantified.

  Applera Corporation

     In November 2004, Stratagene received notice of a patent infringement suit filed by Applera Corporation against it and other parties in the United States District Court for the District of Connecticut for alleged infringement of U.S. patent no. 6,814,934. The Stratagene products alleged to infringe are the Mx4000 and Mx3000P instruments and certain related reagents. In December 2004, Stratagene filed its answer to the complaint responding that it does not infringe, directly or indirectly, any valid and enforceable claim of the ‘934 patent and asserting related counterclaims of invalidity and non-infringement. An estimate of the possible loss or range of loss cannot be made at this time and Stratagene is unable to determine whether the outcome of the litigation could have a material impact on its results of operations or financial condition in any future period. This case is currently scheduled to be placed on the Court’s trial ready list in April 2006.

  Ariadne Genomics

     In March 2005, the Company filed a demand for arbitration against Ariadne Genomics for declaratory relief and damages relating to the Exclusive Marketing and Distribution Agreement (the “Agreement”) between the parties. In particular, Stratagene seeks to confirm that it holds the exclusive right to market, sell and distribute the software products covered by the Agreement and all upgrades thereof in any country or territory in the world, except Japan, for the duration of the term of the Agreement. Further, Stratagene seeks to confirm that it is the party entitled to ownership and use of the trademark “Pathway Assist” or, alternatively, that neither party may use that name. The matter is currently pending before the American Arbitration Association in San Diego, California.

  Other Legal Matters

     Pursuant to the terms of a litigation settlement in 2002, Stratagene is entitled to receive 35,290 shares of a European company. Stratagene received 11,763 shares in August 2004, 11,764 shares in September 2004 and the final 11,763 shares in March 2005. These shares were sold and converted into cash upon receipt, resulting in a gain in other income of approximately $527,000 during the quarter ended March 31, 2005 and $664,000 during the quarter ended September 30, 2004.

13

9. New Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which will be effective for the Company’s first quarterly reporting period in 2006. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The new standard requires that the compensation cost relating to share-based payments be recognized in financial statements at fair value. As such, reporting employee stock options under the intrinsic value-based method prescribed by APB No. 25 will no longer be allowed. The Company has historically elected to use the intrinsic value method and has not recognized expense for employee stock options granted. The Company has not yet determined the impact that adopting SFAS No. 123R will have on the financial results of the Company in future periods.

     In December 2004, the FASB staff issued FASB Staff Position (“FSP”) SFAS No. 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, to provide guidance on the application of SFAS No. 109 to the provision within the American Jobs Creation Act of 2004 (the “Act”) that provides tax relief to U.S. domestic manufacturers. The FSP states that the manufacturer’s deduction provided for under the Act should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. A special deduction is accounted for by recording the benefit of the deduction in the year in which it can be taken in the Company’s tax return, and not by adjusting deferred tax assets and liabilities in the period of the Act’s enactment (which would have been done if the deduction on qualified production activities were treated as a change in enacted tax rates). The proposed FSP also reminds companies that the special deduction should be considered by an enterprise in (a) measuring deferred taxes when the enterprise is subject to graduated tax rates and (b) assessing whether a valuation allowance is necessary as required by SFAS No. 109. The FSP is effective upon issuance. In accordance with the FSP, the Company will record the benefit, if any, of the tax deduction in the year in which the deduction becomes available.

     In December 2004, the FASB staff issued FSP FAS No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, to provide accounting and disclosure guidance for the repatriation provisions included in the Act. The Act introduced a special limited-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. As a result, an issue has arisen as to whether an enterprise should be allowed additional time beyond the financial reporting period in which the Act was enacted to evaluate the effects of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The FSP is effective upon issuance. The Company has not yet completed its evaluation of this aspect of the Act and will complete its review in connection with the preparation of its 2004 corporate tax returns.

     In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 107 to provide public companies additional guidance in applying the provisions of SFAS No. 123(R). Among other things, the SAB describes the staff’s expectations in determining the assumptions that underlie the fair value estimates and discusses the interaction of SFAS No. 123(R) with certain existing staff guidance. SAB No. 107 should be applied upon the adoption of SFAS No. 123(R).

14

10. Segment Information

     The Company operates in two business segments: research supplies and medical diagnostics. The segment information provided for the three months ended March 31, 2004 includes only research supplies segment information, as the Company only established a separate medical diagnostics reporting segment in connection with the Hycor merger on June 2, 2004.

     At March 31, 2005 and December 31, 2004, total assets for each business segment were as follows:

15

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

     The following information should be read in conjunction with the financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The financial information for Stratagene includes the accounts and balances of Stratagene Corporation and subsidiaries on a consolidated basis, and includes the results of operations of Hycor Biomedical Inc. and subsidiaries since Stratagene’s acquisition of Hycor on June 2, 2004.

     This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements and include assumptions concerning the Company’s operations, future results and prospects. These forward-looking statements are based on current expectations and are subject to a number of risks, uncertainties and other factors. The Company’s actual results could differ materially from those expressed in or implied by these forward-looking statements as a result of various factors, including those set forth below under the caption “Factors that May Affect Future Results.”

Overview

     Stratagene develops and manufactures biological products and instruments designed to improve the speed and accuracy of life sciences research and medical diagnosis. Stratagene markets its products to researchers at academic and government institutions and pharmaceutical, biotechnology and industrial companies, in the U.S. and internationally. These researchers use Stratagene’s products to identify genes and proteins, study how cells are regulated by genes and proteins, determine the molecular mechanisms of health and disease, search for new drug therapies, develop diagnostic tests, and test the safety of compounds used in food and pharmaceuticals.

     Stratagene engages in business activity in two operating segments: Research Supplies and Medical Diagnostics. The Company has marketed and sold its Research Supplies products for over 20 years, while the Medical Diagnostics products are a new addition to Stratagene’s product portfolio as a result of the merger with Hycor Biomedical Inc. in June 2004.

Merger with Hycor

     On June 2, 2004, Stratagene acquired all of the outstanding shares of Hycor Biomedical Inc. through a merger of a wholly owned subsidiary of Stratagene with Hycor, with Hycor continuing as a wholly owned subsidiary of Stratagene. Pursuant to the merger, Hycor’s stockholders received 0.6158 of a share of Stratagene common stock in exchange for each share of Hycor common stock, plus cash for any fractional shares. The merger has been recognized as a tax-free reorganization. Stratagene filed a registration statement on Form S-4 (No. 333-109420) and related amendments in connection with the transaction, which registration statement was declared effective by the Securities and Exchange Commission on April 29, 2004. Stratagene incurred merger-related costs of approximately $1.7 million, which were capitalized as a component of the purchase price.

BCH Asset Acquisition

     Concurrently with the closing of the Hycor merger, Stratagene acquired substantially all of the assets of BioCrest Holdings, LLC, or BCH, including BCH’s interests in its subsidiaries. In exchange, Stratagene forgave all of the outstanding intercompany indebtedness owed by BCH and its subsidiaries to Stratagene of approximately $5.4 million and assumed all of the other outstanding liabilities of BCH and its subsidiaries of approximately $0.8 million. Because Stratagene and BCH are under common control, with substantially all of the BCH membership units held by certain Stratagene shareholders, the acquisition of BCH was recorded on a historical cost basis. As such, there was no adjustment of BCH’s assets and liabilities to fair value and no goodwill resulting from the purchase. As of and for the year ended December 31, 2004, Stratagene’s financial statements are presented on a consolidated basis, which represents a change in reporting entity under Accounting Principles Board Opinion 20, Accounting Changes. Previously combined statements are now presented on a consolidated basis as a result of the transaction. There is no change to income for previous periods presented on a combined basis. For income tax purposes, this transaction is considered a taxable pooling. The financial statements reflect net deferred tax assets of $875,000 for differences between the tax and book bases of assets and liabilities acquired by Stratagene.

16

     Prior to the acquisition date, Stratagene presented its financial statements on a combined basis with BCH. BCH was a limited liability company treated as a partnership for income tax purposes; therefore, any related income tax obligations were the responsibility of the members of BCH. As a result, the operations of BCH did not reflect a provision for income taxes in the combined financial statements. Beginning on June 2, 2004, the consolidated results of Stratagene, which includes the results of BCH, includes a provision for income taxes.

     As part of the acquisition of BCH, Stratagene acquired BCH’s interests in its subsidiaries, which include Phenogenex, LLC, or Phenogenex, Iobion Informatics, LLC and subsidiaries, which the Company refers to collectively as Iobion, and an investment in a joint venture consisting of a 49% interest in a limited partnership that operates a research lab. The investment in a joint venture is accounted for under the equity method.

     At the time of the acquisition, Stratagene owned 100% of Phenogenex and approximately 78% of Iobion. The remaining 22% interest in Iobion was held by two individuals, one of which is now an employee of Iobion and the other is a consultant to the Company. In October 2004, the Company purchased the remaining 22% outstanding membership interests in Iobion owned by these individuals. As a result of the purchase of these minority interests, Stratagene now owns 100% of Iobion. Total cash consideration of $330,000 was paid and was recorded to intangible assets based on the fair value of the assets and liabilities acquired.

Basis of Presentation

     The financial information of the Company has been presented on a consolidated basis, and includes the results of operations of Hycor Biomedical Inc. and subsidiaries (“Hycor”) since Hycor was acquired by the Company on June 2, 2004. The financial information also includes the results of operations of BCH, whose assets were acquired by the Company on June 2, 2004. Prior to the acquisition, BCH was under common control with Stratagene, and substantially all of the BCH membership units were held by certain Stratagene shareholders. The acquisition of the BCH assets has been presented as a change in reporting entity. Accordingly, the financial statements of Stratagene and BCH are presented on a consolidated basis for all periods. Intercompany balances and transactions have been eliminated as appropriate in the consolidation of Stratagene.

     The results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

Critical Accounting Policies and Estimates

     The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and management is required to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results include the following:

     Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and disclosures made in the accompanying notes. Actual results could differ from those estimates.

     Revenue Recognition

     Revenue from research supplies, diagnostic and basic instrumentation product sales is recognized under the provisions of Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, which is generally when products are shipped, title has transferred and risk of loss has passed. In accordance with Statement of Position, or SOP, No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, for instrumentation products where software is a key component, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Generally, these criteria are met at the time product is shipped and title has transferred. When contractual acceptance clauses exist, revenue is recognized upon

17

satisfaction of such clauses. Contract research service revenues are earned and recognized in accordance with contract provisions. Government grant revenues related to research activities are recognized when earned, generally as related research activities occur. Amounts received in advance of performance or acceptance are recorded as deferred revenue.

     The following table summarizes the types of deferred revenue and the timing of when that revenue is recognized:

     The following table provides the percentage of the ending balance in deferred revenue that each type of deferred revenue represents as of December 31, 2004:

     Accounts Receivable

     Stratagene performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness. Stratagene regularly monitors collections and payments from customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. Stratagene’s credit losses have historically been within expectations and the provisions established.

     Inventories

     Inventories are valued at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. Stratagene regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory on specifically identified items based primarily on an estimated forecast of product demand and production requirements. Stratagene’s losses from disposal of excess or obsolete inventory have historically been within expectations and the provisions established. However, Stratagene’s estimates of future product demand may prove to be inaccurate, in which case Stratagene may have understated or overstated the provision required for excess and obsolete inventory. In addition, rapid technological change or new product development could result in an increase in the quantity of obsolete inventory on hand. In the future, if Stratagene’s inventory is determined to be overvalued, it would be required to recognize such costs in its cost of products sold at the time of such determination. Likewise, if Stratagene’s inventory is determined to be undervalued, it may have over-reported its cost of products sold in previous periods and would be required to recognize such additional operating income at the time of sale.

     Additionally, Stratagene’s manufacturing costs and inventory carrying costs are dependent on management’s accurate estimates of customer demand for Stratagene’s products. A significant increase in the demand for Stratagene’s products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand and increase the expense of storing and maintaining the inventory until it is sold. As a result, although management attempts to maximize the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of Stratagene’s inventory and its reported operating results.

18

     Deferred Taxes

     Stratagene’s deferred tax assets relate primarily to prior operating losses that are available to offset future taxable income and tax credits that are available to offset future income taxes. Deferred taxes are also recognized for differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Stratagene evaluates a variety of factors in determining the amount of deferred income tax assets to be recognized pursuant to Statement of Financial Accounting Standards, or SFAS, No. 109, Accounting for Income Taxes.

     Long-lived Assets

     The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 142, Goodwill and Intangibles, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. These Statements require that long-lived assets and certain identifiable intangible assets be reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. With the acquisition of Hycor in the second quarter of 2004, Stratagene has substantial amortizable and non-amortizable long-lived assets (including goodwill) that are reviewed for impairment quarterly and when there is an indication that the carrying value of an asset may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

     Royalties

     Stratagene enters into license agreements in the ordinary course of its business, which require royalty payments based on specified product sales. These agreements cover the majority of Stratagene’s products. Since mid-2003, Stratagene has withheld payments to a license holder while Stratagene evaluates a possible overpayment in the royalties paid in prior periods. Stratagene has continued to record the estimated quarterly royalty payable under the patent license agreement and reports this amount to the license holder. Management believes the royalty payments accrued are determined in accordance with the patent license agreement. However, the Company’s calculations of royalty payments are subject to review by the license holder. Therefore, Stratagene’s financial position or results of operations could be materially affected if the license holder later determines that the royalty calculation differs significantly from the amounts recorded by Stratagene. As of March 31, 2005, the amount of accrued and unpaid royalties related to this patent license agreement was $4.8 million. The patent underlying this royalty obligation expired in the United States in March 2005. The corresponding foreign patents will expire in 2006 and 2007. Following the expiration of these PCR process patents, Stratagene will no longer be required to pay royalties on future product sales related to such patents. Accordingly, Stratagene expects that the expiration of the subject United States patent in March 2005 will result in an approximately $300,000 per quarter reduction in royalty expense beginning in the second quarter of 2005. In addition, upon the expiration of the corresponding foreign patents, Stratagene expects an additional $300,000 reduction in royalty expense beginning in the second quarter of 2006. The Company anticipates that this decrease in royalty expense will be partially offset by decreases in the average unit selling price of products using the patented technology following the expiration of the patents.

     Warranties

     Stratagene warrants certain equipment against defects in workmanship or materials for a period of one year from the date of purchase. Upon shipment of equipment sold that includes a warranty, Stratagene establishes, as part of cost of products sold, a provision for the expected costs of such warranty. While Stratagene’s warranty costs have historically not been significant, Stratagene cannot guarantee that it will continue to experience the same warranty return and repair rates that it has in the past. A significant increase in product return and repair rates could have a material adverse impact on operating results for the period or periods in which such items materialize.

     Research and Development

     Stratagene focuses its research and development efforts on developing products that use innovative technologies in both the Research Supplies and Medical Diagnostics product lines. Research and development costs are expensed as incurred. For the three months ended March 31, 2005 and for fiscal year 2004, Stratagene’s research and

19

development expenses totaled approximately $2.9 million and $10.8 million, respectively, and Stratagene intends to spend between 11% and 14% of its revenues on research and development activities for at least the next few years.

     Stratagene’s numerous research and development initiatives are generally ongoing. Some of the efforts are for new product technologies, while others are designed to support an existing product or products relating to one of Stratagene’s more than 2,500 stock keeping units, which cover approximately 75 existing product categories. In addition, the funds used by Stratagene in its research and development activities are allocated among the various technologies and products in which Stratagene is currently involved and are not concentrated to one specific product or product line.

     Stratagene does not provide forward-looking estimates of costs and time to complete any of its individual ongoing research and development projects because none of such projects are material to the Company on an individual basis. In addition, any such estimates would be subject to a number of risks and uncertainties, including Stratagene’s ability to predict the outcome of complex research, competition from other entities of which Stratagene may become aware in future periods, predictions of market potential from products that may be derived from Stratagene’s research and development efforts and Stratagene’s ability to recruit and retain personnel with the necessary knowledge and skills to perform the required research activities.

Results of Operations

     Three months ended March 31, 2005 compared to three months ended March 31, 2004

     Revenues

     For the three months ended March 31, 2005, revenue increased $5.2 million, or 26.7%, compared to the three months ended March 31, 2004. This increase was primarily attributable to the Company recording three months of Hycor’s diagnostics product sales of $5.7 million for the three months ended March 31, 2005. This increase was offset by declines in research supplies product sales of approximately $0.5 million for the three months ended March 31, 2005 when compared to the same period in 2004 due to declines in sales of older technology products of $1.2 million, or 8%, offset by growth in QPCR products of $0.7 million, or 15%. In addition, for the three months ended March 31, 2004, there were $0.5 million more of backordered products shipped than for the same period in 2005. Sales during the three months ended March 31, 2005 were also affected by the weakening dollar resulting in a positive foreign exchange impact to foreign sales of 4.5% and a 1.2% increase to total worldwide revenue for the three months ended March 31, 2005 when compared to the three months ended March 31, 2004. There were no significant changes to price or volume during the three months ended March 31, 2005 compared to the same period in 2004. Stratagene expects that future revenue will depend on a number of factors, including the market acceptance of new products, competitive conditions, currency fluctuations and the continued funding of customer research budgets.

     Stratagene’s operating results have fluctuated in the past and may continue to fluctuate in the future. In particular, Stratagene has historically seen slower sales in the fourth quarter as a result of reduced purchases by academic and research institutions as well as the closing of such facilities during the holiday period. Conversely, Stratagene’s sales in the first quarter have historically been higher than other quarters due to increased sales by academic and research institutions. Therefore, the results of operations for any interim period are not necessarily indicative of results to be expected for the full year.

     Gross Profit

     Gross profit increased $2.6 million, or 19.5%, for the three months ended March 31, 2005 compared to the same period in 2004 due to inclusion of Hycor’s results of operations in the first quarter of 2005. As a percentage of sales, gross profit decreased 3.9% from 69.5% for the three months ended March 31, 2004 to 65.6% for the three months ended March 31, 2005 due to the inclusion of Hycor’s lower margin medical diagnostic products. The decrease was also attributable to higher royalty expense for research supplies as a result of increased sales of QPCR and software products for the three months ended March 31, 2005 as compared to the same period in 2004.

     Research and Development Expenses

     Research and development expenses increased $0.3 million, or 14.6%, for the three months ended March 31,

20

2005 compared to the same period in 2004. The increase in spending was primarily due to approximately $0.4 million of Hycor’s medical diagnostic research and development efforts for the three months ended March 31, 2005. As a percentage of product sales, research and development expenses decreased from 13.0% for the three months ended March 31, 2004 to 11.7% for the three months ended March 31, 2005. This decrease in research and development expense as a percentage of sales is primarily the result of including revenue from the sale of medical diagnostic products for the three months ended March 31, 2005.

     Selling and Marketing Expenses

     Selling and marketing expenses increased $0.9 million, or 23.1%, for the three months ended March 31, 2005 compared to the same period in 2004. The increase in spending was due to the Company recording three months of Hycor sales and marketing expenses of approximately $0.9 million. However, as a percentage of total revenue, selling and marketing expenses decreased slightly from 20.9% for the three months ended March 31, 2004 to 20.3% for the three months ended March 31, 2005. As a result of the merger with Hycor, Stratagene recorded amortizable intangible assets related to trade names and customer contracts. These intangible assets are being amortized to sales and marketing expense over various periods ranging from one to five years beginning in June of 2004. The amortization expense included in sales and marketing was approximately $0.1 million for the three months ended March 31, 2005.

     General and Administrative Expenses

     General and administrative expenses increased by $1.0 million, or 32.7%, for the three months ended March 31, 2005 compared to the same period in 2004. As a percentage of total revenue, general and administrative expenses increased from 15.9% for the three months ended March 31, 2004 to 16.7% for the three months ended March 31, 2005. The increased spending is primarily due to $0.2 million of expenses related to increased legal fees associated with patent litigation, approximately $0.3 million of expense for additional costs related to public company oversight and three months of general and administrative expenses related to the Hycor operations of $0.6 million, which includes approximately $0.1 million for the amortization of patents and non-cash stock compensation charges related to the unvested stock options assumed in the merger with Hycor. These increases were offset by $0.1 million of decreases in other general and administrative spending.

     Total Other Income (Expense), Net

     Total other income, net of expense, increased by $1.0 million, or 146.8%, for the three months ended March 31, 2005 compared to the same period in 2004. This increase was primarily due to a reduction in interest expense of $0.6 million for the three months ended March 31, 2005 resulting from the repayment of long-term debt obligations.

     Also contributing to the net increase in other income was a gain of $0.5 million as a result of a litigation settlement in 2002. Pursuant to the terms of the settlement, Stratagene received the final 11,763 shares in March 2005. These shares were sold and converted into cash upon receipt, resulting in a gain of approximately $527,000 in other income during the quarter ended March 31, 2005.

     Income Taxes

     Stratagene recorded $1.5 million in tax expense for the three months ended March 31, 2005, which is approximately 34.1% of pre-tax income as compared to 32.7% for the three months ended March 31, 2004. Stratagene recognizes state research and development and other credits when they are generated. Excess credits for mature operating entities are recognized and will be used to offset future taxable income as management believes it is more likely than not that the credits will be realized.

Liquidity and Capital Resources

     Stratagene’s liquidity requirements have historically consisted of research and development expenses, sales and marketing expenses, debt service, capital expenditures, working capital and general corporate purposes. These expenses have been funded primarily through cash from operations, supplemented with borrowings under credit facilities and other debt instruments.

21

     Stratagene generated net cash from operating activities of $3.5 million and $2.5 million for the three months ended March 31, 2005 and 2004, respectively.

     Stratagene used $0.7 million of net cash in its investing activities for each of the three months ended March 31, 2005 and 2004. Capital expenditures and additions to patents for the three months ended March 31, 2005 totaled $0.4 million and $0.3 million, respectively, as compared to $0.2 million and $0.3 million for the three months ended March 31, 2004, respectively. For fiscal 2005, Stratagene currently anticipates capital spending on property and equipment to be in the range of $1.5 million to $2.0 million.

     Stratagene used $3.7 million and $0.8 million in net cash for financing activities for the three months ended March 31, 2005 and 2004, respectively, which included the repayment of $3.8 million and $14.9 million in debt, respectively. The $14.9 million repayment of debt for the three months ended March 31, 2004 was offset by borrowings under the Company’s credit facilities of $14.1 million.

     Based on management’s review of Stratagene’s accounts receivables, an allowance for doubtful accounts is accrued. However, Stratagene does not write off individual accounts receivable until substantially all avenues of legal recourse to collect the outstanding amount have been exhausted. The actual write-off for the three months ended March 31, 2005 was minimal and the allowance decreased by approximately $0.2 million. This decrease in expected uncollectible accounts was due in part to continued collection efforts. No significant change to future liquidity is anticipated.

     Gross accounts receivable used cash of $1.2 million and $0.5 million for the three months ended March 31, 2005 and 2004, respectively, due primarily to increased instrumentation sales during the first quarter of each year.

     Gross inventory used cash of $0.8 million and $0.2 million for the three months ended March 31, 2005 and 2004, respectively, due to supporting ongoing business requirements.

     Stratagene had cash, cash equivalents and restricted cash totaling $4.7 million and $5.7 million at March 31, 2005 and December 31, 2004, respectively, and working capital of $17.6 million and $17.9 million at March 31, 2005 and December 31, 2004, respectively.

     As of March 31, 2005, BioCrest Manufacturing, L.P., a consolidated subsidiary of Stratagene, had approximately $6.0 million in total debt. This debt included approximately $1.2 million under a $9.0 million reducing revolving line of credit and $4.8 million in industrial revenue bonds.

     The obligations of BioCrest Manufacturing under the reducing revolving line of credit have been guaranteed by Stratagene and each of its wholly owned domestic subsidiaries. The obligation is also generally secured by substantially all of the personal property assets of Stratagene and each of its wholly owned domestic subsidiaries, as well as liens on the real property and improvements related to Stratagene’s Texas manufacturing facility.

     Borrowings under the reducing revolving line of credit bear interest at a variable rate equal to the one-month LIBOR rate plus 2.55% and matures in January 2007. The reducing revolving line of credit includes customary but significant restrictions on the incurrence of additional debt, the payment of dividends, acquisitions and capital expenditures above stated limits. The reducing revolving line of credit also contains restrictive covenants requiring the Company to maintain certain financial ratios, including minimum debt service coverage ratios, fixed charge coverage ratios and tangible net worth. As of March 31, 2005, the Company was in compliance with all of these covenants.

     The industrial revenue bonds are secured by land, building and equipment acquired in Bastrop County, Texas with the proceeds from the issuance of the bonds. The average interest rate on the industrial revenue bonds was 2.0% for the three months ended March 31, 2005 and was 1.44% for fiscal 2004. Under the instrument governing the industrial revenue bonds, Stratagene was required to make sinking fund payments of $870,000 per year through April 2004 and $735,000 in April 2005, and is required to make sinking fund payments of $240,000 per year through April 2021, and then $175,000 in April 2022 when the bonds mature.

     Stratagene leases certain facilities and equipment under noncancelable operating leases, with equipment leases expiring through January 2007 and facility leases for the Company’s headquarters in La Jolla and its offices in

22

Garden Grove, California, Canada, the Netherlands, Germany, Scotland and Japan expiring on various dates between September 30, 2005 and September 30, 2008.

     Stratagene has entered into employment agreements with certain of its officers which expire from June 2006 to June 2007 and with salary ranges from approximately $181,000 to $450,000. These agreements generally provide for severance benefits if the officer is terminated by Stratagene other than for cause, as defined in the employment agreements.

     In addition, in the normal course of operations, Stratagene enters into purchase obligations with various vendors and suppliers of various key raw materials and other goods and services through purchase orders or other documentation. Such obligations are generally outstanding for periods of less than one year and are settled by cash payments upon delivery of goods and services. At December 31, 2004, the purchase commitments covered by these various key raw materials and other goods and services aggregate approximately $3,130,000.

     The following table summarizes the approximate future minimum payments under the above contractual obligations at December 31, 2004:

Off-Balance Sheet Arrangements

     At March 31, 2005 and December 31, 2004, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, the Company does not engage in trading activities involving non-exchange traded contracts. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.

Other Commitments and Contingencies

     In connection with the closing of the Hycor merger, Stratagene entered into a new employment agreement with the Chief Executive Officer, or the CEO, of the Company, pursuant to which, among other things, the CEO’s base annual salary was reduced from $1.1 million to $450,000, and the CEO was granted an option to purchase 738,960 shares of Stratagene common stock at an exercise price of $9.34 per share. The agreement provides for the CEO’s base salary to be reviewed on at least an annual basis by the compensation committee of the board of directors, which may also increase the CEO’s base salary from time to time in its discretion. It is anticipated that if the Company establishes any general bonus program for senior executives based upon the attainment of established goals, the CEO will be entitled to participate in such program on a basis at least comparable to other senior executives. The CEO may also receive bonuses at the discretion of the board of directors upon the recommendation of the compensation committee. The new employment agreement has an initial term of three years and is subject to successive one year renewals unless either party provides a notice of non-renewal at least 30 days prior to the termination of the then current term.

New Accounting Pronouncements

     Information regarding recent accounting pronouncements is contained in Note 9 to the Consolidated Financial Statements for the period ended March 31, 2005, which note is incorporated herein by this reference and is included as part of “Item 1. Financial Statements,” to this Form 10-Q.

23

Cautionary Note Regarding Forward-Looking Statements

     Some of the statements in this Quarterly Report on Form 10-Q, including, but not limited to, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. Stratagene generally identifies forward-looking statements in this Quarterly Report by using words like “believes,” “intends,” “targets,” “expects,” “estimates,” “may,” “should,” “plans,” “projects,” “contemplates,” “anticipates,” “predicts” or similar expressions. You can also identify forward-looking statements by discussions of strategies, plans or intentions. These statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These factors include the absence of a public market for the Stratagene common stock prior to the Hycor merger, Stratagene’s ability to introduce new products and the acceptance of these products by the marketplace, competition, the inability to sell products as a result of the termination of license agreements, fluctuations in operating results, dependence on key employees, Stratagene’s substantial indebtedness, future capital requirements, the possibility of unproductive research and development projects, ability to manage growth, price volatility of Stratagene’s common stock, the impact of future sales of common stock on Stratagene’s stock price and potential declines in research and development budgets or funding. For more information about the risks faced by the Company, please see “Factors that May Affect Future Results” included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and the discussion set forth below under the caption “Factors that May Affect Future Results.”

     Although Stratagene believes that the expectations reflected in its forward-looking statements are reasonable, Stratagene cannot guarantee future results, events, levels of activity, performance or achievement. Stratagene undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

Factors that May Affect Future Results

     It is important to carefully consider the following risks, together with other matters described in this Form 10-Q or in other documents referred to in this Form 10-Q in evaluating Stratagene’s business and prospects. If any of the following risks occur, Stratagene’s business, financial condition or operating results could be harmed. In such case, the trading price of Stratagene’s common stock could decline. The risks described below are not the only risks Stratagene faces. Additional risks not presently known to Stratagene or that Stratagene currently deems immaterial may also impair business operations.

     Stratagene’s future success depends on the timely introduction of new products and the acceptance of these new products in the marketplace.

     Rapid technological change and frequent new product introductions are typical for the markets Stratagene serves. Stratagene’s future success will depend in large part on continuous, timely development and introduction of new products that address evolving market requirements.

     Stratagene believes successful new product introductions provide a significant competitive advantage because customers make an investment of time in selecting and learning to use new products, and are reluctant to switch thereafter. To the extent that Stratagene fails to introduce new and innovative products, it may lose market share to its competitors, which may be difficult to regain. Any inability, for technological or other reasons, to successfully develop and introduce new products could materially damage Stratagene’s business.

     In the past Stratagene has experienced, and is likely to experience in the future, delays in the development and introduction of products. Stratagene cannot assure you that it will keep pace with the rapid rate of change in life sciences or medical diagnostic research, or that its new products will adequately meet the requirements of the marketplace or achieve market acceptance. Some of the factors affecting market acceptance of new products include:

	•	availability, quality and price relative to competitive products;
	•	the timing of introduction of the product relative to competitive products;

24

	•	customers’ opinions of the product’s utility;
	•	citation of the product in published research; and
	•	general trends in life sciences and medical diagnostics research.

     The markets for Stratagene’s products are extremely competitive and subject to rapid technological change and if Stratagene fails to compete effectively, its business may suffer.

     The markets for Stratagene’s products are highly competitive. Stratagene competes with many other suppliers of life sciences research products and medical diagnostics products. Many of Stratagene’s competitors have greater financial, operational and sales and marketing resources and more experience in research and development than it does. These and other companies may have developed or could in the future develop new technologies that compete with Stratagene’s products or even render Stratagene’s products obsolete. Competition in Stratagene’s markets is primarily driven by:

	•	product performance, features and reliability;
	•	price;
	•	timing of product introductions;
	•	ability to develop, maintain and protect proprietary products and technologies;
	•	sales and distribution capabilities;
	•	technical support and service; and
	•	breadth of product line.

     If a competitor develops or acquires superior technology or cost-effective alternatives to Stratagene’s products, Stratagene’s business, financial condition and results of operations could be materially adversely affected.

     Stratagene’s competitors have in the past and may in the future compete by lowering prices. Stratagene may respond by lowering its prices, which could reduce revenues and profits. Conversely, failure to anticipate and respond to price competition may damage Stratagene’s market share. In addition, Stratagene must continually adapt to new marketing and distribution trends in order to compete effectively.

     Stratagene believes that customers in its markets display a significant amount of loyalty to their initial supplier of a particular product. Therefore, it may be difficult to make sales to customers who have previously purchased products from Stratagene’s competitors. To the extent Stratagene is unable to be the first to develop and supply new products, its competitive position may suffer.

     If Stratagene’s existing license agreements are terminated, Stratagene may be prevented from selling some of its products.

     Approximately 50% of Stratagene’s revenue in 2004 came from products sold pursuant to license agreements. If Stratagene loses the rights to a patented technology, it may be forced to stop selling some of its products or redesign its products and may lose significant sources of revenues. In addition, potential competitors could license technologies that Stratagene fails to license. The loss of a significant license could have a material adverse effect on Stratagene’s business.

     Stratagene’s significant licenses include a license from Hoffman La Roche and Roche Molecular Systems, Inc., which we refer to collectively as Roche, which includes rights to use PCR and Taq polymerase in its research efforts and rights to manufacture, promote and sell products for PCR for the research field of use, and a license from Applied Biosystems, which grants rights to promote and sell thermal cyclers and temperature cycling instruments as authorized thermal cyclers for the automated performance of PCR for the research field of use. Each of these license

25

agreements terminates upon the expiration of the last to expire underlying patent in each agreement. The agreement with Roche is subject to early termination in the event of the bankruptcy or insolvency of Stratagene.

     Roche may also terminate the agreement (1) for cause or (2) if a third party which is licensed by Roche to manufacture products for use in PCR-based human diagnostics testing acquires more than 50% of the voting stock of the Stratagene subsidiary party to the agreement. Since mid-2003, Stratagene has withheld royalty payments to Roche under this license agreement while it evaluates a possible overpayment in the royalties paid in prior periods. Stratagene has continued to record the estimated quarterly royalty payable under the patent license agreement and reports this amount to Roche. Management believes that the royalties calculated and accrued are determined in accordance with the terms of the patent license agreement. However, Stratagene’s calculations of the royalties are subject to review by Roche. Stratagene’s financial position or results of operations could be materially affected if the parties determine that the royalty calculation differs significantly from the amounts recorded by Stratagene. Additionally, there can be no assurances that Stratagene will recover any overpayment in royalties paid in prior periods. The PCR process patents underlying this royalty obligation expired in the United States in March of 2005. The corresponding foreign patents will expire in 2006 and 2007. Upon the expiration of the patents, Stratagene will no longer be required to pay royalties on future product sales related to these PCR process patents. The agreement with Applied Biosystems is subject to early termination in the event that all claims of the underlying patents in the agreement are unenforceable or invalid. Applied Biosystems may also terminate the license agreement (1) for cause, (2) upon a change in control of the Stratagene subsidiary party to the license agreement or (3) in the event of the bankruptcy or insolvency of Stratagene. Stratagene does not anticipate that either of these license agreements will terminate in the near future.

     Stratagene’s licenses also typically subject it to various commercialization, sublicensing and other obligations. If Stratagene fails to comply with these requirements, it could lose important rights under a license, such as the right to exclusivity in a specified market. In some cases, Stratagene could also lose all rights under a license. In addition, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent. Stratagene typically does not receive significant indemnification from a licensor against third party claims of intellectual property infringement.

     Because Stratagene’s quarterly revenue and operating results may vary significantly in future periods, its stock price may decline.

     Stratagene’s operating results have fluctuated in the past and may continue to fluctuate in the future. In particular, Stratagene has historically seen slower sales in the fourth quarter as a result of reduced purchases by academic and research institutions as well as the closing of such facilities during the holiday period. Stratagene’s revenues are unpredictable and may also fluctuate due to changes in demand for its products, delays in development and introduction of new products and new product introductions by Stratagene’s competitors. A high proportion of Stratagene’s costs are fixed, due in part to significant research and development costs. Thus, small declines in revenue could disproportionately affect operating results in a quarter and the price of the Stratagene common stock may decline. Moreover, a variety of factors may affect Stratagene’s ability to make accurate forecasts regarding its operating results. Because of these factors, Stratagene’s operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors, which could also cause its stock price to decline.

     Stratagene’s founder, chairman of its board of directors, chief executive officer and president exerts considerable control over it.

     As of March 31, 2005, Joseph A. Sorge, M.D., the founder, chairman of the board of directors, chief executive officer and president of Stratagene, beneficially owned approximately 62% of Stratagene’s outstanding common stock. As a result, Dr. Sorge controls all matters requiring approval of its stockholders, including the election of directors and the approval of mergers or other business combinations. Such a concentration of ownership may have the effect of delaying or preventing transactions resulting in a change of control of Stratagene, including transactions where stockholders might otherwise receive a premium for their shares over then current market prices.

     Stratagene depends substantially on key employees, and the loss of the services of any of its key employees or the failure to hire qualified employees could seriously damage Stratagene’s business.

     To a large degree, Stratagene is dependent on its founder, chairman of its board of directors, chief executive officer and president, Joseph A. Sorge, M.D. Dr. Sorge has significant expertise in the life sciences research market

26

and has been instrumental in establishing and executing Stratagene’s business plan. The loss of Dr. Sorge’s services could have a material adverse effect on Stratagene’s business. Dr. Sorge has an existing employment agreement with Stratagene which expires in June 2007, subject to automatic one year renewals unless either party provides timely notice of non-renewal.

     Because Stratagene’s products and services are highly technical in nature, only highly qualified and trained scientists have the necessary skills to develop and market Stratagene’s products and provide Stratagene’s services. As such, Stratagene’s future success also will depend in large part on the continued service of its key scientific and management personnel, including research and development, customer service, marketing and sales staffs. Stratagene faces intense competition for these professionals from its competitors, its customers and other companies throughout its industry. Stratagene does not generally enter into employment agreements requiring these employees to continue in its employment for any period of time. Any failure on Stratagene’s part to hire, train and retain a sufficient number of qualified professionals could seriously damage its business.

     Stratagene’s indebtedness could limit its ability to operate its business, obtain additional financing and pursue other business opportunities.

     As of March 31, 2005, Stratagene had approximately $6.0 million of outstanding indebtedness, including approximately $1.2 million of borrowings under its reducing revolving line of credit and approximately $4.8 million in principal amount of industrial revenue bonds. Stratagene’s indebtedness could have negative consequences for Stratagene, including the following:

	•	Stratagene will need a substantial portion of its cash flow to pay the principal and interest on its indebtedness, including indebtedness it may incur in the future;
	•	payments of Stratagene’s indebtedness will reduce the funds that would otherwise be available for its operations and future business opportunities;
	•	Stratagene may have greater relative debt burdens than its competitors, which may place Stratagene at a competitive disadvantage;
	•	Stratagene’s debt level may make it more vulnerable than its competitors to a downturn in its business or the economy generally; and
	•	there would be a material adverse effect on Stratagene’s business and financial condition if Stratagene is unable to service its indebtedness or obtain additional financing.

     Stratagene may not have financing for future capital requirements, which may prevent it from addressing gaps in its product offerings or improving its technology.

     Although historically Stratagene’s cash flow from operations has been sufficient to satisfy working capital, capital expenditure and research and development requirements, in the future Stratagene may need to incur additional debt or issue equity in order to fund these requirements as well as to make acquisitions and other investments. Stratagene’s senior credit facility restricts the Company’s ability to incur new debt. If Stratagene cannot obtain additional debt or equity financing on acceptable terms or is limited with respect to incurring additional debt or issuing equity, Stratagene may be unable to address gaps in its product offerings or improve its technology, particularly through strategic acquisitions or investments.

27

     Stratagene may need to raise substantial amounts of money to fund a variety of future activities integral to the development of its business, including but not limited to the following:

	•	for research and development to successfully develop additional products;
	•	to file and prosecute patent applications and defend and assert patents to protect its technology;
	•	to retain qualified employees, particularly in light of intense competition for qualified scientists;
	•	to manufacture additional products itself or through third parties; and
	•	to acquire new technologies, products or companies.

     If Stratagene raises funds through the issuance of debt or equity, any debt securities or preferred stock issued will have rights, preferences and privileges senior to those of holders of the Stratagene common stock in the event of a liquidation. The terms of the debt securities may impose restrictions on Stratagene’s operations. If Stratagene raises funds through the issuance of equity, this issuance would dilute the ownership interest of existing stockholders in Stratagene. Stratagene expects to fund future acquisitions in part by issuing additional equity. If the price of Stratagene’s equity is low or volatile, it may not be able to acquire other companies.

     Inability to secure and maintain intellectual property protection for its products and technologies could adversely affect Stratagene’s ability to compete.

     Stratagene’s success depends to a significant degree upon its ability to develop, maintain and protect proprietary products and technologies. Stratagene files patent applications in the United States and selectively in foreign countries as part of its strategy to protect its proprietary products and technologies. However, patents provide only limited protection of Stratagene’s intellectual property. The assertion of patent protection involves complex legal and factual determinations and is therefore uncertain and expensive. Stratagene cannot assure you that patents will be granted with respect to any of its patent applications, that the scope of any of its issued patents will be sufficiently broad to offer meaningful protection or that Stratagene will develop additional proprietary technologies that are patentable. Stratagene’s issued patents or patents licensed to it could be successfully challenged, invalidated or circumvented so that Stratagene’s patent rights would not create an effective competitive barrier. The loss of a significant patent or the failure of a patent to issue from a pending patent application that Stratagene considers significant could have a material adverse effect on Stratagene’s business.

     The laws governing the scope of patent coverage in the United States and abroad continue to evolve, particularly in the life sciences area. The laws of some foreign countries may not protect Stratagene’s intellectual property rights to the same extent as United States laws. Stratagene holds patents only in selected countries. Therefore, third parties can make, use and sell products covered by its patents in some countries in which Stratagene does not have patent protection.

     Stratagene gives its customers the right to use some of its products under label licenses that are for research purposes only. These licenses could be contested and no assurances can be given that Stratagene would either be aware of an unauthorized use or be able to enforce these restrictions in a cost-effective manner.

     Stratagene attempts to protect its trade secrets by entering into confidentiality agreements with employees, consultants and third parties. However, these agreements might be breached and, if they are, there may not be an adequate remedy available to Stratagene. Also, Stratagene’s trade secrets might become known to a third party through means other than by breach of its confidentiality agreements, or they could be independently developed by Stratagene’s competitors. If Stratagene’s trade secrets become known, its business and competitive position could be adversely affected.

     Intellectual property litigation could seriously harm Stratagene’s business.

     Litigation involving patents and other intellectual property rights is pervasive in the biotechnology industry. Stratagene is aware that patents have been applied for and in some cases issued to others claiming technologies that are closely related to its own technology. As a result, Stratagene periodically receives notices of potential infringement of patents held by others. Although Stratagene has generally been successful in resolving these types of claims, it may not be able to do so in the future. While Stratagene takes steps to avoid infringing the patents of other

28

parties, Stratagene cannot assure investors that it will not be found to infringe these patents or other proprietary rights of third parties.

     In the event of an intellectual property dispute, Stratagene may become involved in litigation or arbitration. Litigation could involve proceedings in court as well as in the United States Patent and Trademark Office or the International Trade Commission. Intellectual property litigation can be extremely expensive and may divert management’s time and resources away from Stratagene’s operations. Moreover, the outcome of any such litigation is inherently uncertain. Even a successful outcome may take years to achieve and the costs associated with such litigation, in terms of dollars spent and diversion of management time and resources, could seriously harm its business.

     Stratagene has been involved in patent disputes with third parties, a number of which remain unresolved. For example, Stratagene is involved in litigation with Invitrogen Corporation regarding patents relating to specified reverse transcriptase enzymes and certain competent cell products. Stratagene is also involved in litigation with Third Wave Technologies regarding patents relating to certain assays for detection of nucleic acids. Stratagene is also involved in litigation with Applera Corporation regarding a patent relating to real-time PCR instrumentation and certain related reagents. Stratagene is also involved in litigation with Invitrogen Corporation and Takara Bio regarding one of Stratagene’s patents relating to polymerase blend products. As part of the patent infringement claims in these matters, the litigants are seeking monetary damages, injunctive relief and attorneys’ fees. At the present time, Stratagene is unable to quantify the probability or extent of any potential monetary recovery or exposure with respect to these matters.

     If a third party claims an intellectual property right to technology Stratagene uses, Stratagene may be forced to discontinue an important product or product line, alter its products and processes, pay license fees, pay damages for past infringement or cease certain activities. Under these circumstances, Stratagene may attempt to obtain a license to this intellectual property, but it may not be able to do so on commercially reasonable terms, or at all.

     Stratagene may spend resources on research and development projects without being able to achieve an adequate return, if any, on its investment.

     It is important for Stratagene to continue to invest heavily in research and development. However, because Stratagene competes in a relatively new and constantly evolving market, it may pursue research and development projects that do not result in viable commercial products. In addition, Stratagene has in the past, and may in the future, terminate research efforts in a particular area after it has made substantial initial funding commitments in that area. Any failure to translate research and development expenditures into successful new product introductions could have an adverse effect on Stratagene’s business.

     If Stratagene fails to manage its growth effectively, its business could suffer.

     A significant portion of Stratagene’s historical revenue growth is attributable to internal product development. Stratagene, being one of the smaller companies in its industry, is particularly dependent on internal invention and product development to replace older products in its product line. Stratagene’s ability to achieve its expansion objectives and to manage its growth effectively depends upon a variety of factors, including Stratagene’s ability to internally develop products, to attract and retain skilled employees, to successfully position and market its products and to identify and acquire technologies and intellectual property rights from third parties. In addition, Stratagene faces significant challenges and risks in building and managing its sales team, including managing geographically dispersed sales efforts and adequately training its sales people in the use and benefits of its products. To accommodate its growth and compete effectively, Stratagene will be required to improve its information systems, create additional procedures and controls and expand, train, motivate and manage its work force. Stratagene’s future success will depend in part on the ability of current and future management personnel to operate effectively, both independently and as a group. Stratagene cannot be certain that its personnel, systems, procedures and controls will be adequate to support its future operations.

     If Stratagene is unable to implement and maintain effective internal control over financial reporting, its stock price could be adversely affected.

     Item 308 of Regulation S-K promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies annually evaluate the effectiveness of their internal control over financial reporting as of the end of each fiscal year, and include a management report assessing the effectiveness of such internal control over financial reporting in all annual reports. Item 308 of Regulation S-K also requires that the independent accountants of public companies attest to, and report on, management’s assessment of its internal control over financial reporting. The initial compliance date with respect to these requirements depends on whether a company is an “accelerated filer” as determined by Rule 12b-2 of the Exchange Act. An “accelerated filer” must begin to comply with the rules regarding management’s report on internal control over financial reporting for its first fiscal year ending on or after November 15, 2004, and a “non-accelerated filer” must begin to comply with these requirements for its first fiscal year ending on or after July 15, 2006. “Accelerated filer” status is measured as of the end of each fiscal year and is determined in part on whether the aggregate market value of the common equity of a company held by non-affiliates of such company is $75.0 million or more measured as of the last business day of the company’s most recently completed second fiscal quarter.

     As disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2004, Stratagene was not an “accelerated filer” as of December 31, 2004. Accordingly, Stratagene was not subject to the rules regarding management’s report on internal control over financial reporting for the fiscal year ended December 31, 2004. However, Stratagene will not be able to determine if it will be subject to the rules regarding management’s report on internal control over financial reporting for the fiscal year ending December 31, 2005 until June 30, 2005. Notwithstanding the question as to whether Stratagene will be subject to the rules regarding management’s report on internal control over financial reporting for fiscal 2005, Stratagene is currently making concerted efforts to prepare itself to be able to comply with such requirements. These efforts include documenting, evaluating the design and testing the effectiveness of Stratagene’s internal control over financial reporting. During this process, Stratagene expects to make improvements in the design and operation of its internal control over financial reporting, including further formalization of policies and procedures, improved segregation of duties and additional monitoring of controls.

     Stratagene’s management, including the CEO and CFO, does not expect that Stratagene’s internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Stratagene have been, or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and Stratagene cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

     Stratagene cannot assure you that it or its independent registered public accounting firm will not identify a material weakness in Stratagene’s internal control over financial reporting. A material weakness in Stratagene’s internal control over financial reporting would require management and its independent registered public accounting firm to evaluate Stratagene’s internal control over financial reporting as ineffective. If Stratagene’s internal control over financial reporting is not considered adequate, Stratagene may experience a loss of public confidence, which could have an adverse effect on its business and its stock price.

     The price of the Stratagene common stock is expected to be volatile.

     The market price of the Stratagene common stock may be subject to significant fluctuations. These fluctuations may occur, among other reasons, in response to:

•

quarterly fluctuations in Stratagene’s operating and earnings per share results;

29

	•	technological innovations or new product introductions by Stratagene or its competitors;
	•	delays in the development and introduction of new products;
	•	disputes concerning patents, licenses or other proprietary rights;
	•	changes in earnings estimates by equity and market research analysts;
	•	sales of common stock by existing stockholders;
	•	loss of key personnel; and
	•	securities class actions or other litigation affecting Stratagene or other companies in its industry.

     Any failure to meet analysts’ expectations could have an adverse effect on the market price for the Stratagene common stock. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. If similar litigation were instituted against Stratagene, it could result in substantial costs and a diversion of Stratagene’s management’s attention and resources, which could have an adverse effect on its business, financial condition and results of operations. In addition, Stratagene cannot predict the extent to which investors’ interest in the Company will lead to a liquid trading market in the Stratagene common stock.

     Future sales of currently outstanding shares of Stratagene common stock could adversely affect Stratagene’s stock price.

     As of March 31, 2005, Stratagene had approximately 22.0 million shares of common stock outstanding. Of this amount, the 5,015,453 shares issued to the former Hycor stockholders in the merger transaction with Hycor are freely tradable under the Securities Act, except for any shares held by affiliates of Stratagene or Hycor, as the case may be, which may be sold from time to time in accordance with the requirements of Rule 144 or Rule 145 of the Securities Act. In addition, Stratagene has entered into a registration rights agreement with Dr. Sorge and certain of his affiliates pursuant to which, at the request of Dr. Sorge and subject to specified conditions, Stratagene will file a registration statement under the Securities Act covering 2,000,000 shares of Stratagene common stock held by Dr. Sorge and specified trusts and partnerships controlled by Dr. Sorge. Dr. Sorge and such trusts and partnerships are also entitled to register the remaining approximately 11.3 million shares of Stratagene common stock held by them in specified situations. The shares held by Dr. Sorge and such trusts and partnerships and the remaining shares of Stratagene common stock held by the other stockholders of Stratagene prior to the Hycor merger may also be sold from time to time in the public market subject to the requirements of Rule 144 under the Securities Act. The sale by Stratagene’s current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of the Stratagene common stock.

     Stratagene has also registered the shares of common stock that it may issue from time to time under its employee benefits plans. As a result, these shares can be freely sold in the public market upon issuance, subject to restrictions under the securities laws. If any of the Company’s stockholders cause a large number of securities to be sold in the public market, the sales could reduce the trading price of the Stratagene common stock. These sales also could impede Stratagene’s ability to raise future capital.

     Reductions in research and development budgets or government funding may impact Stratagene’s sales.

     Fluctuations in the research and development budgets of Stratagene’s customers could have a significant effect on the demand for its products. Research and development budgets fluctuate due to changes in available resources, spending priorities and institutional budgetary policies. Stratagene’s business could be seriously damaged by any significant decrease in research and development expenditures by pharmaceutical and biotechnology companies, academic institutions or government and private laboratories.

     A substantial portion of Stratagene’s sales have been to researchers at universities, government laboratories and private foundations whose funding is dependent upon grants from government agencies, such as the United States

30

National Institutes of Health. Although Stratagene is not aware of any impending reductions in governmental grants, government funding of research and development is subject to the political process and as a result the amount of available funding may decrease. Stratagene’s sales may be adversely affected if its customers delay purchases as a result of uncertainties surrounding the approval of government budget proposals. A reduction in government funding for the National Institutes of Health or other government research agencies could seriously damage Stratagene’s business.

     In recent years, the pharmaceutical and biotechnology industries have undergone substantial consolidation. Further mergers or corporate consolidations in these industries could cause Stratagene to lose existing customers and potential future customers. Pharmaceutical and biotechnology companies have generally raised little money in the past few years, and some are low on funds. Some of these companies have begun to reduce their research and development budgets in recent years. It is possible that these biotechnology and pharmaceutical companies will continue to reduce spending on research and development in the future and some companies may go out of business entirely. In addition, health care reform and other changes in the regulatory environment affecting these industries could have an adverse impact on research and development expenditures by pharmaceutical and biotechnology companies, which would negatively impact Stratagene’s business.

     Stratagene’s academic customers generally receive funds from approved grants at particular times of the year, as determined by the government. Grants have in the past been frozen for extended periods or have otherwise become unavailable to various institutions without advance notice. The timing of the receipt of grant funds affects the timing of purchase decisions by Stratagene’s customers and, as a result, can cause fluctuations in its sales and operating results.

     Failure to license new technologies could impair Stratagene’s new product development.

     In order to meet the needs of its customers, Stratagene must develop a broad spectrum of products. To build a product line, it is sometimes advantageous or necessary to license technologies from third parties. Approximately 50% of Stratagene’s revenues for 2004 were attributable to products manufactured or sold under licenses from third parties. As a result, Stratagene believes its ability to license new technologies from third parties is and will continue to be important to its ability to offer new products.

     From time to time, Stratagene is notified or becomes aware of patents held by third parties that are related to technologies Stratagene is selling or may sell in the future. After a review of these patents, Stratagene may attempt to obtain a license for these technologies from these third parties. Stratagene can give no assurances that it will be able to negotiate such licenses on commercially reasonable terms, or at all.

     Stratagene’s ability to gain access to technologies needed for new products and services depends in part on its ability to convince inventors that it can successfully commercialize their inventions. Stratagene can give no assurances that it will be able to continue to identify new technologies developed by others or that it will be able to negotiate appropriate licenses on commercially reasonable terms, or at all.

     Stratagene may acquire other businesses or form joint ventures that could decrease its profitability, dilute your ownership in Stratagene, increase its debt or cause Stratagene to incur significant expense.

     As part of Stratagene’s business strategy, it intends to pursue acquisitions of other complementary businesses and technology licensing arrangements. Stratagene also intends to pursue strategic alliances that leverage its core technology and industry experience to expand its product offerings and geographic presence. Stratagene has limited experience with respect to acquiring other companies and limited experience with respect to the formation of collaborations, strategic alliances and joint ventures. If Stratagene were to make any acquisitions, it may not be able to integrate these acquisitions successfully into its existing business and Stratagene could assume unknown or contingent liabilities. Any future acquisitions by Stratagene also could result in large and immediate write-offs or the incurrence of debt and contingent liabilities, any of which could harm Stratagene’s operating results. Integration of an acquired company also may require management resources that otherwise would be available for ongoing development of Stratagene’s existing business. Stratagene may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and Stratagene may not realize the anticipated benefits of any acquisition, technology license or strategic alliance.

31

     Changes in distribution and purchasing methods by Stratagene’s customers may force it to use more expensive marketing and distribution channels.

     A number of Stratagene’s customers have developed purchasing initiatives to reduce the number of vendors they purchase from in order to lower their supply costs. In some cases, these customers have established agreements with large distributors, which include discounts and the distributors’ direct involvement with the purchasing process. These activities may force Stratagene to supply these large distributors with its products at a discount to continue to reach its customers. For similar reasons, many of Stratagene’s larger customers, including the government, have requested and may in the future request special pricing arrangements, including blanket purchase agreements. To date, Stratagene does not believe that these special pricing arrangements have had a material effect on either sales revenues or margins. However, in the future these agreements may limit Stratagene’s pricing flexibility, which could adversely impact its business, financial condition and results of operations. In addition, if Stratagene loses one or more of its distributors and cannot arrange suitable alternatives, its business could be adversely affected.

     Several of Stratagene’s customers have requested that Stratagene sell its products through third party, e-commerce web sites. While this trend does not seem to be growing, offering its products through these web sites generally requires Stratagene to agree to offer volume-related discounts and pay commissions on the sales made through these web sites to these third party e-commerce providers. Consequently, margins on sales made through these third party web sites would generally be lower than those on sales made through traditional channels. Stratagene’s business may be harmed as a result of these web sites or other sales methods that may be developed in the future.

     Stratagene relies on third party manufacturers for raw materials and product components.

     Stratagene relies on third party manufacturers to supply many of its raw materials and product components. Some of these components are only available from a single supplier or a limited group of suppliers, either because the market for these components is too small to support multiple suppliers or because the components are protected by patents, in which case there may only be a single supplier for the covered components. Stratagene’s reliance on outside vendors generally, and a sole supplier or a limited group of suppliers in particular, involves several risks, including:

	•	an inability to obtain an adequate supply of required components due to manufacturing capacity constraints, the discontinuance of a product by a third-party manufacturer, an acquisition of the manufacturer by one of Stratagene’s competitors or other supply constraints;
	•	delays and long lead times in receiving materials from vendors; and
	•	reduced control over quality and pricing of components.

     If a sole source third party supplier were to go out of business, Stratagene might be unable to find a replacement for such source or it might take Stratagene several months to be able to make the substance or component internally. If a sole source third party supplier were to be acquired by a competitor, that competitor may elect not to sell to Stratagene in the future.

     Adverse developments affecting Stratagene’s international operations or foreign currency fluctuations could harm its results from operations.

     Including sales made by Stratagene’s subsidiaries and distributors, its products are currently marketed in over 45 countries throughout the world. Measured in U.S. dollars, Stratagene’s product sales outside the United States for the three months ended March 31, 2005 and for fiscal 2004 represented 33% and 27% of its total sales, respectively. In addition, approximately 10% and 12% of its total sales for the three months ended March 31, 2005 and for fiscal 2004, respectively, were for products exported from the United States. Stratagene expects that international sales will continue to account for a significant percentage of its revenues for the foreseeable future, in part because Stratagene intends to expand its international operations. There are a number of risks arising from Stratagene’s international business, including:

	•	difficulties and costs associated with staffing and managing foreign operations;
	•	unexpected changes in regulatory requirements;

32

	•	the difficulties of compliance with a wide variety of foreign laws and regulations;
	•	more limited protection for intellectual property rights in some countries;
	•	changes in Stratagene’s international distribution network and direct sales force;
	•	potential trade restrictions and exchange controls;
	•	import and export licensing requirements;
	•	longer accounts receivable collection cycles in certain foreign countries; and
	•	potential increased costs associated with overlapping tax structures.

     A significant portion of Stratagene’s business is conducted in currencies other than the U.S. dollar, which is its reporting currency. Stratagene recognizes foreign currency gains or losses arising from its operations in the period incurred. As a result, currency fluctuations among the U.S. dollar and the currencies in which Stratagene does business could adversely affect its results of operations. Stratagene cannot predict the effects of exchange rate fluctuations upon its future operating results because of the number of currencies involved, the variability of currency exposures and the potential volatility of currency exchange rates. Stratagene engages in foreign currency exchange hedging transactions to manage its foreign currency exposure, but it cannot assure you that its strategies will adequately protect its operating results from the effects of exchange rate fluctuations.

     Stratagene’s activities involve hazardous materials and may subject it to costly environmental liability.

     Stratagene uses hazardous materials, including phenol, chloroform and ethanol, and radioactive isotopes in connection with its research and development activities, as well as in its manufacturing processes and in evaluating the performance of various products. Stratagene is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these materials and specified waste products. The risk of accidental contamination of property or injury to individuals from these materials cannot be completely eliminated. In the event of such an accident, Stratagene could be liable for any damages that result, which could have a material adverse effect on its business, financial condition and results of operations. Stratagene carries insurance for contamination resulting from the use of hazardous materials with $25,000 limitations per incident with respect to pollution clean-up and removal and radioactive contamination. Additionally, any accident could partially or completely shut down Stratagene’s research and manufacturing facilities and operations. Stratagene may also have to incur substantial costs to comply with current or future environmental laws and regulations.

     Interruptions in its manufacturing operations could adversely impact Stratagene’s ability to effectively operate its business.

     Stratagene maintains manufacturing facilities in San Diego, California, Garden Grove, California and in the Austin, Texas area. Damage to these facilities due to fire, earthquake or other natural disaster, power loss, unauthorized entry or other events could cause an interruption in the production of Stratagene’s products. Stratagene does not have or plan to obtain earthquake insurance. In late 1999 and early 2000 Stratagene opened a manufacturing facility outside of Austin, Texas and moved over 100 jobs to that location. During the transition process, Stratagene lost some key personnel who were important to certain manufacturing processes. As a result, Stratagene was unable to manufacture certain products for a period of three to six months. Many of the customers who wanted to purchase the affected products during this period switched to other suppliers and Stratagene found it difficult to reacquire these customers once it was able to manufacture the products again. Accordingly, Stratagene believes that a prolonged interruption in its manufacturing operations could have a material adverse impact on Stratagene’s ability to effectively operate its business.

     If its biological products and instruments are not properly produced or manufactured, Stratagene could incur substantial unexpected expenses, experience product returns and suffer damage to its brand and reputation.

     Stratagene’s biological products and instruments are complex and may be improperly produced or manufactured. In the past, Stratagene has voluntarily recalled several of its products. In each case, the problem was identified by

33

Stratagene and corrected. If Stratagene’s products need to be recalled, it could experience decreased sales and loss of customers and market share. In addition, a recall would divert managerial and financial resources and could harm Stratagene’s reputation with customers.

     If Stratagene’s access to necessary tissue samples is restricted or ethical concerns surrounding the use of genetic information become widespread, its business could suffer.

     Stratagene requires access to human and other tissue samples and other biological materials to continue to develop its products. Stratagene competes with many other companies for these materials and may not be able to obtain or maintain access to these materials on acceptable terms, or at all. In addition, genetic testing has raised ethical issues regarding confidentiality and the appropriate use of the resulting information. Governmental regulation in the United States and foreign countries could limit access to, or use of, human and other tissue samples or restrict the use of, or regulate, genetic testing. If Stratagene loses access to sufficient numbers or sources of tissue samples, or if tighter restrictions are imposed on Stratagene’s customers’ use of the information generated from tissue samples, its business could suffer.

     Anti-takeover provisions of Stratagene’s certificate of incorporation and bylaws and provisions of Delaware law could delay or prevent a change of control that you may favor.

     Provisions of Stratagene’s amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger or other change of control that stockholders may consider favorable or may impede the ability of the holders of Stratagene’s common stock to change Stratagene’s management. The provisions of Stratagene’s amended and restated certificate of incorporation and amended and restated bylaws, among other things, authorize Stratagene’s board of directors to issue preferred stock in one or more series, without stockholder approval.

     Because Stratagene has not chosen to be exempt from Section 203 of the Delaware General Corporation Law, this provision could also delay or prevent a change of control that you favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15 percent of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisition of additional shares, for a three-year period following the date on which that person or its affiliate crosses the 15 percent ownership threshold.

     Additionally, because Dr. Sorge owns approximately 62% of the Company’s outstanding common stock, he controls all matters requiring approval of Stratagene’s stockholders. As a result, among other things, Dr. Sorge must approve any merger or other business combination related to Stratagene.

34

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     Stratagene’s financial instruments include cash and cash equivalents, investments and long-term debt. At March 31, 2005, the carrying values of its financial instruments approximated their fair values based on current market prices and rates.

     Foreign Currency Translation/Transaction

     The accounts of foreign subsidiaries and affiliates of Stratagene are measured using the local currency as the functional currency. For these operations, assets and liabilities are translated into U.S. dollars at period-end exchange rates, and income and expense accounts are translated at average monthly exchange rates. Net translation gains or losses are excluded from net income and reflected in accumulated other comprehensive income (loss) in the accompanying consolidated balance sheets.

     Stratagene’s international sales expose it to foreign currency risk in the ordinary course of its business. Approximately 33% and 27% of Stratagene’s revenue for the three months ended March 31, 2005 and 2004, respectively, was generated by its foreign subsidiaries. The foreign subsidiaries sell products in various local currencies that are collected at future dates and purchase raw materials and finished goods in both U.S. dollars and local currencies. Accordingly, Stratagene is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. Realized gains and losses from foreign currency transactions are included in operations as incurred.

     For financial reporting purposes, the foreign subsidiaries’ income statements are translated from the local currency into U.S. dollars at the exchange rates in effect during the reporting period. When the local currency strengthens compared to the U.S. dollar, there is a positive effect on the foreign subsidiaries’ sales as reported in Stratagene’s consolidated financial statements. Conversely, when the U.S. dollar strengthens, there is a negative effect. For the three months ended March 31, 2005, the net impact to Stratagene’s reported sales from the effect of exchange rate fluctuations was an increase of approximately $0.2 million when compared to the exchange rates for

35

the three months ended March 31, 2004. For the three months ended March 31, 2005, the net impact to Stratagene’s reported operating expenses from the effect of exchange rate fluctuations was an increase of approximately $0.2 million when compared to rates for the three months ended March 31, 2004.

     Derivative Financial Instruments

     As part of distributing its products, Stratagene regularly enters into intercompany transactions with its foreign subsidiaries. Stratagene’s currency exposures vary, but are primarily concentrated in the Euro, British Pound, Swiss Franc and Japanese Yen. Prior to 2005, Stratagene entered into derivative instruments to mitigate foreign currency risk on its European revenues, however, such derivative instruments did not qualify for hedge accounting under the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. Accordingly, both unrealized and realized gains or losses resulting from changes in fair value were recognized as incurred in gain (loss) on foreign currency transactions in the current period income statement.

     Stratagene managed its foreign currency exposure over a maximum of 12 months. All futures contracts entered into for fiscal year 2004 were settled by year end, and the Company has no pending futures contracts currently outstanding.

     Fair Value of Financial Instruments

     The carrying amounts of cash, marketable securities, restricted cash, foreign currency exchange contracts, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, other current liabilities, and lines of credit are considered to be representative of their respective fair values because of the short-term nature of these financial instruments. The carrying amount of the long-term debt is a reasonable estimate of fair value, as the loans have terms based on market rates.

     Interest Rates

     Stratagene’s cash and cash equivalents are generally invested in money market accounts and short-term debt instruments of highly rated credit issuers. Stratagene limits the amount of credit exposure to any one issuer and seeks to improve the safety and likelihood of preservation of its invested funds by limiting default risk and market risk. Based on the Company’s short-term investment portfolio at March 31, 2005, the Company believes that a 10% rise or fall in interest rates would have had no material impact on its financial statements.

     The following table shows the average interest rate for the three months ended March 31, 2005 for each of Stratagene’s long-term debt obligations:

     Stratagene’s interest income on long-term investments is dependent on the interest rate attributable primarily to the debt securities purchased by Stratagene. Since Stratagene generally holds these securities to maturity, changes in interest rates are not expected to have a material impact on the value of Stratagene’s portfolio.

     Item 4. Controls and Procedures

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed by the Company pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

36

     The Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

     Changes in Internal Control

     There were no changes in the Company’s internal control over financial reporting during the Company’s first fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Item 308 of Regulation S-K promulgated under Section 404 of the Sarbanes-Oxley Act of 2002 requires that public companies annually evaluate the effectiveness of their internal control over financial reporting as of the end of each fiscal year, and include a management report assessing the effectiveness of such internal control over financial reporting in all annual reports. Item 308 of Regulation S-K also requires that the independent accountants of public companies attest to, and report on, management’s assessment of its internal control over financial reporting. The initial compliance date with respect to these requirements depends on whether a company is an “accelerated filer” as determined by Rule 12b-2 of the Exchange Act. An “accelerated filer” must begin to comply with the rules regarding management’s report on internal control over financial reporting for its first fiscal year ending on or after November 15, 2004, and a “non-accelerated filer” must begin to comply with these requirements for its first fiscal year ending on or after July 15, 2006. “Accelerated filer” status is measured as of the end of each fiscal year and is determined in part on whether the aggregate market value of the common equity of a company held by non-affiliates of such company is $75.0 million or more measured as of the last business day of the company’s most recently completed second fiscal quarter.

     As disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2004, Stratagene was not an “accelerated filer” as of December 31, 2004. However, Stratagene will not be able to determine if it will be subject to the rules regarding management’s report on internal control over financial reporting for the fiscal year ending December 31, 2005 until June 30, 2005. If the aggregate market value of Stratagene’s common stock held by non-affiliates of Stratagene as of June 30, 2005 is equal to or greater than $75.0 million, then Stratagene will become an “accelerated filer” effective as of December 31, 2005 and will be required to comply with the rules regarding management’s report on internal control over financial reporting for fiscal 2005. Conversely, if the aggregate market value of Stratagene’s common stock held by non-affiliates of Stratagene as of June 30, 2005 is less than $75.0 million, then Stratagene will continue to be a “non-accelerated filer” for fiscal 2005 and will not be required to comply with the rules regarding management’s report on internal control over financial reporting until December 30, 2006.

     Notwithstanding the question as to whether Stratagene will be subject to the rules regarding management’s report on internal control over financial reporting for fiscal 2005, Stratagene is currently making concerted efforts to prepare itself to be able to comply with such requirements. These efforts include documenting, evaluating the design and testing the effectiveness of Stratagene’s internal control over financial reporting. During this process, Stratagene expects to make improvements in the design and operation of its internal control over financial reporting, including further formalization of policies and procedures, improved segregation of duties and additional monitoring of controls.

37

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     Information regarding legal proceedings is contained in Note 8 to the Consolidated Financial Statements for the period ended March 31, 2005, which note is incorporated herein by this reference and is included as part of “Item 1. Financial Statements,” to this Form 10-Q.

Item 6. Exhibits

38

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STRATAGENE CORPORATION

Date: May 12, 2005	By:	/s/        Joseph A. Sorge, M.D.
		Joseph A. Sorge, M.D.
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

Date: May 12, 2005	By:	/s/        Reginald P. Jones
		Reginald P. Jones
		Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

39