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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the Fiscal Year Ended December 31, 2003

For Transition Period From              to             

Commission File No. 000-22400

STRATEGIC DIAGNOSTICS INC.

(Exact name of Registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value

(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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

The aggregate market value of the common stock held by non-affiliates of the Registrant was $75,149,550, calculated by using the number of shares outstanding on March 8, 2004 and by referring to the closing price of the common stock on June 30, 2003 (the last business day of the Registrant’s most recently completed second fiscal quarter).

As of March 8, 2004 there were 19,220,184 shares outstanding of the Registrant’s common stock, par value $.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement (the “Definitive Proxy Statement”) to be filed with the Securities and Exchange Commission relative to the Company’s 2003 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report.

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PART I

ITEM 1. BUSINESS

Overview

Strategic Diagnostics Inc. (“the Company”) is a Delaware corporation formed in 1987 under the name EnSys Corporation. In 1996, Strategic Diagnostics, Inc., a Delaware corporation formed in 1990, which prior to that time conducted the operations of the Company, merged with and into EnSys Corporation, which changed its name to Strategic Diagnostics Inc. The Company develops, manufactures and markets immunoassay and bioluminescence-based test kits for rapid and cost-effective detection of a wide variety of substances in the food safety and water quality markets and also provides antibody and immunoreagent research, development and production services to medical diagnostic and pharmaceutical companies, as well as research institutions.

Since its inception, the Company and its predecessors have, in addition to conducting internal research and development of new products, entered into research and development agreements with multiple corporate partners that have led to the introduction of various products to the food safety, water quality and other markets. The Company believes that its competitive position has been enhanced through the combination of talent, technology and resources resulting from the relationships it developed and the acquisitions it concluded during the past five years. These relationships and acquisitions have enabled the Company to achieve meaningful economies of scale for the unique products it offers through the utilization of its consolidated facilities in Newark, Delaware, for the manufacture of test kits and antibodies, its facility located in Oceanside, California, for the manufacture of instruments, and its facility located in Windham, Maine for the manufacture of antibodies.

On July 8, 2002, the Company purchased certain assets of Molecular Circuitry, Inc. (MCI). The purchased assets consisted primarily of various proprietary growth media technology that are used in combination with the Company’s diagnostic tests for food-borne pathogens, including Salmonella and E. coli. The assets purchased also included the sales and marketing rights to the ruminant feed test product line that the Company and MCI had been jointly developing prior to the acquisition.

On September 28, 2001, the Company acquired AZUR Environmental (AZUR), a privately-held manufacturer of proprietary rapid test systems, including the Microtox^® toxicity test system, which measures toxicity in drinking and process water. Mentioned in more than 600 peer-reviewed scientific articles and with more than 2,000 instruments sold worldwide, the Microtox^® toxicity test system has been approved in regulations or standards in Canada, eight European countries, and has been submitted to the U.S. Environmental Protection Agency for approval.

In addition to this annual report on Form 10-K, the Company files periodic and current reports, proxy statements and other information with the SEC. The Company will provide these documents to you, free of charge, if you request copies by sending a letter to the Company’s Investor Relations Department at the address set forth on the cover of this report. You may also read and copy any document the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information about the public reference facilities. These documents also may be accessed through the SEC’s electronic data gathering, analysis and retrieval system (“EDGAR”) via electronic means, including the SEC’s home page on the Internet, www.sec.gov.

Immunoassay Technology

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

The technology was first developed more than 25 years ago and has replaced many laboratory diagnostic tests in the medical industry. The Company has applied immunoassay technology to a variety of industrial and

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agricultural applications. As with medical applications, immunoassay technology has demonstrated its value in these markets by virtue of its ability to yield specific, accurate, cost-effective and timely data in a manner previously unavailable.

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

Immunoassay technology relies on the specific binding characteristics of antibodies. Antibodies are proteins made by cells within the bodies of animals as part of the immune system response to invasion by foreign substances such as bacteria and viruses. An antibody physically binds only to the substance that elicited its production. This characteristic of specific binding makes antibodies useful tools for detecting substances in complex sample matrices (e.g., blood, plant tissue, soil and water). Methods exist for isolating and purifying antibodies from animals, and labeling them in such a way that they can be used as components, or reagents, within a test to detect the presence of the substance of interest. Immunoassay technology has advanced to the point that antibodies can be made to a wide variety of substances including microorganisms, drugs, hormones, proteins, polymers, environmental pollutants and other chemicals.

Once an antibody reagent that has the desired performance characteristics (sensitivity and specificity) has been identified, it can be incorporated into a test format that is appropriate for the customer’s application. In the human clinical chemistry market, antibodies are employed as reagents on large, automated instruments that can analyze hundreds of samples per hour. In contrast, antibodies also can be packaged into single use, disposable formats such as home pregnancy tests. Immunoassays can be designed to be highly quantitative or yield a simple yes/no result. The type of test format chosen for any given application depends on the needs of the customer and may include factors such as ease-of-use, cost-per-test, number of samples to be tested, location where the test will be performed and experience of the user.

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

Latex particle filtration assays offer ease-of-use, field portability and semi-quantitative results and are ideally suited for on-site, field screening applications where limited numbers of samples are to be analyzed.

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

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

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

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

All measurement technologies, including immunoassays, have strengths and limitations. The Company’s expertise with multiple immunoassay formats, coupled with a thorough understanding of the needs of a market and specific customer applications, has allowed the Company to develop a diverse array of immunoassay products designed to meet the analytical needs of multiple, sizable markets.

The products that the Company manufactures and markets using this technology include TraitChek^TM, MycoChek^TM, RapidChek^®, SeedChek^TM, FeedCheck^TM, RaPID Assay^®, EnviroGard^®, D TECH^®.

Bioluminescence Technology

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

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

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

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

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The Company manufactures and markets its Microtox^® and Deltatox^® toxicity test systems using this technology.

Markets, Products and Competition

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

Food Safety

The Company’s food safety product line includes tests to detect targeted traits in genetically engineered plants, tests to detect Genetically Modified (GM) traits in food ingredients and food fractions, tests to detect naturally occurring fungi in grains (mycotoxins), tests for food pathogens, including E. Coli and Salmonella, and products to detect remnants of ruminants in animal feed (ruminant feed testing).

Agricultural Testing

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

Agricultural biotechnology companies are developing varieties of commercially important crops like corn, cotton and soybeans that have altered or additional genes which are designed to confer a commercial advantage to the plant, such as insect or pesticide resistance or enhanced growth or nutritional characteristics. Each year this technology expands throughout world agricultural systems because of the meaningful beneficial economic impact of these products. The Company believes that as the use of these products proliferates, so will the need for analysis to identify the genetic characteristics of a particular food product.

Crop varieties developed by genetic engineering were first introduced for commercial production in 1996 with about 4 million acres of GM crops grown. It is estimated today that GM crops are planted on more than 167 million acres worldwide. Globally in 2003, six principal countries were responsible for 99% of the GM crop area. They include the U.S. at 106 million acres (63% of the global total), Argentina at 34 million acres (21%), Canada at 11 million acres (6%), Brazil at 8 million acres (4%), China at 7 million acres (4%) and South Africa at 1 million acres (1%). The Company has distribution in place within each of these GM crop producing countries.

A large agricultural biotechnology company that has used genetic engineering technology in developing proprietary varieties of herbicide resistant soybeans and insect-resistant corn and cotton, among other products, commissioned the Company’s first test in this market. Not all the seed produced by a genetically engineered plant contains the gene for the desired trait and, therefore, not all the plants arising from a batch of seed will express the desired characteristic. The Company has developed a simple ‘one-step’ lateral flow test that is used at the point of testing to determine if an individual plant contains the new genetic trait. The Company also has developed similar one-step products for other crops. Commercial seed producers use these products to ensure the quality of their products. This type of test also can be used for enforcement purposes in crops to expose unlicensed application of the genetic technology. Agricultural biotechnology companies, including Monsanto and Bayer CropScience, are currently developing additional genetically engineered traits in plants. Based on these trends, coupled with the increased volume of new trait introduction, the Company expects sales of these products to grow.

Though acceptance of GM crops has increased and the development of new traits has risen, there are many countries that have adopted strict regulations on biotech crops. The European Union has recently adopted strict regulations regarding labeling and traceability of GM food and feed. Enforcement is scheduled to begin in April

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2004. The regulatory tolerance for EU-authorized GM traits is 0.9% and 0.5% for unauthorized GM traits that have already received a favorable risk assessment. Compliant traceability systems must be in place and must demonstrate that any traces of GM traits are adventitious and are technically avoidable. The impact of these regulations may be stricter testing of U.S. grain exports to meet these new regulations. If there were widespread acceptance of GM crops, it may reduce the need for grain testing.

During 2000, a genetic trait used in corn, known as Cry9C, or StarLink^®, which had been approved by the U.S. Environmental Protection Agency only for non-food uses, was discovered in food products. The impact of this discovery resulted in the need for growers, handlers, processors, shippers and exporters to test corn for the presence of StarLink^®. The Company’s Bt9 TraitChek^TM test was the first GM test validated by the U.S. Department of Agriculture. The Company worked closely with key grain processors worldwide to provide significant volumes of tests to meet the high market and regulatory demand and hence more than 2 million Bt9 tests were sold in 2001, becoming the Company’s largest selling product at that time. The StarLink^® issue brought to light the need for definitive genetic analysis and demonstrated that paper certifications as to genetic origin and concentration alone are inadequate. The U.S. Department of Agriculture’s Grain Inspection, Packers and Stockyards Administration (GIPSA) recommended that all corn seed sold for the 2001 planting season and parent lines to be used in 2001 seed production be tested for the presence of the StarLink^® protein. This recommendation expanded the market opportunities for the Company’s Bt9 testing products. With the removal of StarLink^® corn from the U.S. grain supply during 2000 and 2001, the Company’s sales of tests to detect StarLink^® corn diminished significantly in 2002 and 2003, while Company sales of test kits to test other traits have grown modestly.

Due to the StarLink^® incident described above and consumers’ sensitivity to the issue, there were very few new GM traits introduced into the marketplace in 2001 and 2002. During 2003 there was a renewed interest and introduction of new traits, and the Company continued to work closely with the major agricultural biotechnology companies toward development and commercialization of tests in line with their trait commercialization schedules. In 2003, the Company began to recognize broader adoption of testing for traits that had been commercialized in years prior. Tests for the Cry3Bb insecticidal protein have grown and are expected to grow. Cry3Bb is an insecticidal protein used to combat the corn root worm. The corn root worm is responsible for over $1 billion of crop damage and loss annually in the U.S. Conventional pesticides do not perform well on this pest. U.S. farmers are expected to widely adopt corn root worm traits as they become commercially available in 2004.

The Company has had strong sales efforts in Brazil since 2000. Brazil is a major agricultural country and the leading exporter of soybeans in the world, surpassing the U.S. in 2003 with over 27 million tons exported. Brazil had laws in place making it illegal to grow GM crops. In 2003, 8 million acres of GM soy was planted in Brazil, much of this done illegally from seed acquired via black market from Argentina. Due to the GM ban, countries importing non-GM soy products such as China and those from the European Union have increased their imports from Brazil. To assure that their raw commodities are free of GMO, testing is done at many grain elevators and crushing facilities throughout Brazil. Brazil is now the leading customer for the Company’s GM soybean test for Roundup Ready^® herbicide tolerance.

Increased testing in the Brazilian market during 2003 was primarily driven by the Brazilian government opening its regulations to the planting of genetically modified soy, which it had not allowed previously. In late 2003, the Company collaborated with Monsanto Company to develop a test that will be used to manage Monsanto’s value capture program in Brazil. This program is designed to alert grain elevators of trucks entering their facilities with GM soybean levels, containing Monsanto’s Roundup Ready^® trait, at or above 10%. Monsanto anticipates claiming over $50 million in royalties from Brazilian farmers that have planted seed without paying technology rights. This program will go into effect in 2004 and may have future impact in other countries where Monsanto has been unable to claim full value from their technology.

Trends in world food production include the use of second generation genetic technologies to give plants specific nutritional or other high-value consumer characteristics, collectively referred to as output traits. Food

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companies will be able to provide consumers with value-added products they will demand and food manufacturers will source these specialty products on world markets. The Company believes that it is well positioned to provide the analytical tools to allow food companies to purchase such premium products with confidence, due to its existing relationships with large agricultural biotechnology companies and the current success of its technology, particularly in the area of GM traits.

Mycotoxins. Mycotoxins are toxic metabolites produced by certain fungi that can infect and proliferate on various agricultural commodities in the field and/or during storage. The occurrence of these toxins on grains, nuts and other commodities susceptible to mold infestation is influenced by environmental factors such as temperature, humidity, and extent of rainfall during the pre-harvesting, harvesting, and post-harvesting periods. Mycotoxins may exhibit various toxicological manifestations; some are teratogenic, mutagenic and/or carcinogenic in susceptible animal species and are associated with various diseases in domestic animals, livestock, and humans in many parts of the world.

The USDA has developed action levels and advisory levels for certain mycotoxins. Testing is required to meet these regulatory requirements. The market for rapid mycotoxin testing is valued at approximately $25 million annually. Testing is done through ELISA methods, HPLC and other methods such as black light analysis.

The Company has developed and markets ELISA plate methods for aflatoxin, vomitoxin and fumonisin, the three major mycotoxins. These plate methods are quantitative and suitable for laboratory use. For 2004, the Company is marketing a line of five-minute simple, qualitative tests for use at grain elevators as screening mechanisms. These tests will be marketed to our existing customer base, specifically corn producers and distribution facilities. Historically, the Company has had very modest sales of these test kits.

Food Testing

Food Pathogen Testing. Pathogen specific testing is an increasingly important part of the microbiology tests performed in the global food industry. The world-wide rapid-method pathogen testing market is estimated to be $200 million according to independent studies. According to several independent studies, the pathogen testing market has been growing at a rate of 15%. That trend is expected to continue through 2005 and then expected to begin to slow to a rate of 10%. Growth in pathogen testing is driven primarily by regulatory changes, industry consolidation, and globalization of the world’s food supply.

In 2003, the Company continued to invest in the development and market introduction of products for the detection of pathogenic microorganisms in food. In the first year of market introduction, the Company’s test for E. coli O157 captured approximately 10% of the U.S. market. Our RapidChek^® E. coli O157 test and enrichment media have superior performance and ease of use characteristics when compared to other competitive immunoassay tests on the market.

Also during 2003, the Company released its Salmonella test, which received initial AOAC Research Institute approval in March 2003, and subsequently in August 2003, received AOAC validation to expand the applications of its Salmonella test to a variety of foods. The test detects the presence of the bacteria in 24 hours. Before adoption of a new test method for pathogen detection, most food companies require an internal evaluation of the test performance and ease-of-use in their sample matrix. The Company has developed a streamlined procedure for customer evaluations which it believes will speed the rate of evaluation and eventual adoption. Customer adoption of the Company’s Salmonella test has been slower than expected, which the Company attributes to the breadth and complexity of food matrices in this test segment and well-entrenched competitive assays. The Company continues to develop Salmonella assays for specific food matrices.

A typical food pathogen testing system consists of three parts; the enrichment of the food sample to culture the target pathogen, a screening assay to detect the pathogen, and a confirmation procedure to verify the presence of the pathogen. In 2003, the Company developed a novel method for the confirmation procedure. This method is

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unique to the RapidChek^® test kits and provides a time, labor, and cost advantage to the customer. This novel procedure allows the Company to offer its customers solutions for the entire food pathogen testing system. Early customer evaluations within the beef and poultry industries have been promising.

In 2003, the Company continued to develop a pathogen test for detection of Listeria in foods and environmental surfaces. In 2003, the USDA announced changes to regulations for Listeria testing in ready-to-eat foods which will require increased testing for this pathogen. The Company is continuing its development strategy to produce a test which has ease of use, cost, and performance advantages. A proprietary enrichment media with improvements in sample handling, labor, and time to result is being developed, and the Company expects to release this test in 2004.

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

During 2003, publicized cases of “mad cow” have been found in the United States, Canada and Japan. The market and regulatory environment in the United States, Canada and Japan continues to be in a state of flux. Food, feed and regulatory agencies are looking at the adequacy of current approaches but there have been no significant policy revisions or decisions to date. The Company continues to support and participate in policy discussions around the testing of animal feed. The Company has met with regulators and industry leaders to try and facilitate policy making. It appears, at the current time, that regulators and industry are currently focused on meeting the requirements under the USDA’s country of origin labeling (COOL) program, which includes information as to details of where an animal was born, raised, and slaughtered. This COOL program may or may not have an impact on whether feed testing is required, but it appears that without a logistical tracking system in place it would be difficult to institute widespread feed testing.

The Company’s test, known as FeedChek^TM, was designed to be more sensitive and easier to use than other rapid, on-site methods. Compared to certain competitive products, this test does not require weighing or boiling of samples. By eliminating these steps, the FeedChek^TM test is faster, easier to use and will not require equipment such as scales and heating devices. This method for animal feed has been designed with multiple tests per assay to address the various analytical requirements throughout the world. FeedChek^TM is the only test available which provides results for both mammalian meat and bone meal and poultry meal. Poultry meal is currently prohibited from use in cattle feed in Europe. It is not prohibited from use in the United States. The FeedChek^TM product has been shown to detect as little as 0.1% bovine meat-and-bone meal in feed. These product features are important to comply with feed specifications and governmental regulations throughout the United States, Europe and Japan. The Company’s FeedChek^TM test participated in a comparison study performed by the Joint Research Centre (JRC) of the European Union. The study findings demonstrated that the Company’s test had 100% sensitivity, specificity and accuracy when analyzing for total processed animal proteins, and was the only immunoassay method to provide this level of performance.

Water Quality

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

Microtox^®. The Microtox^® test system is a unique rapid acute toxicity test that detects a broad range of toxins and chemical agents in water. Microtox^® makes toxicity analysis simple and easy to perform and results can be generated in as little as 30 minutes. Microtox^® toxicity testing technology is used in drinking water,

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wastewater, environmental remediation, research and industrial applications around the world. With nearly 600 peer-reviewed scientific articles and more than 2,000 instruments sold worldwide, the Company believes that the Microtox^® toxicity test system is the standard for rapid toxicity screening and analysis.

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

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

Drinking water utilities will generally run toxicity tests on a daily basis and, in doing so, consume the Microtox^® reagent and other consumables necessary to run the test. This represents a recurring revenue source for this product line. A typical drinking water utility, testing three times per day, would consume approximately $15,000-$20,000 of reagents on an annual basis.

Currently in the United States, the Company believes that there are no other companies marketing a rapid bioluminescence based toxicity test, and only a few other companies who market a rapid toxicity test that is competitive with Microtox^®. However, we are aware of competitive programs outside the U.S.

The US EPA is currently considering adding Microtox^® to its approved list of toxicity test methods under the Whole Effluent Toxicity testing program. This is the regulatory program under which permitted waste dischargers, including the large number of municipal sewage treatment plants, are mandated to test their effluents on a regular basis and comply with regulated toxicity discharge limits. When and if this method becomes an approved method, this will open up a significant market for Microtox^®. The size of this testing market is estimated to be between $25-$30 million, however this consideration will also likely stimulate the entrance of numerous competitors into this market.

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

The RaPID Assay^® test kit marketed by the Company for one of these pesticides—Atrazine—was validated in 2003 by the US EPA under the Environmental Technology Verification program. The report confirmed the accuracy and reliability of the Company’s RaPID Assay^® test format for Atrazine and, in our evaluation of the data, is one of only two immunoassay products validated by this program showing acceptable performance for this application.

The Company believes that it offers immunoassay test kits for a far larger number of different pesticides or pesticide classes than any other company. This wide product offering is an advantage, especially in international markets, where a wide variety of pesticides (different from those applied in North America) may be used providing the Company with a wide market for our products.

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Immunoassays are specific for a particular pesticide or pesticide class. When a customer is analyzing for one pesticide or class, the advantages to using immunoassay include speed, ease of use, field portability, and cost per test. If a customer needs to analyze for multiple pesticides or pesticide classes, the use of immunoassay becomes less advantageous and laboratory analysis becomes more competitive. The Company markets its products to those users who are analyzing for a single class of compounds and who are in situations where speed to result, ease of use, field portability, cost per test, or some combination of these is desirable.

Environmental Remediation. Analytical testing is routinely done during environmental remediation projects as required by federal and state regulations such as the Resource Conservation and Recovery Act (RCRA), Superfund (CERCLA) other federal and state regulations in the United States and similar regulations internationally. Economic factors, such as the cleanup and re-development of urban real estate (“Brownfields”) also drive the demand for environmental remediation and testing. After initial discovery of a contaminated site, a substantial amount of analytical testing is typically required to complete a site characterization and to delineate the extent and location of the contamination. Upon the commencement of a remedial action project, additional testing is necessary to determine the effectiveness of the remediation measures. In addition, ongoing testing as part of a long-term monitoring program is frequently required at many remediation sites. The Company’s products are applicable at each of these stages of an environmental project.

The Company’s key user segments in these applications have been the largest environmental engineering and construction firms, the Department of Defense (including the US Army Corps of Engineers), the Department of Energy, NASA, NOAA, and many other major federal and state regulatory and research agencies.

Typical contaminants of concern at contaminated sites include petroleum and fuel-derived products, polycyclic aromatic hydrocarbons (PAHs), polychlorinated biphenyls (PCBs), dioxins, explosives, pesticides, and chlorinated solvents. The Company is currently marketing test kits for all of these contaminant classes.

The Company is seeing some new opportunities as agencies, such as the US EPA and the US Army Corps of Engineers, promote, and often require through contract mechanisms, the use of field analytical tools. The EPA and US Army Corps of Engineers are jointly promoting what they call the “Triad Approach” which uses immunoassay and other field analytical systems to increase the accuracy and reduce costs on environmental projects. In public presentations and publications promoting the use of field analytical tools, US EPA and US Army Corps of Engineers officials often cite successful field sampling projects referring to the Company’s products by trade name. This has the potential to expand the market for immunoassay and field analytical kits in general, and specifically those products marketed by the Company. In one frequently used example, EPA cites the use of the Company’s RaPID Assay^® and EnviroGard^® products at a project in the State of Washington where the use of the Triad Approach reduced the project’s analytical cost to $589,000, from an estimated $1,200,000 that would have been required using a traditional site characterization approach and laboratory-based analytical methods. Continued promotion of this program is expected and may stimulate demand for the Company’s products. That said, the Company believes the overall market for remediation products is shrinking at approximately 4% per year, due to weak general economic conditions and lower levels of Federal funding to support remediation projects in this area.

Environmental Contaminant Test Products. The Company sells different format immunoassay product into the environmental market including latex particle-based tests, coated-tube tests, magnetic particle tests and microtiter plate tests. Each of the four different test formats has performance characteristics that make them more or less suited for a particular customer application. The Company positions the sale of all of its products so as to provide the customer with the best product for its specific application.

All of the environmental test kits include components for the extraction of target analytes from the sample matrix (typically soil or water) and subsequent analysis. Sample preparation time is typically less than five minutes per sample. All of the Company’s environmental test kits are capable of analyzing multiple samples and some allow analysis of as many as forty samples per hour.

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Other Assays

RapidChek^® SRB. Sulfate Reducing Bacteria (“SRBs”) are environmentally significant because they generate hydrogen sulfide gas and cause corrosion of stainless steel pumps, pipelines, and drilling rigs and result in the souring of oil reserves. SRBs can be controlled by the addition of treatment chemicals. Historically, the majority of testing in this market was performed using a culture method called the American Petroleum Institute Recommended Procedure No. 38. This method requires that samples be incubated from 14-28 days before a result is obtained. RapidChek^® SRB test is a simple-to-use, field portable test that provides the user with accurate results in 20 minutes and allows for a rapid, more cost-effective application of treatment chemicals. Although the Company believes there is a large market for SRB testing, to date the Company has not sold a significant amount of these tests.

Antibody Products

The Company develops, manufactures and markets a comprehensive set of monoclonal and polyclonal antibody products and services. Specific expertise includes hybridoma development and cell culture expertise, large-scale ascites and antibody production, large-scale purification, characterization and a complete array of related services.

These products are sold to a wide range of customers including pharmaceutical, biotechnology and diagnostic companies and major research centers in the United States, the European Union and the Pacific Rim. The Company believes it is one of the largest independent custom antibody operations in the United States. Throughout the Company’s history, many product development agreements have progressed from research projects to long-term supply arrangements. The comprehensive customer base of this division has the potential to provide an even greater number of these meaningful opportunities. The Company believes the size of the market where its technology and products apply to be $160 million on an annual basis and it is highly fragmented.

Continuing work on the human genome project by our biotechnology customers has provided an opportunity for increased sales to these customers. The study of gene functionality is often examined at the protein level, and antibodies, which naturally bind to proteins, are critical tools in building on this new knowledge. Going forward, the Company believes that, as work continues on this project, it will provide a unique opportunity for the Company to build on our existing market share.

The Company received AAALAC (Association for the Assessment and Accreditation of Laboratory Animal Care) accreditation at its Maine polyclonal antibody facility in October 2000. The Maine site now joins the Delaware facility, which has maintained AAALAC accreditation since 1993, in offering products and services which meet the highest quality standards in the industry.

In the fourth quarter of 2003, the Company took a non-cash charge of $3.0 million in connection with the write-down of certain inventories. The write-down primarily reflects the Company’s decision to exit its “catalog” antibody business and to focus on its custom and made-to-order sales of antibody products. This non-cash charge is a result of the Company undertaking a strategic review of its operations in a manner designed to ensure the Company focuses its resources on its most promising growth opportunities. The Company’s evaluation included, but was not been limited to, the efficiency and effectiveness of the Company’s sales operations and manufacturing processes, the Company’s product offerings, the Company’s key channels to market, the size and opportunities within the principal markets targeted by the Company as well as those presented by the Company’s existing customer base. The goal of this effort was to improve operational and supply chain efficiencies of the Company.

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Sales and Marketing Strategy

The Company sells products in the food safety, water quality and antibody market categories through a small direct sales force, a network of over 50 distributors in Canada, Mexico, Latin America, Europe and Asia and its corporate partners. The Company has a sales organization of 21 individuals. The Company also has a European headquarters and sales operation near London, England.

In the U.S., the major route of sale is through a national field sales force in defined sales territories. The field sales force is augmented by an in-house sales force and customer service function, which in addition to selling product directly to customers, provides marketing and logistics support to the field sales personnel and interfaces between customers and technical support.

The Company recently began evaluating the efficiency and effectiveness of its sales effort, as well as its distributor network, in order to determine the based channels to market. Early findings showed a majority of the effort was focused on customer service rather than outbound sales calls. The Company has instituted metrics in order to measure the productivity of its direct sales force, including sales call and prospect reporting, sales pyramids and time engaged in direct customer contact.

Competition

Many of the Company’s potential competitors are large companies with substantially greater financial and other resources than the Company. To the extent that any such companies enter into one or more of the Company’s markets, the Company’s operations could be materially adversely affected. The Company anticipates increased competition as potential competitors perceive that the Company’s markets have become commercially proven.

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

Other companies may be developing additional products for one or more of the Company’s markets that could be competitive with the Company’s products. The Company believes none of these competitors have products that compete with all of the Company’s products in the food safety market. Additionally, the Company has exclusive rights to products developed by Syngenta Crop Protection and is the sole provider of other GM tests. The Company believes that the breadth of its product offerings in the food safety market, the expertise it has accumulated in developing tests for GM traits in the food safety market, the relationships it maintains with the developers of new genetically modified plant varieties and the extensive customer relationships it has assembled throughout the agricultural seed, grain and food processing industries are all significant competitive advantages.

In food pathogen testing, the Company is the new entrant to the market and faces a wider base of competition. The world-wide rapid-method pathogen testing market is estimated to be $200 million annually and as such has drawn competitive products. The Company’s RapidChek^® E. coli O157 and Salmonella tests will compete globally with numerous competitive rapid testing systems. Instrument-based tests are offered by bioMerieux SA and Dupont Qualicon among others. Competitive lateral flow tests are offered from Neogen Corp., BioControl Systems, Inc., Tecra Holdings Pty Limited and others. In addition, traditional lab culture methods offer direct competition. The Company hopes to gain market share from competitive methods and with new users due to key product advantages such as speed of result, ease-of-use and accuracy.

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There is no direct competition for the Company’s Microtox^® product line in the United States. In Europe and other parts of the world, the Company competes against one other instrument based test method produced by Dr. Bruno Lange GmbH & CO, an affiliate of The Donaher Corporation, which has greater technical and marketing resources than the Company. The Company believes its products have a number of competitive advantages including the comprehensive screening for general toxicity and competes effectively on superior features and functions.

Currently, the Company believes that there are no similar competing immunoassay products for the Company’s SRB, proprietary chemical, industrial marker or water treatment polymer tests. The Company holds U.S. patents relating to the SRB tests and believes they will help to provide a competitive advantage in the event that competing products enter the market. The Company’s water treatment polymer tests are unique to the industry and the Company has secured U.S. patents and an exclusive technology license and believes that such property will help to provide a competitive advantage in the event that competing products enter the market.

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

Regulatory Approvals

The environmental legislation and regulations that the Company believes are most applicable to its current business are RCRA, CERCLA, TSCA, FIFRA and the Pure Food and Drug Act. For analysis of water and wastewater, the Safe Drinking Water Act, the Clean Water Act and the NPDES permitting program under the Clean Water Act also will be significant to the Company’s business. As the utility of the Company’s Microtox^® products continues to be widely recognized in drinking water security applications, regulations and mandates associated with Homeland Security programs may also have an impact on the Company’s business. Collectively, these programs regulate the management, disposal and clean-up of hazardous substances and protect the nation’s ground and surface water and drinking water supplies. In addition, regulatory responsibilities in a number of areas have been delegated to state agencies and state and local laws and regulations impose additional restrictions and requirements. While environmental regulations overseas vary, many countries, particularly those in Europe, have counterparts to the U.S. legislation.

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

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

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

Other Testing Methods. Tests for bacterial food pathogens, mycotoxins, genetically engineered traits in plants, and water treatment polymers are currently unregulated. However, agencies such as the EPA, the FDA and the Food Safety and Inspection Service of the U.S. Department of Agriculture are engaged in testing environmental samples and, together with the AOAC Research Institute, maintain compilations of official methods for use in testing for environmental contaminants in certain market segments. Some of these organizations also issue procedures and guidelines for validating new methods. Although not required, official methods adopted by these agencies sometimes have the impact of regulated facilities following the practice of the agency.

Manufacturing

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

The Company also supplies a wide array of custom antibody products and services to the in-vitro diagnostic, academic and medical research industries. Antibodies are developed and produced using live animals or cell culture methods. Polyclonal antibodies are routinely produced in goats, rabbits, chickens, mice, guinea pigs and other rodents. Monoclonal antibodies are typically produced in mice and cell culture.

Animal facilities house isolated specific pathogen free animal colonies or herds. The animals are routinely tested to assure they are free from disease and are isolated from conventional colonies or herds. The isolated colonies or herds are less likely to acquire catastrophic diseases. The animal facility in Windham, Maine maintains a USDA Class B dealer’s license. Both the polyclonal production facilities in Windham, Maine and the mouse facility in Newark, Delaware are AAALAC accredited.

AAALAC is a private nonprofit organization that promotes the humane treatment of animals in science through a voluntary accreditation program. AAALAC stands for the “Association for Assessment and Accreditation of Laboratory Animal Care.” The Company volunteers to participate in AAALAC’s program, in addition to complying with the local, state and federal laws that regulate animal research. The accreditation requires the Company to meet high standards demonstrating our commitment to responsible animal care and use. The Company utilizes the accreditation as a marketing tool as well as an infrastructure tool for the caring for valuable animals. Other antibody services include cell banking, cell line testing, antibody purification, conjugation, and fragmentation.

The key manufacturing processes are instrument production, critical reagent and in-process testing, filling and dispensing, lateral flow strip production, kit assembly, quality control, packaging and shipping. The Company produces the Microtox^® test systems from its manufacturing facility in Oceanside, California. The technical manufacturing group produces critical reagents from its laboratories in Newark, Delaware and the sub-assemblies and finished kits are manufactured and shipped worldwide out of the Company’s headquarters facility in Newark, Delaware.

Biological materials are primarily developed and produced in-house, however, some reagents are licensed from third parties or purchased from commercial sources. A crucial step in the Company’s manufacturing process is the stabilization of the immunoreagents utilizing proprietary lyophilization techniques. In general, raw materials used by the Company in its products are obtainable from multiple sources. The Company purchases instruments and ancillary equipment from outside vendors. A number of the instruments sold by the Company were developed to be used exclusively with the Company’s products and are subject to specific supply

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agreements. The Company believes that the raw materials, instruments and equipment used in the manufacture of its products are adequately available for the Company’s current and foreseeable manufacturing needs.

The Company manufactures certain products in accordance with FDA’s Good Manufacturing Practices guidelines and has implemented data driven problem solving and statistical process controls to continuously improve quality and performance. The Company utilizes an integrated Manufacturing Resource Planning (MRP) tool to control all elements of the supply chain and manufacturing processes; including raw material procurement, inventory management, capacity planning and production scheduling, work-in-process tracking, order processing, shipping and customer invoicing.

During 2002, the Company maintained separate manufacturing organizations for the test kit and antibody operations. In early 2003, the Company combined these groups to more efficiently deploy its scientific, technical and labor resources. By combining work centers and groups, the Company is able to manage its operations with a flatter, more streamlined structure than before this combination. The Company believes the existing facilities and equipment are sufficient to support a significantly larger manufacturing base. Manufacturing operations are currently running one shift.

Research and Development

The Company engages in substantial research and development activities involving antibody and immunoassay development. In the three years ended December 31, 2003, 2002 and 2001, the Company incurred approximately $2.6 million, $3.3 million and $3.0 million, respectively, in research and development expenditures, principally for test kit products. Research and development expenses decreased $695,000 in 2003, primarily due to higher expenses in the prior year associated with the development efforts of the Company’s food pathogen and animal feed test, and continued emphasis on devoting research and development resources to internal projects rather than undertaking contract research projects for third parties.

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

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

To the extent the Company believes that improvements to existing prod