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Article by DailyStocks_admin    (03-05-08 01:46 AM)

Firebrand Partners and Harbinger Capital Partners are seeking representation on the board of the New York Times. The pair of hedge funds said that they have raised their stake to about 16.9 million (11.82%) shares, after a Harbinger fund bought 793,000 Class A shares for $18.71 each on Feb. 15.



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

The Company develops, manufactures and markets antibodies, antibody products and analytical test kits to a diverse customer base, across multiple industrial and human health markets. By applying its core competencies of creating custom antibodies and assay development, the Company produces unique, sophisticated diagnostic testing and reagent systems that are responsive to customer diagnostic and information needs. Customers benefit with quantifiable "return on investment" by reducing time, labor, and/or material costs associated with applications for which the Company's products are used. In addition, the Company believes its tests provide high levels of accuracy, reliability and actionability of essential test results as compared to alternative products. The Company is focused on sustaining profitable growth by leveraging its expertise in immunology, proteomics, bio-luminescence and other bio-reactive technologies to successfully develop proprietary products and services that enhance the competitive advantage of its customers.

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

The Company currently meets its customers' needs through two divisions, bio-services and industrial bio-detection services, which are described as follows:


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

The use of antibodies is a proven methodology used in research and diagnostics, and is of particular importance in proteomics, a rapidly growing segment of the Life Sciences market which involves the large-scale study of proteins, particularly as they relate to human conditions such as, among others, cancer, cardiovascular disease and neurological disorders.


SDI's detection technologies allow industrial customers to rapidly and cost-effectively identify the presence of pollutants, such as chemical toxins, biological pathogens and other contaminants, that can compromise human or environmental safety, and/or financially impact efficiencies of production processes. Many of SDI's products in this area are in the form of single use test devices, sample prep materials and reagents, thus creating recurring revenue opportunities. Specific industry applications include:

o FOOD AND BEVERAGE MANUFACTURING: Systems for high efficiency testing for the identification of pathogens and toxins in food, water and the manufacturing environment.

o WATER UTILITIES: Drinking water tests for chemical toxins, metals, and pathogens. Pollution control tests for effluent toxicity, pesticides, metals and efficiency maintenance in biological processing systems.

o ENVIRONMENTAL MANAGEMENT: On-site testing systems to increase the speed and accuracy of environmental remediation of soil and ground water pollutants.

o AGRICULTURE AND AGRO-SCIENCE: Systems for the detection, identity preservation, and quantification testing of genetically modified organisms, and test systems for feed and grain safety testing, including for the presence of mycotoxins.

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

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

The Company has adopted a Code of Ethics, within the meaning of applicable SEC rules, applicable to its Chief Executive Officer, Chief Financial Officer, Controller and other corporate officers and directors. The Code of Ethics is available on the Company's internet home page and is further available, free of charge, by sending a written request to the Company's Investor Relations Department. If the Company makes any amendments to this Code (other than technical, administrative, or other non-substantive amendments), or waives (explicitly or implicitly) any provision of the Code of Ethics to the benefit of our Chief Executive Officer, Chief Financial Officer, Controller and other corporate officers and directors, it intends to disclose the nature of the amendment or waiver, its effective date and to whom it applies in the investor relations portion of the website, or in a report on Form 8-K that filed with the SEC.


Genomic Antibodies(TM) are antibodies that result from the process of immunizing an animal with a gene that then instructs the animal to produce an antigen (referred to as genetic immunization or DNA immunization). Traditional methods of antibody production use protein-based antigens that are produced in the laboratory and injected into animals resulting in the production of antibodies. The most popular forms of protein-based antigens include recombinantly produced protein and synthetic peptides. Producing protein-based antigens is a limitation in antibody production because the antigen is often of poor quality. Producing quality protein antigen is very expensive, time consuming and difficult to automate. The Genomic AntibodicsTM technology promotes high quality antigen expression allowing for the production of high performance antibodies on a high throughput, cost effective basis.

In principle, DNA immunization technology has been developed over more than 15 years and offers many advantages over the traditional method. DNA is inherently far easier, and less expensive to manufacture than protein allowing high throughput and faster production, uniform lots and a high success rate. The resulting antigen that is expressed from the DNA is superior to the traditional recombinant protein or peptides in terms of the ability to generate antibodies that recognizes the natural target protein.

Although DNA immunization is known to many researchers, it has not been widely utilized because known approaches produced very low yields of antibodies. The Genomic AntibodicsTM technology differs from previous DNA immunization technologies in that it has been extensively optimized to produce high levels of antibodies. The system that has been developed at SDI contains multiple proprietary components. These include; antigen design, DNA design and construction, antigen expression plasmids, adjuvants to boost the antibody yields, DNA delivery methods, immunization protocols, and a system for generating protein used to test the antibody. Immunoassay platforms to validate the resulting antibody, methods to purify the antibody, and procedures for generating labeled- antibody reagents have also been developed and are all integral components of high throughput proteomic assay platforms such as microarrays. The system covers all aspects of antibody production from target sequence selection through to delivery of highly characterized antibody reagents ready for use in an immunoassay. The high throughput nature of the technology coupled with SDI's extensive animal facilities gives the Company the capability to produce antibodies to proteins from any gene from any organism in unprecedented numbers and speed. High throughput and superior quality make Genomic Antibodies ideal for use in biomarker discovery and pharmaceutical drug target discovery and validation programs.


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 30 years ago and is a cornerstone of laboratory diagnostic testing in the medical industry. Therapeutic drug monitoring, drugs of abuse testing, hormone tests, infectious disease testing (e.g., AIDS and hepatitis) and pregnancy testing are all based on immunoassay and employ antibodies as critical reagents. The Company has taken this same technology that has developed in the medical diagnostics arena and applied it to a variety of industrial and agricultural applications. As with medical applications, immunoassay technology has demonstrated its value in these markets by virtue of its ability to yield reliable, accurate, cost-effective and timely results in a manner previously unavailable.

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. Antibodies are found in high concentrations in the blood of immunized animals. The attributes of antibodies that are useful in diagnostic tests are: that they physically bind only to the substance that elicited their production and that the binding is very strong. This characteristic of specific binding (specificity) makes antibodies useful tools for detecting substances in complex samples such as blood and other human samples, plant tissue, soil and water. Strong binding enables detection of substances at very low concentrations (sensitivity). Methods exist for isolating and purifying antibodies from immunized 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 diagnostic 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'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(R), SeedChek(TM), FeedCheck(TM), RaPID Assay(R), EnviroGard(R), and D TECH(R).


Bacteriophage, or phage, are viruses that infect bacteria. They are highly specific for the type of bacteria that they infect and do not infect any other living cell from any other organism including animal, plant, fungus or yeast. The specificity of phage is so high that a given phage will only infect certain types of bacteria. The life cycle of certain bacteriophage, known as lytic phage, involves binding of phage to bacterial cells and injection of their genetic material into the bacteria where it commandeers the host's cellular processes. The phage genes direct the production of large numbers of new phage particles and ultimately cause the bacterial cell to burst, or lyse, releasing large numbers of new phage to the surrounding environment. In the process of replication, lytic bacteriophage kill their bacterial host and rapidly amplify their numbers. The replication cycle may be as short as 20 minutes and the number of phage released from an infected cell may be anywhere from 10 to 10,000. Subsequent rounds of replication result in an exponential increase in the number of infectious phage and a rapid and dramatic decline in contaminating bacteria.

Because lytic bacteriophage specifically kill their bacterial hosts and not other living cells, purified preparations of phage have been used medicinally to treat bacterial infections of plants and animals, including humans. The Company has filed patent applications claiming the use of specific lytic bacteriophage to control contaminating bacteria in large scale industrial fermentation processes such as ethanol production. In these processes, a production organism, such as yeast in the case of ethanol production, is used to convert sugar derived from non-sterile feedstocks like ground corn into ethanol. Normal soil bacteria contaminating the corn also thrive in these conditions, compete for nutrients, release unwanted byproducts into the reaction and reduce process efficiency and yield. The large-scale use of antibiotics to control harmful bacteria can have a negative effect on the production organism, is undesirable because it leads to bacterial resistance to important antibiotics, and is limited by federal regulations governing their use. The Company's scientists are actively engaged in the development of specific bacteriophage reagents to control bacterial contamination in large-scale industrial processes.

The Company is also applying its bacteriophage technology in its test kit products for the detection of bacterial food pathogens, including its newly commercialized Salmonella product. The process of testing food for the presence of pathogenic bacteria requires that a food sample be cultured in a liquid growth medium for some requisite time prior to testing with an analytical method such as the Company's proprietary immunoassays. During this "enrichment" phase, the target pathogenic bacteria are encouraged to grow and multiply, however, other non-pathogenic bacteria also present in the sample grow and compete for nutrients. Often when present, pathogenic bacteria occur in very low numbers in food and in a background of much greater numbers of non-pathogenic bacteria. In such instances, the non-pathogenic bacteria can out-compete the pathogenic bacteria, leaving them undetectable by the analytical method and giving rise to falsely negative results. In other cases, the analytical method may "crossreact" with non-pathogenic bacteria giving rise to false positive results. The Company has filed patent applications claiming the use of bacteriophage to control competing and crossreacting bacteria, thereby reducing false positive and negative results and improving analytical test performance.


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

The Company's basis for identifying sales by country is the ship-to location. There were no individual countries outside of the United States that represented more than 10% of the total revenues of the Company. There are no significant long-lived assets located outside the United States.


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

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

The human genome project carried out over the past 15 years has been a major driving factor in the emergence of the study of proteomics. With a new knowledge of genomes (human and other species), the biomedical research community is exploring many new proteins, their functions and the clues they reveal about human and animal health. The study of gene and protein functionality often requires the use of antibodies, which naturally bind to proteins. The Company believes that proteomics research, and products developed out of the proteomics effort, offer the Company an attractive opportunity to explore new initiatives to build revenues in the antibody product group around proteomics. Antibodies are used by customers as tools on the path to discovery as well as the key component in some products.

In March 2005, the Company announced a strategic initiative to develop a high throughput antibody reagent production service designed to enable rapid discovery and commercialization of products for customers in the proteomics, pharmaceutical, diagnostics and biological research industries. The Company estimates the total market opportunity for antibody services available to SDI, through SBS, to be $300 million. Management anticipates that adjacent technologies have the potential to substantially expand this opportunity as the market evolves. The Company has hired two leading scientists widely recognized for their work in the development of genetic immunization and associated processing technologies for the high throughput production of high purity, high reactivity antibodies to oversee this initiative out of the Company's molecular biology research and production facility in Dallas, Texas.

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

In 2006, the Company further developed products and service offerings designed to be valuable tools for the target markets. The Company experienced substantial progress in the Genomic Antibodies(TM) technology demonstrating that the antibodies made by SDI's exclusive proprietary technology were superior to those made by conventional methods. Several high profile customers found success with Genomic Antibodies(TM) after having none with conventional methods. These antibodies went on to be key tools that enhanced their research or product development efforts.

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

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

In January 2006, the Company announced a positive conclusion to initial customer trials involving the Genomic Antibodies(TM) product. These "beta" tests have validated the high throughput, highly optimized production processes for mouse polyclonal antibody reagents for use in research and discovery. These antibody reagents are the first products the Company has released on this important new technology platform.


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


Pathogen specific testing is an increasingly important part of microbiology testing performed in the global food industry. The world-wide market for rapid method pathogen tests is estimated to be between $200 and $300 million according to independent studies and the Company's own market research. The market for proprietary enrichment media is estimated to be between $50 and $100 million. According to several independent studies, the market for pathogen tests has been growing at an average annual rate of 8% through 2006. However, market research also suggests that annual growth has slowed in this segment. Growth in pathogen testing is driven primarily by regulatory changes, customer sampling practices, industry consolidation, and globalization of the world's food supply.

Since 2001, the Company has invested in the development and market introduction of products for the detection of pathogenic microorganisms in food. In 2002, the Company introduced its first test method for the pathogen E. COLI O157:H7. This product has received ongoing market acceptance in the United States. In 2005, the Company was notified that its RapidChek E. COLI O157:H7 assay had been selected as the assay method of choice for the National School Lunch Program for screening raw and frozen beef for the organism. The National School Lunch Program is a federally-assisted meal program that operates in over 97,000 public and non-profit private schools and residential childcare institutions. The United States Department of Agriculture (USDA) is responsible for determining that the meat produced for the National School Lunch Program is safe. In addition, the RapidChek test for detection of E. COLI O157:H7 was selected by the Food Safety Inspection Service (FSIS) as an approved methodology for screening of the organism in raw beef samples. The FSIS section of the USDA conducted a rigorous evaluation of rapid methods that are currently on the market for screening pathogens, including polymerase chain reaction (PCR), and automated/manual immunoassays and benchmarked kit performance against the current USDA traditional cultural method. The RapidChek E. COLI O157:H7 method was evaluated and determined to be the "best in class" against the other immunological methods tested. RapidChek has been placed on the approved USDA list as one of only two immunoassays that is recognized for use for screening raw beef for E. COLI O157:H7. The Company believes that the acceptance of its method by the agencies regulating Food Safety will increase sales as producers seek to use methods that have been evaluated and accepted by the regulatory agencies.

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

In August 2006, the Company launched its new RapidChek SELECT SALMONELLA test with AOAC-RI approval at the International Association of Food Protection Meeting (IAFP) in Calgary, Canada. This novel test is based on a patent pending phage technology combined with SDI's next generation lateral flow technology and is set to revolutionize the SALMONELLA testing arena. The RapidChek SELECT test was developed to meet some of the challenges faced in SALMONELLA testing, including high false positive and negative rates, which can be particularly prevalent in high burden samples. The patent claims technology that increases both the specificity and sensitivity of rapid pathogen tests. The SALMONELLA SELECT test has been evaluated and adopted by several large food producers and with several additional evaluations underway, this successful rate of adoption for 2007 is expected to continue.

In September 2006, the RapidChek SELECT SALMONELLA test was the first lateral flow test approved for the National Poultry Improvement Plan (NPIP), and will provide an attractive alternative to current methods used such as labor intensive cultural methodologies. This same patent also makes important claims for composition and methodology associated with the enrichment and control of production organisms in large scale industrial bio-processing applications. The Company intends to develop these applications for licensing purposes during early 2007.


benefits the Ronald McDonald House Charities. Mr. Lotman is also a board member of The Children's Cancer Research Foundation of Philadelphia, Ronald McDonald House Charities, The Penn Companies (Penn Emblem) and the Board of Trustees of The Philadelphia College of Osteopathic Medicine.

CLIFFORD L. SPIRO served as a director of the Company since 2006. Dr. Spiro currently serves as the Vice President of Research and Development for Cabot Microelectronics Corporation, the leading supplier of chemical-mechanical-plana rization technologies that are critical to the successful production of semiconductors and data storage devices. In 2001, Dr. Spiro was named Vice President of R&D for the Nalco subsidiary of Suez Corporation, a leader in water, paper, and energy chemicals. From 1980 through 2001, he held a series of progressively responsible research and management positions at General Electric Company. Dr. Spiro holds 19 US Patents and has published 80 scientific articles and coauthored 55 conference presentations. He has served as a Director on the Board of the Mississippi Polymer Technologies Corporation and Maxdem Corporation. Dr. Spiro received a B.S. degree with honors in chemistry from Stanford University and a Ph.D. degree in chemistry from Caltech.

STEPHEN L. WAECHTER has served as a director of the Company since 2002. Mr. Waechter served as Executive Vice President, Chief Financial Officer and Treasurer of CACI International Inc, a leading provider of information technology services and solutions, from April 1999 through January 2007. From 1997 to 1999, he served as Executive Vice President, Chief Financial Officer and Treasurer of GTSI, Corp., a provider of integrated information technology solutions. Mr. Waechter serves on the Advisory Board of the Junior League of Northern Virginia. He holds a B.A. in History from Christian Brothers College and received an M.B.A. from Xavier University.


(2) Includes 1,159,400 shares held by various entities under the control of Mr. Lotman and Mr. Lotman's spouse, and 57,334 shares underlying options, all of which are currently exercisable.

(3) Includes 45,334 shares underlying options, all of which are currently exercisable.

(4) Includes 101,000 shares held by family members of Mr. Collins and 65,334 shares underlying options, all of which are currently exercisable.

(5) Includes 313,800 shares underlying options, all of which are currently exercisable.

(6) Includes 221,300 shares underlying options, all of which are currently exercisable.

(7) Includes 45,334 shares underlying options, all of which are currently exercisable.

(8) Includes 57,334 shares underlying options, all of which are currently exercisable.

(9) Mr. Fronczkowski joined the company as an executive officer on January 15, 2007.

(10) Includes 65,000 shares underlying options, all of which are currently exercisable. Mr. Simonetta was an executive officer through January 5, 2007.

(11) Includes 52,000 shares underlying options, all of which are currently exercisable.

(12) Includes 5,299 shares underlying options, all of which are currently exercisable.

(13) Mr. Rumble was an executive officer through July 7, 2006.

(14) Includes 928,069 shares underlying options, all of which are currently exercisable.

(15) The Company has relied solely on a Schedule 13G dated February 8, 2007 for this information.

(16) The Company has relied solely on a Schedule 13D dated April 7, 2006 for this information.

(17) The Company has relied solely on a Schedule 13G dated February 14, 2007 for this information.




Revenues: Revenues for the year ended December 31, 2006 increased 2.7% to $25.5 million, compared to $24.8 million for the same period in 2005.


Water and environmental products revenue increased 1.2% to $5.2 million for the year ended December 31, 2006, compared to $5.1 million for 2005 and increased 2.2% to $1.22 million for the fourth quarter of 2006, compared to $1.19 million for the same quarter in 2005.

Sales of water and environmental products increased 10% in foreign markets, excluding the effects of foreign currency translation, for the year ended December 31, 2006 when compared to the year ended December 31, 2005. This increase was primarily due to increased sales of water testing equipment and supplies into China. The increased sales into foreign markets were partially offset by a 3.2% decline in sales in the U.S. domestic market during the comparable year period.


For the year ended December 31, 2006, food safety revenues were $9.2 million, compared to $9.0 million for 2005, an increase of 2.6%. Food safety revenues were $2.8 million in the fourth quarter of 2006, compared to $2.3 million in the fourth quarter of 2005, an increase of 21.1%.

Sales of tests for food pathogens grew 14.5% from $3.3 million to $3.7 million when comparing the years ended December 31, 2005 and December 31, 2006. This increase is due primarily to increased sales of the Company's tests for Listeria which the Company launched in mid-2004.

Since 2001, sales of the Company's product for the StarLinkR trait have dropped from $5.4 million to approximately $871,000 in 2006. The Company expects sales of this product to ultimately cease entirely.


Antibody revenues increased 3.5% to $11.1 million in the year ended December 31, 2006, compared to $10.7 million for 2005, and increased 24.2% to $3.0 million for the fourth quarter of 2006, compared to $2.4 million for the same quarter in 2005.

The fourth quarter 2006 increase resulted from an increase in demand for monoclonal products and services, an increase in demand for bulk antibody products and deliveries of custom Genomic Antibodies(TM) projects. Management is encouraged by the overall increase in volume and margin but continues to recognize that the "bulk" monoclonal and polyclonal segments of the business have inconsistent order patterns and may produce periodic spikes in revenue. Overall, production capacity and utilization of production capacity increased in 2006; a trend that is expected to continue.


Gross profit for the year ended December 31, 2006 totaled $13.8 million, as compared to $13.4 million for 2005. Gross margins were 54.1% for both years presented.

For the year ended December 31, 2006, operating expenses increased 3.2% to $24.9 million, compared to $24.17 million in the same period in 2005.

For the year ended December 31, 2006, research and development spending was $2.6 million, or 10.3% of revenues, compared to $3.0 million, or 12.2% of revenues, for 2005. This decrease was primarily the result of approximately $398,000 in spending during 2005 related to upgrades to the Microtox(R) equipment software.

Selling, general and administrative expenses were $10.6 million for the year ended December 31, 2006, compared to $9.7 million for 2005. This increase is primarily attributable to marketing efforts utilized to launch the Genomic Antibodies(TM) product and the cost of a detailed review of the Company's business and opportunities for growth by an outside consulting group.

INTEREST, NET: The Company recorded interest income of $386,000 during 2006 compared to interest income of $207,000 during 2005. This increase is primarily due to increased interest rates received on invested funds in 2006.

Pre-tax income totaled $966,000 for the year ended December 31, 2006, compared to $880,000 for 2005.

INCOME TAXES: The Company's annual effective tax rate of 29.2% for 2006 primarily reflects the federal statutory rate of 34%, state income taxes net of U.S. Federal benefit of 6.2% and research and development credits of 14.6%.

Net income for the year ended December 31, 2006 was $684,000, or $0.03 per diluted share, compared to $584,000, or $0.03 per diluted share, for 2005. Diluted shares totaling 20.1 million and 19.9 million were used in the computations for 2006 and 2005, respectively.


Results of Operations
Three Months Ended September 30, 2007 versus Three Months Ended September 30, 2006
Revenues for the third quarter of 2007 were essentially unchanged from the third quarter of 2006 at $6.6 million for each reporting period. Revenues for the third quarter were positively impacted by a 15% increase in sales of antibody products and a 24% increase in sales of the Company’s food pathogen testing methods in the third quarter of 2007 as compared to the same period in 2006. These increases were offset by an accelerated but anticipated decline in the Company’s legacy Ag/GMO business of 49% as compared to the third quarter of 2006.
Operating expenses for the third quarter of 2007 increased 4% to $6.4 million, compared to $6.2 million for the third quarter of 2006. This increase is primarily attributable to a 14% increase in selling, general and administrative expenses a 9% increase in research and development expenses and a loss of $108,000 on disposal of equipment partially offset by a 10% reduction in manufacturing expenses all as described below.
The Company continued to demonstrate ongoing improvement in gross profit (defined as total revenues less manufacturing expenses) stemming from a favorable shift from lower margin revenue, such as Ag/GMO sales, to higher margin antibody and food pathogen revenues. For the quarter ended September 30, 2007, gross profit totaled $3.9 million, as compared to $3.7 million for the same period in 2006. Gross profit margins were 59.4% for the third quarter of 2007 compared to 55.2% for the same period in 2006, an 8% increase.
Research and development costs for the third quarter were $723,000, a 9% increase from $666,000 in the prior year period. These costs constituted 11.0% of revenues compared to 10.1% in the prior year. Increases in R&D were primarily associated with the Company’s new Genomic Antibodies ® Technology (GAT™) platform as well as ongoing development of the ethanol application of its bacteriophage technology for the selective control of lactic acid producing bacteria.
SG&A expenses increased to $2.9 million in the third quarter of 2007, a 14% increase from $2.5 million in the third quarter of 2006. As a percentage of sales, SG&A expenses were 44.2% of revenues for the third quarter compared to 38.4% in the prior year. The Company continues to invest in the development of its sales, marketing and customer service capabilities increasing staff 14% during the quarter.
The Company recorded a loss on disposal of fixed assets totaling $108,000 in the 2007 quarter, related to the disposal of manufacturing equipment that was no longer fit for use. This equipment was replaced during the quarter with a new capital purchase.
The Company recorded net interest income of $109,000 in the third quarter of 2007 compared to $101,000 in the prior year third quarter. The increase was primarily due to increased interest rates received on higher levels of invested cash during the 2007 period, partially offset by increased interest expense from the $2.0 million term loan financed in August 2007.
Pre-tax income totaled $275,000 for the three months ended September 30, 2007 compared to pre-tax income of $551,000 for the same period in 2006, a decrease of 50%. This decrease was primarily attributable to the increased R&D and SG&A costs as well as the costs for disposing of equipment unfit for use, all as described above.
The Company’s effective tax rate was approximately 100% for the three month period ended September 30, 2007 and approximately 40% for the three month period ended September 30, 2006. The 2007 expense also includes additional expense of approximately $158,000 associated with the reconciliation of the December 2006 tax provision to the actual 2006 tax return filed in the third quarter of 2007. The difference between the 2006 tax provision and the 2006 tax return is primarily due to the amount of federal research and experimentation credits utilized, and changes in applicable effective state tax rates. The normalized tax rate without the effect of the additional $158,000 expense as described above for the three month period ending September 30, 2007 was approximately 43%.
The Company had no net income or loss in the third quarter of 2007, compared to net income of $332,000, or $.02 per diluted share, for the same period in 2006. This decrease was primarily attributable to increased costs for R&D and SG&A, loss on disposal of equipment, and $158,000 in additional tax expense incurred during the 2007 quarter, all as described above. Diluted shares utilized in the computations for the third quarter of 2006 were 20.1 million.

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