UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

OR

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to

Commission File Number: 000-50786

STRATAGENE CORPORATION

11011 North Torrey Pines Road, La Jolla, CA 92037

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

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

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

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

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

STRATAGENE CORPORATION

Quarterly Report on Form 10-Q
Table of Contents

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

2

STRATAGENE CORPORATION AND SUBSIDIARIES

See accompanying notes to unaudited consolidated financial statements.

4

STRATAGENE CORPORATION AND SUBSIDIARIES

(Continued)

5

STRATAGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

(Concluded)

See accompanying notes to unaudited consolidated financial statements.

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STRATAGENE CORPORATION AND SUBSIDIARIES

1. Basis of Presentation

     The consolidated financial statements of Stratagene Corporation and its subsidiaries (“Stratagene” or the “Company”) for the three and nine months ended September 30, 2004 and 2003 are unaudited. These financial statements include all adjustments that, in the opinion of management, are necessary to present fairly the consolidated financial position of the Company as of September 30, 2004 and the consolidated results of operations and cash flows of the Company for the three and nine months ended September 30, 2004 and 2003.

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

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

     Stratagene accounts for marketable securities pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. At September 30, 2004 and December 31, 2003, marketable debt securities have been categorized as available for sale and, as a result, are stated at fair value. Marketable debt securities are available for current operations and are classified in the consolidated balance sheet as current assets. Unrealized holding gains and losses are included as a component of accumulated other comprehensive income (loss), net of tax, until realized.

     These statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and do not include all the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements but reflect all adjustments (consisting only of normal recurring accruals) necessary for the fair presentation of the financial position, results of operations and cash flows for the periods and dates presented. These consolidated financial statements should be read in conjunction with the combined financial statements and related notes included in Amendment No. 3 to the registration statement on Form S-4 filed by Stratagene on April 29, 2004 with the SEC.

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

2. Business Combinations

Hycor Merger

     On June 2, 2004, Stratagene acquired all of the outstanding shares of Hycor through a merger of a wholly owned subsidiary of Stratagene with Hycor, with Hycor surviving as a wholly owned subsidiary of Stratagene. Hycor engages in researching, developing, manufacturing and marketing medical diagnostic products throughout the United States and in many foreign countries. The primary reasons for the merger were the following:

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the combination of Stratagene’s molecular diagnostics technology and Hycor’s Good Manufacturing Practice (“GMP”) approved facilities and U.S. Food and Drug Administration (“FDA”) experience allows the Company to enter the molecular diagnostic market;

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potential growth from increased earnings and revenue;

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expanded access to capital markets; and

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diversified customer base and product lines.

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     As a result of the merger, Hycor’s former shareholders received 0.6158 of a share of Stratagene common stock in exchange for each share of Hycor common stock, plus cash for fractional shares. The fair value of the consideration exchanged in the merger has been calculated based upon the fair value of Hycor’s publicly-traded common shares, as their fair value was determined to be more clearly evident than that of Stratagene’s common shares. In accordance with Emerging Issues Task Force (“EITF”) No. 99-12, Determining the Measurement Date for the Market Price for an Acquirer of Securities Issued in a Business Combination, the market price was determined based on an average of the closing prices of the Hycor stock for the trading days nearest July 24, 2003, the date on which the merger agreement was originally signed. Using the 0.6158 exchange ratio, 5,015,453 shares of Stratagene common stock were issued to the former Hycor stockholders in connection with the merger and 655 fractional shares were redeemed through a cash payment by Stratagene.

     Stratagene also assumed each outstanding option to purchase shares of Hycor common stock issued under the stock option plans of Hycor, whether or not then exercisable, on substantially the same terms and conditions as were applicable prior to the merger date, except that

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the options are now exercisable for shares of Stratagene common stock, and

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the number of shares of Stratagene common stock that may be purchased are equal to the number of shares of Hycor common stock underlying the option multiplied by 0.6158, rounded down to the nearest whole number.

     The stock option plans of Hycor include the following:

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the Hycor Biomedical Inc. 2001 Stock Option Plan;

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the Hycor Biomedical Inc. 1992 Incentive Stock Plan; and

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the Hycor Biomedical Inc. Nonqualified Stock Option Plan for Non-Employee Directors, as amended.

     The exercise price per share for the Stratagene common stock issuable under each Hycor option equals the per share exercise price of the Hycor common stock purchasable under the Hycor option divided by the exchange ratio of 0.6158, rounded up to the nearest whole cent.

     Stratagene has reserved for issuance a number of shares of Stratagene common stock at least equal to the number of shares of Stratagene common stock that are issuable upon the exercise of options assumed by Stratagene in connection with the Hycor merger. Stratagene assumed options to purchase an aggregate of 756,822 shares of Stratagene common stock in connection with the merger.

     The total purchase consideration for the acquisition of Hycor was $45,714,053, based on the following components:

     The following represents an estimated allocation of the purchase price to the acquired assets and the assumed liabilities of Hycor. Stratagene considered a number of factors in its determination of the allocation of purchase price, including the results of a third-party valuation. Stratagene has not yet obtained all the information required to complete the purchase price allocation related to the Hycor merger. The final allocation is expected to be completed in the fourth quarter of 2004.

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     Goodwill represents the excess of the purchase price over the fair value of the tangible and identifiable intangible assets. The other non-amortizable intangible assets represent $1,575,000 for a trade name with an indefinite life. The amortizable intangible assets include $480,000 for patents and trademarks, which will be amortized over 1 to 5 years, and $1,189,000 for contractually based customer relationships, which will be amortized over 1 to 5 years.

     Unearned stock-based compensation for unvested Hycor stock options assumed is the sum of the intrinsic value of each unvested stock option assumed by Stratagene in the merger with Hycor. The unvested portion of the assumed options will be amortized over the remaining vesting period using the graded vesting method prescribed under Financial Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN No. 28”).

     In connection with the merger, the following events occurred on June 2, 2004:

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Stratagene forgave $390,000 of the shareholder note receivable due to Stratagene by Dr. Joseph A. Sorge, Stratagene’s Chief Executive Officer (“Dr. Sorge”), and paid the income taxes related to the forgiveness, which resulted in a charge to Stratagene of $650,000. This forgiveness was applied to reduce the note receivable, which was $3,351,311 at June 2, 2004, including interest. Dr. Sorge satisfied the remaining portion of his shareholder note receivable on June 2, 2004 by tendering an aggregate of 524,160 shares of common stock to Stratagene at a price of approximately $6.50 per share. The share price was based on Hycor’s stock price of approximately $4.00 at the time Stratagene and Hycor agreed on the repurchase, adjusted for the exchange ratio.

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In addition, another shareholder paid off the balance of her note, which was $276,877 at June 2, 2004, including interest, by tendering 42,623 shares of common stock to Stratagene at a price of approximately $6.50 per share. This price was based on Hycor’s stock price of approximately $4.00 at the time Stratagene and Hycor agreed on the repurchase price, adjusted for the exchange ratio.

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Dr. Sorge received a bonus in the amount of approximately $1,670,000, which will be paid pursuant to the terms of a promissory note with a 39-month term and bearing interest at a rate of 3.89% per annum. These amounts are included in due to related party on the balance sheet.

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

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In accordance with the terms of the instrument governing its then outstanding subordinated notes, Stratagene converted $9.0 million in principal amount of the subordinated notes into 1,753,604 shares of Stratagene common stock. As a result of the conversion, there are no subordinated notes outstanding subsequent to the merger.

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     Pro Forma Information

     The results of operations of Hycor have been included in the accompanying consolidated financial statements of Stratagene from the date of acquisition. However, the following unaudited pro forma information assumes that the June 2, 2004 Hycor merger occurred on January 1, 2004 and 2003, respectively. These unaudited pro forma results have been prepared for comparative purposes only and are not indicative of the results of operations that would have actually resulted had the acquisition been in effect as of the periods indicated above, or of future results of operations. The unaudited pro forma results for the three and nine months ended September 30, 2004 and 2003 are as follows:

     The unaudited pro forma information presented above has been adjusted for charges for material, nonrecurring items that include the following:

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removing interest income on shareholder loans that were paid off upon the closing of the merger;

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removing interest expense on subordinated debt that converted to common stock upon the closing of the merger;

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recording amortization expense on acquired other intangible assets;

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recording amortization expense on unearned stock-based compensation for assumed stock options;

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reducing the CEO’s salary pursuant to a new employment agreement effective on the merger date;

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removing Hycor’s merger related costs incurred in the periods presented; and

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recording the tax provision adjustment to the pro forma statement of operations at the statutory rate of 36%.

BCH Acquisition

     Concurrently with the closing of the Hycor merger, Stratagene acquired substantially all of the assets of BCH, including BCH’s interests in its subsidiaries. In exchange, Stratagene forgave all of the outstanding intercompany indebtedness owed by BCH and its subsidiaries to Stratagene of approximately $5.5 million and assumed all of the other outstanding liabilities of BCH and its subsidiaries of approximately $0.8 million. Because Stratagene and BCH are under common control, and substantially all of the BCH membership units are held by certain Stratagene shareholders, the acquisition of BCH was recorded on a historical cost basis. As such, there was no adjustment of BCH’s assets and liabilities to fair value and no goodwill resulting from the purchase. As of and for the periods ended September 30, 2004, Stratagene’s financial statements are presented on a consolidated basis, which represents a change in reporting entity under Accounting Principles Board Opinion 20, Accounting Changes. Previously combined statements are now presented on a consolidated basis as a result of the transaction. There is no change to income for previous periods presented on a combined basis. For tax purposes, this transaction is considered a taxable pooling. The financial statements reflect net deferred tax assets of $750,000 for differences between the tax and book basis of assets and liabilities acquired by Stratagene.

     Prior to the acquisition date, Stratagene presented its financial statements on a combined basis with BCH. BCH consisted substantially of limited liability companies that were treated as partnerships for income tax purposes; therefore, any related income tax liabilities were the responsibility of the members of BCH. As a result, the operations of BCH did not reflect a provision for income taxes in the combined financial statements, including its share of the $1.8 million gain in equity in earnings of a joint venture on June 1, 2004. Beginning on June 2, 2004, the consolidated results of Stratagene, which includes the results of BCH, include a provision for income taxes.

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

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     As a result of the acquisition, Stratagene owns 100% of Phenogenex and approximately 78% of Iobion. The remaining 22% interest in Iobion is represented by membership units held by two individuals, one of which is now an employee of Iobion and one is a consultant to the Company. Gains, losses and cash flows are allocated in accordance with the limited liability company (“LLC”) agreement, generally first to eliminate any deficit in a member’s capital account, next to provide for a priority return to Stratagene, and then in accordance with respective ownership percentages. For the nine months ended September 30, 2004 and 2003, Iobion incurred losses of approximately $245,000 and $625,000, respectively. As of September 30, 2004 and December 31, 2003, Iobion had accumulated deficits of approximately $766,000 and $696,000, respectively. None of the losses have been allocated to the minority holders of the 22% interest, due to the fact that they did not fund initial capital contributions and have no requirement to make future capital contributions to Iobion. Accordingly, Stratagene has absorbed all losses incurred since inception. In October 2004, the Company purchased the remaining 22% outstanding membership interests in Iobion owned by these individuals. As a result of the purchase of these minority interests, Stratagene now owns 100% of Iobion. Total cash consideration of $330,000 was paid and will be recorded based on the fair value of the assets and liabilities acquired in the fourth quarter of 2004.

3. Earnings Per Share (“EPS”)

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

     Options outstanding totaling 2,924,864 and 1,576,796 for the three month periods ended September 30, 2004 and 2003, respectively, and 2,101,828 and 1,781,962 for the nine month periods ended September 30, 2004 and 2003, respectively, were excluded from the calculations of earnings per common share, as their effect would have been antidilutive.

4. Accounting for Stock-Based Compensation

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

     Pro forma information regarding net income is required by SFAS No. 123, Accounting for Stock-based Compensation (“SFAS No. 123”), and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. The fair value for Stratagene employee stock options was estimated at the dates of grant using the minimum value option pricing model from the inception date of the applicable stock option plan through June 2, 2004 and the Black-Scholes pricing model for all option grants made subsequent to that date. Fair value for Hycor employee stock options assumed by Stratagene in the Hycor merger was estimated at the dates of grant using the Black-Scholes pricing model for all option grants. The following weighted average assumptions were used for the three and nine month periods ended September 30, 2004 and 2003:

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

     Charges for options granted to non-employees have been determined in accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, as the estimated fair value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges for options granted to non-employees are periodically re-measured as the underlying options vest and are included in additional paid-in capital in the financial statements.

5. Balance Sheet Information

     Inventories

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

     Intangible Assets and Goodwill

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

     Amortizable patents and other includes costs incurred in connection with patent applications, which consist principally of legal fees. Amortizable intangible assets, non-amortizable intangible assets and goodwill were established in connection with the merger with Hycor (see Note 2).

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     Amortization expense totaled $267,177 and $98,726 for the three months ended September 30, 2004 and 2003, respectively. Amortization expense totaled $553,220 and $336,400 for the nine months ended September 30, 2004 and 2003, respectively. Amortization expense in each of the next five fiscal years is expected to be as follows:

     Accrued Expenses and Other Liabilities

     Accrued expenses and other liabilities consist of the following:

6. Long-Term Debt

     The Company has several debt instruments bearing interest at variable rates (up to 5.75% as of September 30, 2004), most of which are guaranteed by Stratagene and secured by substantially all of the assets of Stratagene. Many of the instruments contain restrictive covenants requiring the Company to maintain certain financial ratios, including minimum debt service coverage ratios, fixed charge coverage ratios and tangible net worth. The Company was in compliance with all covenants at September 30, 2004. Long-term debt and line of credit consist of the following:

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     The aggregate maturities of long-term debt principal payments for each of the five years subsequent to September 30, 2004 are as follows:

7. Comprehensive Income

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

8. Employee Stock Purchase Plan

     In June 2004, the Company adopted the Stratagene Corporation Employee Stock Purchase Plan (“ESPP”) that provides for the issuance of up to 1,000,000 shares of the Company’s common stock. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code and is for the benefit of qualifying employees as designated by the board of directors. Under the terms of the ESPP, purchases are made quarterly. Participating employees may elect to have a maximum of 15% of their compensation, up to a maximum of $25,000 of the fair market value of the common stock per calendar year, withheld through payroll deductions to purchase shares of common stock under the ESPP. The price of the common stock purchased under the ESPP will be equal to 85% of the fair market value of the common stock on the offering or purchase date, whichever is lower. The initial quarterly purchase period began on July 1, 2004. During the initial offering period ended September 30, 2004, 11,965 shares of common stock were issued under the plan from proceeds raised of $72,149.

9. Commitments and Contingencies

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

     Invitrogen Corporation

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

     In addition, in March 2001, Stratagene was sued by Invitrogen in the United States District Court for the Western District of

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

     In November 2001, Stratagene filed a complaint in the United States District Court for the District of Maryland charging Invitrogen with willful infringement and inducing others to infringe United States patent no. 5,556,772 for making, using, selling and offering for sale certain polymerase blend products. Stratagene seeks a permanent injunction against continued infringement as well as monetary damages (compensatory and enhanced) and recovery of its attorneys’ fees and costs. Given the nature of patent litigation, at the present time Stratagene is unable to quantify the amount of remuneration it will ultimately seek in this proceeding or the likelihood of recovering any portion of such remuneration once quantified. This action is currently stayed pending resolution of the Takara Bio litigation on the same patent, described below. Invitrogen has also sought re-examination of the ‘772 patent with the United States Patent and Trademark Office.

     Takara Bio

     In November 2002, Stratagene filed a complaint in the United States District Court for the District of Maryland charging Takara Bio with willful infringement and inducing others to infringe United States patent no. 5,556,772 for making, using, selling and offering for sale certain polymerase blend products. Stratagene seeks a permanent injunction, monetary damages (compensatory and enhanced) and recovery of its attorneys’ fees and costs. Given the nature of patent litigation, at the present time Stratagene is unable to quantify the amount of remuneration it will ultimately seek in this proceeding or the likelihood of recovering any portion of such remuneration once quantified. Takara filed a counterclaim in a separate action in the United States District Court for the Southern District of California. By its counterclaim, Takara seeks joint ownership of Stratagene’s ‘772 patent. In June 2003, Stratagene successfully moved to transfer the California action to Maryland. In August 2003, the Maryland district court denied Takara’s motion to dismiss or transfer the complaint, and the cases have been consolidated for pretrial and trial. No trial date has been set. The parties entered into a joint stipulation to stay the proceedings to pursue settlement, which ended in August 2004. While the parties continue to pursue settlement, the litigation is proceeding. No trial date is currently set.

     Third Wave Technologies

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

     Applera Corporation

     On November 9, 2004, Stratagene received notice of a patent infringement suit filed by Applera Corporation against it and other parties in the United States District Court for the District of Connecticut for alleged infringement of U.S. patent no. 6,814,934. The Stratagene products alleged to infringe are the Mx4000 and Mx3000P instruments and certain related reagents. Although it has not yet been formally served with the complaint, Stratagene is in the process of evaluating the allegations set forth in the complaint. Accordingly, an estimate of the possible loss or range of loss cannot be made at this time and Stratagene is unable to determine whether the outcome of the litigation could have a material impact on its results of operations or financial condition in any future period.

     Other Legal Matters

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

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uncertainties in the collectibility of the remaining 11,763 shares, the Company has not recorded any gain related to these shares as of September 30, 2004.

     Royalty Payments — Accrued expenses and other liabilities in the September 30, 2004 and December 31, 2003 balance sheets include $3.4 million and $1.7 million, respectively, of accrued royalties due to an unrelated third party license holder for estimated royalties due from the second quarter of 2003 through the respective balance sheet date. The Company has accrued royalties under this patent license agreement based on an estimate of the amounts payable in accordance with the terms of the patent license agreement. The Company’s calculations of royalty payments are subject to review by the license holder. Beginning in the second half of 2003, such royalty payments have been withheld by the Company while the Company evaluates a possible overpayment of royalties paid in prior periods. However, no assurances can be made that the Company will recover any of the overpayments. Therefore, Stratagene’s financial position or results of operations could be materially affected if the parties later determine that the royalty calculation differs significantly from the amounts recorded by Stratagene. The patent underlying this royalty obligation expires in the United States in March of 2005. The corresponding foreign patents will expire in 2006 and 2007. Once the patents expire, Stratagene will no longer be required to pay royalties on future product sales related to these PCR process patents, which will result in an approximately $400,000 per quarter reduction in royalty expense beginning in the second quarter of 2005 and an additional $150,000 reduction beginning in the second quarter of 2006. The Company anticipates that this decrease in royalty expense will be partially offset by decreases in the average unit selling price of products using the patented technology following the expiration of the patents

     Employment Agreements — Stratagene has entered into employment agreements with certain of its officers. These agreements generally provide for severance benefits if the officer is terminated by Stratagene other than for cause, as defined in the employment agreements. See Note 2 for a summary of Dr. Sorge’s new employment agreement.

     Manufacturing move to Texas — In June 2004, the Company made the decision to move the remaining manufacturing operations it conducts in San Diego, California to its primary manufacturing facility in Austin, Texas. The products affected by this move represent approximately 32% of total product sales for the nine months ended September 30, 2004. As a result, the Company will incur relocation and severance costs for employees affected by the transition. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, the Company has estimated the employee severance costs associated with the move and will charge those costs to expense ratably over the future service period. Management has estimated the costs to be approximately $120,000, which will be recognized from July 2004 through March 2005, of which approximately $40,000 was accrued for the three months ended September 30, 2004. The entire estimated obligation is expected to be paid by the Company by the end of the first quarter in 2005.

10. New Accounting Pronouncements

     In March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. EITF No. 03-1 establishes additional disclosure requirements for each category of SFAS No. 115 investments in a loss position and provides guidance for assessing impairment losses on investments. Effective for years ending after December 15, 2003, companies must disclose the aggregate amount of unrealized losses and the aggregate related fair value of their investments with unrealized losses. Those investments are required to be segregated by those in a loss position for less than twelve months and those in a loss position for greater than twelve months. Additionally, certain qualitative disclosures are required to clarify a circumstance whereby an investment’s fair value that is below cost is not considered other than temporary. In September 2004, the FASB delayed the provisions of EITF 03-1 which provide guidance on evaluating whether an impairment is other than temporary. The disclosure requirements remain effective for annual financial statements. The Company does not expect that the adoption of this EITF will have a material impact on its financial position, results of operations and cash flow.

     In May 2003, the FASB issued Statement No. 149, Amendments of Statement No. 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”). This statement amends and clarifies the financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of SFAS No. 149 did not have a material effect on the Company’s results of operations or financial position.

     In December 2003, the Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, which supersedes SAB No. 101, Revenue Recognition in Financial Statements. SAB No. 104 clarifies existing guidance regarding revenues for contracts which contain multiple deliverables to make it consistent with EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The adoption of SAB No. 104 did not have a material impact on the Company’s revenue recognition policies, nor its financial position or results of operations.

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11. Sale of Certain Assets in Joint Venture

     The Company has a 49% minority interest in a limited partnership (“LP”) that operates a research lab. This investment is accounted for using the equity method of accounting. On June 1, 2004, prior to the BCH asset acquisition by the Company (Note 2), the LP sold the assets related to its clinical diagnostics business to a third party for approximately $4.5 million. The consolidated financial statements reflect a $1.8 million gain in equity in earnings of joint venture for BCH’s share of the realized gain on the sale of these assets. The taxes attributable to the gain are the responsibility of the members of BCH and accordingly, the consolidated financial statements do not include a provision for income taxes on this gain. The LP made a partial distribution of the cash proceeds to BCH on June 1, 2004. In turn, BCH made a distribution to its members to pay for the taxes related to the sale in the amount of $476,280. The LP will distribute the remaining portion of BCH’s net proceeds to Stratagene once the accounting has been finalized for the transaction. Management believes that there will be no further distributions to the BCH members, as the distribution made on June 1, 2004 was for estimated taxes on the entire transaction.

12. Segment Information

     The Company operates in two business segments: research supplies and diagnostics. The segment information provided for the nine months ended September 30, 2004 includes only four months of diagnostic segment information, as the Company only established a separate diagnostics reporting segment in connection with the Hycor merger on June 2, 2004.

     At September 30, 2004 and December 31, 2003, total assets for each business segment were as follows:

13. Restatement of Financial Statements

     As previously disclosed in the Company’s annual audited financial statements included in Amendment No. 3 to Form S-4 filed with the SEC on April 29, 2004, the Company identified errors in its financial statements that related to its derivative instruments, as well as certain other items. Certain amounts in the income statement for the nine months ended September 30, 2003 are different from amounts previously reported. The income statement for the three months ended September 30, 2003 is not considered to be restated, as this period has not been previously reported. The following discussion provides an overview of the restatement and related adjustments.

     Derivative Instruments and Hedge Accounting

     The Company corrected the accounting for its foreign currency denominated futures contracts, as the hedge accounting treatment did not comply with the provisions of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. As a result, losses resulting from changes in the fair value of the Company’s derivative instruments of $114,026 for the nine months ended September 30, 2003 were reported in gain (loss) on foreign currency transactions in the income statement.

     Also, for the nine months ended September 30, 2003, the Company reclassified $471,981 of realized foreign currency losses associated with its futures contracts from product sales to gain (loss) on foreign currency transactions in the income statement.

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     Other Items

     As a result of the restatement for the item discussed above, management deemed it appropriate to record adjustments for certain other known items, principally related to expense accruals.

     Certain items have also been reclassified to conform to the current period presentation.

     The following summarizes the effect of the restatement on the income statement:

     The following table summarizes the effects of the restatement by financial statement line item affected:

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

     The following information should be read in conjunction with the financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the financial statements and related notes for the year ended December 31, 2003 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Amendment No. 3 to the Company’s registration statement on Form S-4 filed with the Securities and Exchange Commission on April 29, 2004. The financial information for Stratagene includes the accounts and balances of Stratagene Corporation and subsidiaries on a consolidated basis.

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

Overview

     Since inception in 1984, Stratagene has been engaged in developing, manufacturing and marketing products used to conduct molecular biology research. A substantial majority of its revenue comes from the sale of these products. For the nine months ended September 30, 2004, approximately 40%, 56% and 4% of product sales in the research supplies segment were in the areas of genetic technologies; nucleic acid and protein purification and analysis; and genomics, proteomics, and bioinformatics, respectively. Stratagene’s research supplies products are used for research purposes and the use of these products is not regulated by the U.S. Food and Drug Administration (“FDA”) or by any comparable international organization.

     Stratagene manufactures its products for molecular biology research customers in facilities near Austin, Texas and San Diego, California. In June 2004, the Company made the decision to move the remaining manufacturing operations it conducts in San Diego, California to its primary manufacturing facility in Austin, Texas.

     Stratagene’s sales activities are primarily conducted through a dedicated direct sales organization in North America and Europe. For the nine months ended September, 30, 2004, approximately 12% of its product sales in the research supplies segment were to international distributors in selected countries in Europe and Asia, who resell them to researchers. Certain products manufactured by Stratagene in the United States are sold to Stratagene’s Netherlands branch for subsequent sale to their customers in Europe. Non-U.S. product sales in the research supplies segment accounted for approximately 29% of the research supplies segment product sales for the nine months ended September 30, 2004. In August 2003, Stratagene also opened a new facility in Japan to establish direct sales and distribution channels in Asia. The Japan facility recorded its first sale in the first quarter of 2004.

     As a result of the merger with Hycor Biomedical Inc. (see “Merger with Hycor” below), Stratagene has expanded its product portfolio to include diagnostics products with a focus on allergy and autoimmune testing and urinalysis products. Hycor is registered as a manufacturer of medical devices and a licensed biological manufacturer with the FDA. To comply with FDA requirements, the Company must manufacture its diagnostics products in conformance with the FDA’s medical device Good Manufacturing Practice regulations. Hycor’s existing products are also subject to certain pre-market notification requirements of the FDA.

     Subsequent to the merger, Stratagene has determined that it operates in two distinct operating segments; research supplies and medical diagnostic products.

     Stratagene markets its research supplies products to academic and government institutions and pharmaceutical, biotechnology and industrial companies. Historically, a substantial portion of product sales have been to researchers at these academic and government institutions. Stratagene markets its diagnostics products primarily to clinical laboratories and certain specialty physicians.

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Merger with Hycor

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

BCH Asset Acquisition

     Concurrently with the closing of the Hycor merger, Stratagene acquired substantially all of the assets of BCH, including BCH’s interests in its subsidiaries. In exchange, Stratagene forgave all of the outstanding intercompany indebtedness owed by BCH and its subsidiaries to Stratagene of approximately $5.5 million and assumed all of the other outstanding liabilities of BCH and its subsidiaries of approximately $0.8 million. Because Stratagene and BCH are under common control, with substantially all of the BCH membership units held by certain Stratagene shareholders, the acquisition of BCH was recorded on a historical cost basis. As such, there was no adjustment of BCH’s assets and liabilities to fair value and no goodwill resulting from the purchase. As of and for the periods ended September 30, 2004, Stratagene’s financial statements are presented on a consolidated basis, which represents a change in reporting entity under Accounting Principles Board Opinion 20, Accounting Changes. Previously combined statements are now presented on a consolidated basis as a result of the transaction. There is no change to income for previous periods presented on a combined basis. For income tax purposes, this transaction is considered a taxable pooling. The financial statements reflect net deferred tax assets of $750,000 for differences between the tax and book bases of assets and liabilities acquired by Stratagene.

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

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

     As a result of the acquisition, Stratagene owns 100% of Phenogenex and approximately 78% of Iobion. The remaining 22% interest in Iobion is represented by membership units held by two individuals, one of which is now an employee of Iobion and the other is a consultant to the Company. Gains, losses and cash flows are allocated in accordance with the LLC agreement, generally first to eliminate any deficit in a member’s capital account, next to provide for a priority return to Stratagene, and then in accordance with respective ownership percentages. For the nine months ended September 30, 2004 and 2003, Iobion incurred losses of approximately $245,000 and $625,000, respectively. As of September 30, 2004 and December 31, 2003, Iobion had accumulated deficits of approximately $766,000 and $696,000, respectively. None of the losses have been allocated to the minority holders of the 22% interest, due to the fact that they did not fund initial capital contributions and have no requirement to make future capital contributions to Iobion. Accordingly, Stratagene has absorbed all losses incurred since inception. In October 2004, the Company purchased the remaining 22% outstanding membership interests in Iobion owned by these individuals. As a result of the purchase of these minority interests, Stratagene now owns 100% of Iobion. Total cash consideration of $330,000 was paid and will be recorded based on the fair value of the assets acquired in the fourth quarter of 2004.

Basis of Presentation

     The financial information of the Company has been presented on a consolidated basis, and includes the results of operations of Hycor Biomedical Inc. and subsidiaries since Hycor was acquired by the Company on June 2, 2004. The financial information also includes the results of operations of BioCrest Holdings, LLC, whose assets were acquired by the Company on June 2, 2004 and accordingly is presented on a consolidated basis for all periods (See Note 2 to financial statements).

Critical Accounting Policies and Estimates

     The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and management is required to make certain estimates, judgments and assumptions that affect the reported

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amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results include the following:

     Use of Estimates

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

     Revenue Recognition

     Revenue from research supplies, diagnostic and basic instrumentation product sales is recognized under the provisions of SAB No. 104, which is generally when products are shipped, title has transferred and risk of loss has passed. In accordance with Statement of Position No. 97-2, Software Revenue Recognition, as amended by Statement of Position No. 98-9, for instrumentation products where software is a key component, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Generally, these criteria are met at the time product is shipped and title has transferred. When contractual acceptance clauses exist, revenue is recognized upon satisfaction of such clauses. Contract research service revenues are earned and recognized in accordance with contract provisions. Government grant revenues related to research activities are recognized when earned, generally as related research activities occur. Amounts received in advance of performance or acceptance are recorded as deferred revenue.

     Accounts Receivable

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

     Inventories

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

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

     Deferred Taxes

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

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     Long-lived Assets

     In 2002, Stratagene adopted SFAS No. 142, Goodwill and Intangible Assets, which requires that long-lived assets be reviewed for impairment at least annually. With the acquisition of Hycor in the second quarter of 2004, Stratagene has substantial amortizable and non-amortizable long-lived assets (including goodwill) that are reviewed for impairment at each calendar year end and when there is an indication that the carrying value of an asset may not be recoverable. In the event that the cash flows expected to be generated by the asset are not sufficient to recover the carrying value of the asset, an adjustment for the amount that the carrying value of the asset exceeds its fair value is recorded as an impairment charge.

     Royalties

     Stratagene enters into license agreements in the ordinary course of its business, which require royalty payments based on specified product sales. These agreements cover the majority of Stratagene’s products. Since mid-2003, Stratagene has withheld payments to a license holder while Stratagene evaluates a possible overpayment in the royalties paid in prior periods. Stratagene has continued to record the estimated quarterly royalty payable under the patent license agreement and reports this amount to the license holder. Management believes the royalty payments accrued are determined in accordance with the patent license agreement. However, the Company’s calculations of royalty payments are subject to review by the license holder. Therefore, Stratagene’s financial position or results of operations could be materially affected if the parties later determine that the royalty calculation differs significantly from the amounts recorded by Stratagene. As of September 30, 2004, the amount of accrued and unpaid royalties related to this patent license agreement was $3.4 million. The patent underlying this royalty obligation expires in the United States in March of 2005. The corresponding foreign patents will expire in 2006 and 2007. Once the patents expire, Stratagene will no longer be required to pay royalties on future product sales related to these PCR process patents, which will result in an approximately $400,000 per quarter reduction in royalty expense beginning in the second quarter of 2005 and an additional $150,000 reduction beginning in the second quarter of 2006. The Company anticipates that this decrease in royalty expense will be partially offset by decreases in the average unit selling price of products using the patented technology following the expiration of the patents

     Warranties

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

     Derivative Financial Instruments

     Stratagene accounts for derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and related literature, which we refer to collectively as SFAS No. 133. Stratagene enters into derivative instruments to reduce the risk of foreign currency fluctuations; however, such derivative instruments do not qualify for hedge accounting under the provisions of SFAS No. 133. Accordingly, both unrealized and realized gains or losses resulting from changes in fair value are recognized as incurred in gain (loss) on foreign currency transactions in the current period income statement.

     Research and Development

     Stratagene focuses its research and development efforts on developing products that use innovative technologies in both the research supplies and diagnostics product lines. Research and development costs are expensed as incurred. For the nine months ended September 30, 2004 and for fiscal 2003, Stratagene’s research and development expenses totaled approximately $8.0 million and $10.5 million, respectively, in the areas of genetic technologies; nucleic acid and protein purification and analysis; genomics, proteomics and bioinformatics; and medical diagnostics.

     Stratagene’s numerous research and development initiatives are generally ongoing. Some of the efforts are for new product technologies, while others are designed to support an existing product or products relating to one of Stratagene’s more than 2,500 stock keeping units, which cover approximately 75 existing product categories. In addition, the funds used by Stratagene in its research and development activities are allocated among the various technologies and products in which Stratagene is currently involved and are not concentrated to one specific product or product line. Since 1997, Stratagene has spent over $77 million on its research and development efforts and intends to spend between 12% and 14% of its revenues on research and development activities for at least the next few years.

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

Results of Operations

     Three months ended September 30, 2004 compared to three months ended September 30, 2003

     Product Sales

     For the three months ended September 30, 2004, revenue increased $6.2 million or 36.8% compared to the three months ended September 30, 2003. This increase was primarily attributable to the Company recording three months of Hycor’s diagnostics product sales of $5.6 million as a result of the merger on June 2, 2004. Also contributing to the growth was increased sales of research supplies products by Stratagene of $0.6 million for the three months ended September 30, 2004 when compared to the same period in 2003. Sales during the three months ended September 30, 2004 were also affected by the weakening dollar resulting in a positive foreign exchange impact to foreign sales of 8.6% and a 1.4% increase to total worldwide revenue for the three months ended September 30, 2004 when compared to the three months ended September 30, 2003. Stratagene expects that future revenue will depend on a number of factors, including the market acceptance of new products, competitive conditions, currency fluctuations and the continued funding of customer research budgets.

     Stratagene’s operating results have fluctuated in the past and may continue to fluctuate in the future. In particular, Stratagene has historically seen slower sales in the fourth quarter as a result of reduced purchases by academic and research institutions as well as the closing of such facilities during the holiday period.

     Gross Profit

     Gross profit as a percentage of sales decreased 1.3% from 66.3% for the three months ended September 30, 2003 to 65.0% for the three months ended September 30, 2004 due to the inclusion of Hycor’s lower margin diagnostic products as a result of the merger offset by favorable manufacturing variances in the three months ended September 30, 2004 as compared to the same period in 2003. In addition, approximately $39,000 in non-cash stock compensation charges related to the amortization of unvested stock options assumed by Stratagene in the Hycor merger are included in cost of products sold for the three months ended September 30, 2004.

     Research and Development Expenses

     Research and development expenses increased $0.2 million or 7.7% for the three months ended September 30, 2004 compared to the same period in 2003. The increase in spending was primarily due to approximately $0.4 million of Hycor’s diagnostic research and development efforts, which includes approximately $22,000 in non-cash stock compensation charges related to the amortization of unvested stock options assumed in the Hycor merger. This increase was offset by decreased spending in research and development for research supplies by $0.2 million due to transitioning the Mx3000 effort from research and development to manufacturing in the third quarter of 2003. However, as a percentage of product sales, research and development expenses decreased from 15.0% for the three months ended September 30, 2003 to 11.8% for the three months ended September 30, 2004. This decrease in research and development expense as a percentage of sales is primarily the result of including the diagnostic segment revenue for the three months ended September 30, 2004.

     Selling and Marketing Expenses

     Selling and marketing expenses increased $0.9 million or 24.4% for the three months ended September 30, 2004 compared to the same period in 2003. The increase in spending was due to the Company recording three month of Hycor sales and marketing expenses of approximately $0.9 million. However, as a percentage of total revenue, selling and marketing expenses decreased from 22.8% for the three months ended September 30, 2003 to 20.7% for the three months ended September 30, 2004. As a result of the merger with Hycor, Stratagene recorded amortizable intangible assets related to trade names and customer contracts. These intangible assets are being amortized to sales and marketing expense over various periods ranging from one to five years beginning in June of 2004. The amortization expense included in sales and marketing was approximately $0.1 million for the three months ended September 30, 2004. Also included is approximately $34,000 of non-cash stock compensation charges related to the amortization of unvested stock options

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assumed in the Hycor merger. See Note 2 to the Company’s consolidated financial statements for the period ended September 30, 2004.

     General and Administrative Expenses

     General and administrative expenses increased by $1.3 million or 50.2% for the three months ended September 30, 2004 compared to the same period in 2003. As a percentage of total revenue, general and administrative expenses increased from 14.8% for the three months ended September 30, 2003 to 16.2% for the three months ended September 30, 2004. The increased spending is primarily due to three months of Hycor’s general and administrative expenses of approximately $0.8 million, which includes approximately $31,000 for the amortization of patents acquired and approximately $55,000 for non-cash stock compensation charges related to the amortization of unvested stock options assumed in the Hycor merger, and $0.4 million for additional costs related to public company oversight.

     Total Other Income (Expense), Net

     Total other income, net of expense, increased by $1.7 million or 126.9% for the three months ended September 30, 2004 compared to the same period in 2003. This increase was primarily due to a reduction in interest expense of $0.7 million for the three months ended September 30, 2004 from the refinancing of the Company’s debt obligations in the first quarter of 2004, which reduced the weighted average interest rate on outstanding borrowings. In addition, the company further reduced interest expense by paying down approximately $6.4 million in debt during the three months ended September 30, 2004. The Company’s average interest rate on its remaining obligations is approximately 3.8%.

     Also contributing to the net increase in other income was a gain of $0.7 million as a result of a litigation settlement in 2002. Pursuant to the terms the settlement, Stratagene is entitled to receive 35,290 shares of a European company. Stratagene received 11,763 shares in August 2004 and an additional 11,764 shares in September 2004. These shares were sold and converted into cash upon receipt, resulting in a gain of approximately $664,000 in other income during the quarter ended September 30, 2004. Because of uncertainties in the collectibility of the remaining 11,763 shares, the Company has not recorded any gain related to these shares as of September 30, 2004.

     Income Taxes

     Stratagene recorded $1.9 million in tax expense for the three months ended September 30, 2004, which is approximately 45.8% of pre-tax income as compared to 38.3% for the three months ended September 30, 2003. The increase in the effective tax rate was primarily due non-deductible foreign entity losses resulting from the commencement of operations in Japan.

     Stratagene recognizes state research and development and other credits when they are generated. Excess credits for mature operating entities are recognized and will be used to offset future taxable income as management believes it is more likely than not that the credits will be realized.

     Nine months ended September 30, 2004 compared to nine months ended September 30, 2003

     Product Sales

     For the nine months ended September 30, 2004, revenue increased $11.5 million or 22.6% as compared to the nine months ended September 30, 2003. This growth was primarily attributable to the merger with Hycor, which contributed $7.7 million of diagnostics product sales. Also contributing to the growth was increased sales of the research supplies product line of $3.8 million for the nine months ended September 30, 2004 when compared to the same period in 2003. Sales during the nine months ended September 30, 2004 were also affected by the weakening dollar resulting in a positive foreign exchange impact to foreign sales of 10.4% and a 2.1% increase to total worldwide revenue for the nine months ended September 30, 2004 when compared to the nine months ended September 30, 2003.

     Stratagene’s operating results have fluctuated in the past and may continue to fluctuate in the future. In particular, Stratagene has historically seen slower sales in the fourth quarter as a result of reduced purchases by academic and research institutions as well as the closing of such facilities during the holiday period.

     Gross Profit

     Gross profit as a percentage of sales decreased 2.1% from 68.1% for the nine months ended September 30, 2003 to 66.0% for the

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nine months ended September 30, 2004 due to the inclusion of Hycor’s lower margin diagnostic products. In addition, approximately $52,000 of non-cash stock compensation charges related to the amortization of the unvested stock options assumed in the merger with Hycor were recorded for the nine months ended September 30, 2004.

     Research and Development Expenses

     Research and development expenses decreased $0.1 million or 1.0% for the nine months ended September 30, 2004 compared to the same period in 2003. The decrease was primarily due to the inclusion of $0.6 million of Hycor expenses offset by transitioning the Mx3000P instrument from research and development to manufacturing in the third quarter of 2003. Research and development expenses include approximately $0.3 million of non-cash stock compensation expense for stock options granted to non-employee advisors of Stratagene as well as approximately $0.1 million in non-cash stock compensation expense related to the amortization of the unvested stock options assumed in the merger with Hycor. As a percentage of product sales, research and development expenses decreased from 16.0% for the nine months ended September 30, 2003 to 12.9% for the nine months ended September 30, 2004. This decrease was primarily a result of Hycor’s research and development efforts being lower as a percentage of the diagnostic segment sales than Stratagene’s research and development efforts as a percentage of the research supplies segment sales.

     Selling and Marketing Expense

     Selling and marketing expenses increased $1.7 million or 14.8% for the nine months ended September 30, 2004 compared to the same period in 2003. The increase in spending was due to the Company recording four months of Hycor’s sales and marketing expenses of approximately $1.1 million, increased costs related to Stratagene’s Japanese operations of $0.3 million, which commenced in the second quarter of 2003, and approximately $0.2 million of expenses related to increased marketing communication activity. As a percentage of total revenue, selling and marketing expenses decreased 1.5% from 22.5% for the nine months ended September 30, 2003 to 21.0% for the nine months ended September 30, 2004. As a result of the merger with Hycor, Stratagene recorded amortizable intangible assets related to trade names and customer contracts. These intangible assets are being amortized to sales and marketing expense over various periods ranging from one to five years beginning in June of 2004. The amortization expense included in sales and marketing was approximately $0.1 million for the nine months ended September 30, 2004. Also included was approximately $45,000 of non-cash stock compensation charges related to the unvested stock options assumed in the merger with Hycor. See Note 2 to the Company’s consolidated financial statements for the period ended September 30, 2004.

     General and Administrative Expenses

     General and administrative expenses increased by $4.8 million or 63.7% for the nine months ended September 30, 2004 compared to the same period in 2003. As a percentage of total revenue, general and administrative expenses increased from 14.8% for the nine months ended September 30, 2003 to 19.8% for the nine months ended September 30, 2004. The increased spending was primarily due to charges of $2.4 million related to bonuses Dr. Sorge received as a result of the merger with Hycor, four months of general and administrative expenses related to the Hycor operations of $1.1 million, which includes approximately $0.1 million for the amortization of patents and non-cash stock compensation charges related to the unvested stock options assumed in the merger with Hycor, $0.7 million of expenses related to increased legal fees associated with patent litigation and approximately $0.6 million of expense for additional costs related to public company oversight.

     Total Other Income (Expense), Net

     Total other income, net of expense, increased by $3.9 million or 136.0% for the nine months ended September 30, 2004 compared to the same period in 2003. As a result of the BCH asset acquisition, Stratagene has a 49% minority interest in a limited partnership that operates a research lab. On June 1, 2004, prior to the BCH asset acquisition by the Company, the LP sold the assets related to its clinical diagnostics business to a third party for approximately $4.5 million. The consolidated financial statements for the nine months ended September 30, 2004 reflect a $1.8 million gain in equity in earnings of joint venture for the Company’s share of the realized gain on the sale of these assets. In addition, the Company recorded $0.2 million more income from this 49% minority interest company’s normal operations when compared to the same period in 2003.

     Also contributing to the net increase was a reduction in interest expense of $1.1 million for the nine months ended September 30, 2004 resulting from the refinancing of the Company’s debt obligations in the first quarter of 2004, which reduced the weighted average interest rate on outstanding borrowings. Subsequent pay offs of other long-term debt obligations further reduced the interest expense. In addition, $9.0 million of convertible subordinated notes were converted into shares of Stratagene common stock in connection with the closing of the Hycor merger. The weighted average interest rate on the remaining debt facilities is approximately 3.8%.

     The net increase in other income was also attributable to a gain of $0.7 million as a result of the litigation settlement in 2002.

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     Income Taxes

     Stratagene recorded $2.9 million of tax expense for the nine months ended September 30, 2004. The effective tax rate decreased from 34.4% for the nine months ended September 30, 2003 to 33.2% for the same period in 2004. The change in the effective tax rate was primarily a result of BCH recording a gain in equity in earnings of a joint venture of $1.8 million related to the sale of certain assets of the joint venture, in which BCH had a minority interest. Prior to the BCH asset acquisition date, Stratagene and BCH presented their financial statements on a combined basis as a result of being under common control and because substantially all the BCH membership units were held by certain Stratagene shareholders. BCH consisted substantially of limited liability companies that were treated as partnerships for income tax purposes; therefore, any related income tax liabilities were the responsibility of the members of BCH. As a result, the operations of BCH did not reflect a provision for income taxes prior to the acquisition date. The income taxes attributable to the gain are the responsibility of the members of BCH and accordingly, the consolidated financial statements do not include a provision for income taxes on this gain. The change in effective tax rate was also a result of non-deductible foreign entity losses.

     Stratagene recognizes state research and development and other credits when they are generated. Excess credits for mature operating entities are recognized and will be used to offset future taxable income as management believes it is more likely than not that the credits will be realized.

Liquidity and Capital Resources

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

     Stratagene generated net cash from operating activities of $7.8 million and $6.9 million for the nine months ended September 30, 2004 and 2003, respectively.

     For the nine months ended September 30, 2004, Stratagene generated net cash from investing activities of $4.3 million and used $1.4 million of net cash in its investing activities for the nine months ended September 30 2003. Cash acquired related to the merger with Hycor, net of acquisition costs of $1.8 million, totaled $4.5 million for the nine months ended September 30, 2004. Cash distributions from a joint venture resulting from the sale of certain assets of the joint venture totaled $1.0 million and $0 for the nine months ended September 30, 2004 and 2003, respectively. Capital expenditures and additions to patents for the nine months ended September 30, 2004 totaled $0.9 million and $0.9 million, respectively, as compared to $0.8 million and $0.8 million for the nine months ended September 30, 2003, respectively.

     Stratagene used $9.9 million and $2.9 million in net cash for financing activities for the nine months ended September 30, 2004 and 2003, respectively, which included the repayment of $23.7 million and $3.6 million in debt offset by borrowings under the Company’s credit facilities of $14.2 million and $1.1 million, respectively.

     Based on management’s review of Stratagene’s accounts receivables, an allowance for doubtful accounts is accrued, however, Stratagene does not write off individual accounts receivable until substantially all avenues of legal recourse to collect the outstanding amount have been exhausted. The actual write-off for the nine months ended September 30, 2004 was minimal and the allowance decreased by approximately $0.4 million. This decrease in expected uncollectible accounts was due in part to continued collection efforts. No significant change to future liquidity is anticipated.

     Gross accounts receivable provided cash of $0.8 million for the nine months ended September 30, 2004 due primarily to collection efforts. Days sales outstanding decreased from 45 days at December 31, 2003 to 42 days at September 30, 2004. For the nine months ended September 30, 2003, accounts receivable used cash of $0.6 million primarily due to strong sales of a new instrumentation product.

     Gross inventory provided cash of $0.4 million for the nine months ended September 30, 2004 due to inventory management efforts. Gross inventory used $0.5 million due to increased purchases of parts for instrumentation products during the nine months ended September 30, 2003.

     Prepaids and other current assets provided cash of $0.6 million for the nine months ended September 30, 2004 due to allocation of merger related expenses to goodwill and additional paid-in capital in connection with the Hycor merger. For the nine months ended

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September 30, 2003, prepaids and other current assets used cash of $1.1 million as a result of expenses incurred related to the merger with Hycor.

     Accounts payable used $1.6 million in cash for the nine months ended September 30, 2004 due to reducing average days outstanding. Accounts payable provided cash of $0.1 million for the nine months ended September 30, 2003.

     Capital expenditures for property and equipment during the nine months ended September 30, 2004 and 2003 were approximately $0.9 million and $0.8 million, respectively. For fiscal 2004, Stratagene currently anticipates capital spending on property and equipment to be in the range of $1.0 million to $1.5 million.

     Stratagene had cash, cash equivalents and restricted cash totaling $5.0 million and $2.7 million at September 30, 2004 and December 31, 2003, respectively, and working capital of $14.5 million and $9.5 million at September 30, 2004 and December 31, 2003, respectively.

     As of September 30, 2004, BioCrest Manufacturing, L.P., a consolidated subsidiary of Stratagene, had approximately $12.4 million in total debt. This debt included approximately $4.4 million in senior term debt, $3.2 million under a reducing revolving line of credit and $4.8 million in industrial revenue bonds.

     The obligations of BioCrest Manufacturing under the senior credit facility have been guaranteed by Stratagene and each of its wholly owned domestic subsidiaries. The obligations are also generally secured by substantially all of the personal property assets of Stratagene and each of its wholly owned domestic subsidiaries, as well as liens on the real property and improvements related to Stratagene’s Texas manufacturing facility. The senior credit facility is also secured by a pledge of Stratagene’s interest in Iobion Informatics, LLC.

     Borrowings under the senior credit facility bear interest (1) in the case of the one-year revolving facility, at a variable rate equal to the one-month LIBOR rate plus 2.40%, (2) in the case of the three-year reducing revolving facility, at a variable rate equal to the one-month LIBOR rate plus 2.55%, and (3) in the case of the term loan, at a variable rate equal to the prime rate plus 1.00%. The senior credit facility includes customary but significant restrictions on the incurrence of additional debt, the payment of dividends, acquisitions and capital expenditures above stated limits. The senior credit facility also contains restrictive covenants requiring the Company to maintain certain financial ratios, including minimum debt service coverage ratios, fixed charge coverage ratios and tangible net worth. The Company was in compliance with all covenants as of September 30, 2004.

     The industrial revenue bonds are secured by land, building and equipment acquired in Bastrop County, Texas with the proceeds from the issuance of the bonds. The average interest rate on the industrial revenue bonds was 1.33% for the nine months ended September 30, 2004 and was 1.68% for fiscal 2003. Under the instrument governing the industrial revenue bonds, Stratagene was required to make sinking fund payments of $870,000 per year through April 2004, and is required to make sinking fund payments of $735,000 through April 2005, $240,000 per year through April 2021, and then $175,000 through April 2022 when the bonds mature.

     Stratagene leases certain facilities and equipment under noncancelable operating leases, with equipment leases expiring from August 2006 through January 2007 and facility leases expiring in December 2007 and September 2008 for its domestic facilities and from December 2004 through December 2007 for its foreign facilities.

     In addition, in the normal course of operations, Stratagene enters into purchase obligations with various vendors and suppliers of various key raw materials and other goods and services through purchase orders or other documentation. Such obligations are generally outstanding for periods of less than one year and are settled by cash payments upon delivery of goods and services. At September 30, 2004, the purchase commitments covered by these various key raw materials and other goods and services aggregate approximately $2,742,000.

     The following table summarizes the approximate future minimum payments under the above contractual obligations at September 30, 2004:

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Other Commitments and Contingencies

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

New Accounting Pronouncements

     Information regarding recent accounting pronouncements is contained in Note 10 to the Consolidated Financial Statements for the period ended September 30, 2004, which note is incorporated herein by this reference and is included as part of “Item 1. Financial Statements,” to this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

     Some of the statements in this Quarterly Report on Form 10-Q, including, but not limited to, this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are therefore entitled to the protection of the safe harbor provisions of these laws. Stratagene generally identifies forward-looking statements in this Quarterly Report by using words like “believe,” “intend,” “target,” “expect,” “estimate,” “may,” “should,” “plan,” “project,” “contemplate,” “anticipate,” “predict” or similar expressions. You can also identify forward-looking statements by discussions of strategies, plans or intentions. These statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These factors include the absence of a public market for the Stratagene common stock prior to the Hycor merger, the challenges of integrating Stratagene and Hycor, Stratagene’s ability to introduce new products and the acceptance of these products by the marketplace, competition, the inability to sell products as a result of the termination of license agreements, fluctuations in operating results, dependence on key employees, Stratagene’s substantial indebtedness, future capital requirements, the possibility of unproductive research and development projects, ability to manage growth, price volatility of Stratagene’s common stock, the impact of future sales of common stock on Stratagene’s stock price and potential declines in research and development budgets or funding. For more information about the risks faced by the Company, please see “Risk Factors” included in the Company’s Form S-4 Registration Statement relating to the merger transaction with Hycor and the discussion set forth below under the caption “Factors that May Affect Future Results.”

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

Factors that May Affect Future Results

     It is important to carefully consider the following risks, together with other matters described in this Form 10-Q or in other documents referred to in this Form 10-Q in evaluating Stratagene’s business and prospects. If any of the following risks occur, Stratagene’s business, financial condition or operating results could be harmed. In such case, the trading price of Stratagene’s common stock could decline. The risks described below are not the only risks Stratagene faces. Additional risks not presently known to Stratagene or that Stratagene currently deem immaterial may also impair business operations. For a further discussion of factors that could affect future results or performance, please see “Risk Factors” included in the Company’s Form S-4 Registration Statement relating to the merger transaction with Hycor.

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

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

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

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

•

availability, quality and price relative to competitive products;

•

the timing of introduction of the product relative to competitive products;

•

customers’ opinions of the product’s utility;

•

citation of the product in published research; and

•

general trends in life sciences and medical diagnostics research.

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

     The markets for Stratagene’s products are highly competitive. Stratagene competes with many other suppliers of life sciences research products and medical diagnostics products. Stratagene’s major competitors in the genetic technologies market area include Invitrogen Corporation, BD Biosciences, Promega and Novagen. Stratagene’s major competitors in the nucleic acid and protein purification and analysis market area include Applied Biosystems, Qiagen, Roche and Invitrogen. Stratagene’s major competitors in the genomics, proteomics and bioinformatics market area include Invitrogen, Applied Biosystems, Agilent and Silicon Genetics. Stratagene’s major competitors in the medical diagnostics product area include Pharmacia, Inc. and Diagnostic Product Corporation. Many of Stratagene’s competitors have greater financial, operational and sales and marketing resources and more experience in research and development than it does. These and other companies may have developed or could in the future develop new technologies that compete with Stratagene’s products or even render Stratagene’s products obsolete. Competition in Stratagene’s markets is primarily driven by:

•

product performance, features and reliability;

•

price;

•

timing of product introductions;

•

ability to develop, maintain and protect proprietary products and technologies;

•

sales and distribution capabilities;

•

technical support and service; and

•

breadth of product line.

     If a competitor develops or acquires superior technology or cost-effective alternatives to Stratagene’s products, Stratagene’s

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business, financial condition and results of operations could be materially adversely affected.

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

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

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

     Approximately 53% and 58% of Stratagene’s revenue in the first nine months of 2004 and for fiscal 2003, respectively, came from products sold pursuant to license agreements. If Stratagene loses the rights to a patented technology, it may be forced to stop selling some of its products or redesign its products and may lose significant sources of revenues. In addition, potential competitors could license technologies that Stratagene fails to license. The loss of a significant license could have a material adverse effect on Stratagene’s business.

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

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

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

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

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

     As of September 30, 2004, Dr. Sorge, the founder, chairman of the board of directors, chief executive officer and president of Stratagene, owned approximately 62% of Stratagene’s outstanding common stock. As a result, Dr. Sorge controls all matters requiring approval of its stockholders, including the election of directors and the approval of mergers or other business combinations. Such a concentration of ownership may have the effect of delaying or preventing transactions resulting in a change of control of Stratagene, including transactions where stockholders might otherwise receive a premium for their shares over then current market prices.

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

     To a large degree, Stratagene is dependent on its founder, chairman of its board of directors, chief executive officer and president, Joseph A. Sorge, M.D. Dr. Sorge has significant expertise in the life sciences research market and has been instrumental in establishing and executing Stratagene’s business plan. The loss of Dr. Sorge’s services could have a material adverse effect on Stratagene’s business. Dr. Sorge has an existing employment agreement with Stratagene which expires in June 2007, subject to automatic one year renewals unless either party provides timely notice of non-renewal.

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

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

     As of September 30, 2004, Stratagene had approximately $12.4 million of outstanding indebtedness, including approximately $7.5 million of borrowings under its senior credit facility and approximately $4.8 million in principal amount of industrial revenue bonds. Stratagene’s substantial amount of indebtedness could have negative consequences for Stratagene, including the following:

•

Stratagene will need a substantial portion of its cash flow to pay the principal and interest on its indebtedness, including indebtedness it may incur in the future;

•

payments of Stratagene’s indebtedness will reduce the funds that would otherwise be available for its operations and future business opportunities;

•

Stratagene may have greater debt burdens than its competitors, which may place Stratagene at a competitive disadvantage;

•

Stratagene’s debt level may make it more vulnerable than its competitors to a downturn in its business or the economy generally; and

•

there would be a material adverse effect on Stratagene’s business and financial condition if Stratagene is unable to service its indebtedness or obtain additional financing.

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

     Although historically Stratagene’s cash flow from operations has been sufficient to satisfy working capital, capital expenditure and research and development requirements, in the future Stratagene may need to incur additional debt or issue equity in order to fund these requirements as well as to make acquisitions and other investments. Stratagene entered into a senior credit facility in January 2004 that restricts the Company’s ability to incur new debt. If Stratagene cannot obtain additional debt or equity financing on acceptable terms or is limited with respect to incurring additional debt or issuing equity, Stratagene may be unable to address gaps in its product offerings or improve its technology, particularly through strategic acquisitions or investments.

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

•

for research and development to successfully develop additional products;

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•

to file and prosecute patent applications and defend and assert patents to protect its technology;

•

to retain qualified employees, particularly in light of intense competition for qualified scientists;

•

to manufacture additional products itself or through third parties; and

•

to acquire new technologies, products or companies.

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

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

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

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

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

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

     Intellectual property litigation could seriously harm Stratagene’s business.

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

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

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

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

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

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

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

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

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

     The market price of the Stratagene common stock is expected to fluctuate rapidly. Fluctuations may occur, among other reasons, in response to:

•

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

•

technological innovations or new product introductions by Stratagene or its competitors;

•

delays in the development and introduction of new products;

•

disputes concerning patents, licenses or other proprietary rights;

•

changes in earnings estimates by equity and market research analysts;

•

sales of common stock by existing stockholders;

•

loss of key personnel; and

•

securities class actions or other litigation affecting Stratagene or other companies in its industry.

     Any failure to meet analysts’ expectations could have an adverse effect on the market price for the Stratagene common stock. In

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

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

     As of September 30, 2004, Stratagene had approximately 22.0 million shares of common stock outstanding. Of this amount, the 5,015,453 shares issued to the former Hycor stockholders in the merger transaction with Hycor are freely tradable under the Securities Act, except for any shares held by affiliates of Stratagene or Hycor, as the case may be, which may be sold from time to time in accordance with the requirements of Rule 144 or Rule 145 of the Securities Act. In addition, Stratagene has entered into a registration rights agreement with Dr. Sorge and certain of his affiliates pursuant to which, at the request of Dr. Sorge and subject to specified conditions, Stratagene will file a registration statement under the Securities Act covering 2,000,000 shares of Stratagene common stock held by Dr. Sorge and specified trusts and partnerships controlled by Dr. Sorge. Dr. Sorge and such trusts and partnerships are also entitled to register the remaining approximately 11.4 million shares of Stratagene common stock held by them in specified situations. The shares held by Dr. Sorge and such trusts and partnerships and the remaining shares of Stratagene common stock held by the other stockholders of Stratagene prior to the Hycor merger may also be sold from time to time in the public market subject to the requirements of Rule 144 under the Securities Act. The sale by Stratagene’s current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of the Stratagene common stock.

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

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

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

     A substantial portion of Stratagene’s sales have been to researchers at universities, government laboratories and private foundations whose funding is dependent upon grants from government agencies, such as the United States National Institutes of Health. Although Stratagene is not aware of any impending reductions in governmental grants, government funding of research and development is subject to the political process and as a result the amount of available funding may decrease. Stratagene’s sales may be adversely affected if its customers delay purchases as a result of uncertainties surrounding the approval of government budget proposals. A reduction in government funding for the National Institutes of Health or other government research agencies could seriously damage Stratagene’s business.

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

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

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

     In order to meet the needs of its customers, Stratagene must develop a broad spectrum of products. To build a product line, it is sometimes advantageous or necessary to license technologies from third parties. As a result, Stratagene believes its ability to license new technologies from third parties is and will continue to be important to its ability to offer new products. Approximately 53% and 58% of Stratagene’s revenues for the first nine months of 2004 and for all of 2003, respectively, were attributable to products manufactured or sold under licenses from third parties.

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

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

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

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

     The absence of qualified senior accounting personnel within Stratagene’s finance department during parts of 2002, 2003 and 2004 has resulted in diminished oversight of accounting information and reports.

     In connection with the completion of its audit of, and the issuance of an unqualified report on, Stratagene’s financial statements for the year ended December 31, 2002, Deloitte & Touche LLP issued a management letter identifying the absence of qualified senior accounting personnel within Stratagene’s finance department during parts of 2002 and 2003 as a reportable condition pursuant to standards established by the American Institute of Certified Public Accountants. A “reportable condition” is a significant deficiency in the design or operation of internal control that could adversely affect an entity’s ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. Dr. Sorge served as Stratagene’s chief financial officer from the resignation of Stratagene’s former chief financial officer in September 2002 until the completion of the Hycor merger in June 2004 Dr. Sorge does not have a degree in accounting or a certified public accountant’s license. In addition, Stratagene did not have a director of accounting from May 2003, when its former director of accounting resigned, until May 2004. In its management letter, Deloitte & Touche LLP indicated that this lack of qualified senior staffing in Stratagene’s finance department had resulted in a diminished ability to record, process, summarize and report financial data on a timely and accurate basis. Deloitte & Touche LLP recommended that Stratagene hire qualified senior accounting personnel, including a chief financial officer and a director of accounting, to ensure that accounting information and records are prepared and reviewed in a timely manner.

     As disclosed in the Company’s registration statement on Form S-4 relating to the Hycor merger transaction, Stratagene stated that it intended that Reginald P. Jones, the then chief financial officer of Hycor, would become the chief financial officer of the Company following the merger and that the Company would also hire a director of finance. In connection with the closing of the merger transaction with Hycor in June 2004, Reginald P. Jones became the chief financial officer of the Company. In addition, in May 2004 the Company hired a new director of finance.

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     Intellectual property litigation could seriously harm Stratagene’s business.

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

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

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

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

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

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

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

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

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

•

an inability to obtain an adequate supply of required components due to manufacturing capacity constraints, the discontinuance of a product by a third-party manufacturer, acquisition of the manufacturer by one of Stratagene’s competitors, or other supply

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constraints;

•

delays and long lead times in receiving materials from vendors; and

•

reduced control over quality and pricing of components.

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

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

     Including sales made by Stratagene’s subsidiaries and distributors, its products are currently marketed in over 45 countries throughout the world. Measured in U.S. dollars, Stratagene’s product sales outside the United States represented 26% of its total sales for the nine months ended September 30, 2004. In addition, approximately 13% of its total sales for the nine months ended September 30, 2004 were for products exported from the United States. Stratagene expects that international sales will continue to account for a significant percentage of its revenues for the foreseeable future, in part because Stratagene intends to expand its international operations. There are a number of risks arising from Stratagene’s international business, including:

•

difficulties and costs associated with staffing and managing foreign operations;

•

unexpected changes in regulatory requirements;

•

the difficulties of compliance with a wide variety of foreign laws and regulations;

•

more limited protection for intellectual property rights in some countries;

•

changes in Stratagene’s international distribution network and direct sales force;

•

potential trade restrictions and exchange controls;

•

import and export licensing requirements;

•

longer accounts receivable collection cycles in certain foreign countries; and

•

potential increased costs associated with overlapping tax structures.

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

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

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

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

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

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

     Stratagene’s biological products and instruments are complex and may be improperly produced or manufactured. In the past, Stratagene has voluntarily recalled several of its products. In each case, the problem was identified by Stratagene and corrected. If Stratagene’s products need to be recalled, it could experience decreased sales and loss of customers and market share. In addition, a recall would divert managerial and financial resources and could harm Stratagene’s reputation with customers.

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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     Stratagene’s financial instruments include cash and cash equivalents, investments and long-term debt. At September 30, 2004, the carrying values of its financial instruments approximated their fair values based on current market prices and rates.

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     Foreign Currency Translation/Transaction

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

     Stratagene’s international sales expose it to foreign currency risk in the ordinary course of its business. Approximately 22% and 25% of Stratagene’s revenue for the nine months ended September 30, 2004 and 2003, respectively, was generated by its foreign subsidiaries. The foreign subsidiaries sell products in various local currencies that are collected at future dates and purchase raw materials and finished goods in both U.S. dollars and local currencies. Accordingly, Stratagene is exposed to transaction gains and losses that could result from changes in foreign currency exchange rates. Realized gains and losses from foreign currency transactions are included in operations as incurred.

     For financial reporting purposes, the foreign subsidiaries’ income statements are translated from the local currency into U.S. dollars at the exchange rates in effect during the reporting period. When the local currency strengthens compared to the U.S. dollar, there is a positive effect on the foreign subsidiaries’ sales as reported in Stratagene’s consolidated financial statements. Conversely, when the U.S. dollar strengthens, there is a negative effect. For the three and nine months ended September 30, 2004, the net impact to Stratagene’s reported sales from the effect of exchange rate fluctuations was an increase of approximately $0.5 million and $1.5 million, respectively, when compared to the exchange rates for the three and nine months ended September 30, 2003. For the three and nine months ended September 30, 2004, the net impact to Stratagene’s reported operating expenses from the effect of exchange rate fluctuations was an increase of approximately $0.4 million and $1.3 million, respectively, when compared to rates for the three and nine months ended September 30, 2003.

     Derivative Financial Instruments

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

     Stratagene manages its foreign currency exposure over a maximum of 12 months. At September 30, 2004 and 2003, Stratagene had outstanding foreign currency exchange contracts, maturing through December 2004 and 2003, with contract amounts of $3.6 million and $16.4 million, respectively. The Company entered into its 2004 contracts during the third quarter of 2003 and does not plan on entering into its 2005 contracts until the fourth quarter of 2004.

     Fair Value of Financial Instruments

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

     Interest Rates

     Stratagene’s cash and cash equivalents are generally invested in money market accounts and short-term debt instruments of highly rated credit issuers. Stratagene limits the amount of credit exposure to any one issuer and seeks to improve the safety and likelihood of preservation of its invested funds by limiting default risk and market risk. Based on the Company’s short-term investment portfolio at September 30, 2004, the Company believes that a 10% rise or fall in interest rates would have had no material impact on its financial statements.

     The following table shows the average interest rate for the three and nine months ended September 30, 2004 for each of Stratagene’s long-term debt obligations:

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

Item 4. Controls and Procedures

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

     The Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, except as noted below under “Changes in Internal Control,” the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

     Changes in Internal Control

     There have been no changes in the Company’s internal control over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     However, as disclosed in the Company’s registration statement on Form S-4 relating to the merger transaction with Hycor, in connection with its audits of the Company’s fiscal 2002 and 2003 financial statements, Deloitte & Touche LLP, the Company’s independent public accounting firm, identified the absence of qualified senior accounting personnel within the Company’s finance department during parts of 2002, 2003 and 2004 as a reportable condition pursuant to standards established by the American Institute of Certified Public Accountants. A “reportable condition” is a significant deficiency in the design or operation of internal control that could adversely affect an entity’s ability to record, process, summarize and report financial data consistent with the assertions of management in the financial statements. Deloitte & Touche LLP indicated that this lack of qualified senior staffing in the Company’s finance department resulted in a diminished ability to record, process, summarize and report financial data on a timely and accurate basis. Accordingly, Deloitte & Touche LLP recommended that the Company hire qualified senior accounting personnel, including a chief financial officer and a director of finance, to ensure that accounting information and records are prepared and reviewed in a timely manner. As disclosed in the Company’s registration statement on Form S-4 related to the Hycor merger transaction, Stratagene stated that it intended that Reginald P. Jones, the then chief financial officer of Hycor, would become the chief financial officer of the Company following the merger and that the Company would also hire a director of finance.

     In connection with the closing of the merger transaction with Hycor in June 2004, Reginald P. Jones became the chief financial officer of the Company. In addition, in May 2004 the Company hired a new director of finance. As a result of the hiring of Reginald P. Jones as the Company’s new chief financial officer in connection with the closing of the merger and the other additions made to the Company’s finance department in 2004, the Company is confident that it has taken the appropriate steps to remedy the reportable condition described above.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     Information regarding legal proceedings is contained in Note 9 to the Consolidated Financial Statements for the period ended September 30, 2004, which note is incorporated herein by this reference and is included as part of “Item 1. Financial Statements,” to this Form 10-Q.

Item 6. Exhibits

(a)

Exhibits.

**

These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES

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

STRATAGENE CORPORATION

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