UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

OR

Commission File Number: 000-50786

STRATAGENE CORPORATION

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

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

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

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

Common Stock, $.0001 par value
(Title of class)

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

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

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

     As of June 30, 2004, the last day of the registrant’s second fiscal quarter of fiscal 2004, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $64.1 million, based on the last reported sale price on the preceding business day. Shares of common stock held by each executive officer and director and by each person or group who owns 10% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The number of outstanding shares of the registrant’s common stock as of March 24, 2005 was 22,037,743

     DOCUMENTS INCORPORATED BY REFERENCE: Certain information called for by Part III of this Form 10-K will either be filed with the Commission under Regulation 14A under the Securities Exchange Act of 1934 or by amendment to this Form 10-K, in either case not later than 120 days after December 31, 2004.

STRATAGENE CORPORATION

Annual Report on Form 10-K
Table of Contents

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PART I.

     Item 1. Business

Overview

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

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

     Stratagene’s Research Supplies products incorporate a diverse range of molecular biology technologies used for gene transfer, gene and protein expression, gene cloning, protein and gene functional analysis, nucleic acid and protein purification and analysis, microarrays, DNA replication and nucleic acid quantification. Stratagene’s Medical Diagnostics products focus on allergy and autoimmune testing and urinalysis products. The Company’s Research Supplies products are manufactured in its facility near Austin, Texas, while its Diagnostics products are manufactured in its Garden Grove, California facility.

     Stratagene’s Research Supplies segment offers a broad portfolio of products in each of the following three market categories:

	•	Gene Analysis: Stratagene’s gene analysis products, which accounted for 51.3%, 59.2%, and 54.9% of total revenue in 2004, 2003 and 2002, respectively, help researchers study gene activity, genetic code sequences, and gene dosage; as well as allow the purification and amplification of nucleic acid sequences,
	•	Protein Analysis and Cell Biology: Stratagene’s protein analysis and cell biology products help researchers study signaling pathways within and between cells and tissues; create, purify and measure proteins; and change the chemical composition of proteins. These products accounted for approximately 15.2%, 15.1% and 15.3% of total revenue in 2004, 2003 and 2002, respectively.
	•	Gene Discovery: Stratagene’s gene discovery products, which accounted for approximately 11.4%, 17.1% and 23.3% of total revenue in 2004, 2003 and 2002, respectively, help researchers discover genes or find variations within DNA and RNA compositions.

     Stratagene’s Medical Diagnostics segment, which reflects sales from the date of the Hycor merger in June 2004 and, accordingly, does not reflects a full year of results, offers products in the following areas:

	•	Urinalysis: The KOVA™ Microscopic Urinalysis System is the Company’s largest product line in the Medical Diagnostics segment, accounting for approximately 7.4% of total revenue for 2004. The KOVA System provides laboratories with the capability to perform uniform and reliable microscopic analyses of urine specimens. It is composed of plastic collection containers, tubes and pipettes, patented microscopic slides, and human urine-based control materials.
	•	Allergy: The Company’s allergy diagnostic product line, which accounted for approximately 6.8% of total revenue for 2004, is a complete line of radioimmunoassay, or RIA, and enzymatic immunoassay, or EIA, procedures to test for specific allergies to more than 1,000 different allergens such as grasses, weeds, trees, epidermals (i.e., animal hair), dust, dust mites, molds, and foods. The Company also offers general screening tests. Unlike the traditional prick puncture and intradermal testing methods of diagnosing allergies, the Company’s products permit a physician to diagnose allergies by testing a sample of the patient’s blood for the presence of the specific IgE or IgG antibody, which reacts with the corresponding allergen. This method has many advantages over the traditional methods of allergy diagnosis, not the least of which is patient comfort.
	•	Autoimmune: The Company’s autoimmune diagnostic product line, which accounted for approximately 1.2% of total revenue in 2004, includes tests utilized for the diagnosis and monitoring of autoimmune disorders such as rheumatoid arthritis and systemic lupus erythematosus among others. Autoimmune diseases may be systemic or organ-specific and the need for this type of diagnostic testing is expected to increase as the population ages and primary care physicians are educated about autoimmune diseases. The Company’s tests are based on enzyme immunoassay technology in a microplate format. Unlike

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		traditional methods like immunofluorescence, which requires a dedicated and highly trained technologist to read slides manually through a microscope one at a time, the Company’s products can be automated either on the Company’s HY-TEC instruments or on general microplate processors.
		The Company’s allergy and autoimmune product lines also include the HY-TEC 480 and HY-TEC 288 automated diagnostic systems which provide clinical laboratories with significant productivity improvement capabilities. The HY-TEC systems include the instruments, software, and test reagents necessary to perform allergy and autoimmune testing. The Company places a large percentage of the HY-TEC systems on a “reagent rental” basis. A “reagent rental” transaction, common to the diagnostic market, involves the placement of an instrument in the laboratories of customers that pay for the system over an agreed contract period through the purchase of test reagents. The Company’s HY-TEC reagent rental program is similar in that instruments are typically placed in use with direct customers and paid for over an agreed contract period through the purchase of test reagents, but also includes the sale of some instruments to distributors and direct customers. The typical contract period for the HY-TEC reagent rental is between 3 and 5 years. The instruments that are sold to distributors are sold with a minimal gross profit to assist them with their instrument placements, with the expectation that the Company will earn a profit on the subsequent sales of reagents necessary to operate the instrument.

     Stratagene believes that its competitive strengths position it to compete effectively within the life sciences research and medical diagnostics products market. These strengths include innovative product research and development, a diverse intellectual property portfolio, a dedication to quality and customer service, effective sales and marketing, and an experienced management team.

Research and Development

     Stratagene believes that it has a strong scientific team. As of December 31, 2004, Stratagene’s research and development department had 65 employees, 25 of whom have Ph.Ds or M.Ds. Stratagene’s employees actively stay abreast of scientific and industry developments in an effort to identify and acquire innovative technologies from researchers and research institutions throughout the world. As of December 31, 2004, Stratagene owned approximately 160 patents and had approximately 190 patent applications pending. Stratagene spent $10.8 million, $10.5 million and $10.5 million on proprietary research and development activities during fiscal 2004, 2003 and 2002, respectively.

     Stratagene’s core strengths are in the areas of molecular biology, including gene cloning, gene expression and gene libraries. Stratagene has focused research groups in DNA replication factors, nucleic acid and protein purification, E. coli and mammalian genetics, polymerase chain reaction (PCR) and quantitative PCR (QPCR), ribonucleic acid interference (RNAi), proteomics, microarrays and bioinformatics.

Sales and Marketing

     Stratagene currently markets its products in over 45 countries worldwide. Stratagene sells its products directly to customers in the U.S., Canada, Germany, France, Japan, the United Kingdom and 14 other countries. In addition, Stratagene uses specialized distributors to market its products in more than 25 other countries. As of December 31, 2004, Stratagene employed 112 highly trained and skilled people in its sales and marketing department to market its products and provide customer technical support and service. Over 60% of Stratagene’s sales and marketing staff have degrees in biological sciences and over 40% have advanced degrees.

     Stratagene’s customers include most major pharmaceutical and biotechnology companies, including Merck, Pfizer, Amgen and Genentech. Stratagene also serves almost all academic research laboratories, including the United States National Institutes of Health, Harvard University, Stanford University and the University of California system. Additionally, Stratagene serves the two largest reference laboratories in the United States, Quest Diagnostics and Laboratory Corporation of America (LabCorp). Quest Diagnostics standardizes their member and managed laboratories on the Company’s KOVA-Trol urinalysis controls, and Stratagene is the prime allergy testing vendor to LabCorp. As a result of its long history of providing products to the molecular biology research and diagnostics markets, Stratagene enjoys a high degree of brand awareness.

     Due to the highly technical nature of its products, Stratagene employs and trains scientists to work as technical sales representatives. Each technical sales representative has an extensive background in molecular biology, including time spent in the laboratory doing research prior to being hired by the sales department. To guide the professional training of Stratagene’s technical sales representatives, Stratagene has developed a comprehensive product training and consultative selling skills curriculum called Stratagene University. Technical sales representatives matriculate through a series of courses to increase their product knowledge and develop the skills necessary to assist customers in making informed buying decisions. Strong consultative skills, in-depth product knowledge and a thorough understanding of molecular biology techniques and the research process allow Stratagene’s sales representatives to become advisors, acting in a consultative role with their customers. Stratagene’s technical sales representatives also

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seek to identify unmet market needs and opportunities for licensing and product development.

     Stratagene’s marketing departments in San Diego, California and Garden Grove, California combine various types of advertising media and methods to inform customers of new product developments and enhancements to existing products. Stratagene advertises in many prominent scientific journals, periodically publishes a product catalog, distributes quarterly Strategies newsletters and conducts direct mail campaigns to researchers in the U.S. and Europe. Stratagene also reaches a broad range of scientists by presenting at scientific seminars and exhibiting at scientific meetings.

     Stratagene’s web site allows researchers to learn about new products, view an on-line catalog, place orders, download technical manuals and vector sequences, read Stratagene’s newsletter and subscribe to monthly announcements about new products and other pertinent scientific information. In December 2004, the Stratagene web site logged approximately 143,000 visits. Stratagene currently accepts orders on-line and is working to make its entire order fulfillment and billing processes available to its customers electronically. As a result, Stratagene expects to be fully able to support its customers as they seek to shift their purchasing from current conventional procurement processes to e-commerce over the Internet.

Manufacturing

     Stratagene maintains manufacturing facilities in San Diego, California, Garden Grove, California, the Austin, Texas area and Edinburgh, Scotland. In June 2004, Stratagene decided to move its remaining manufacturing operations at the San Diego facility to its Texas facility. The move is expected to be completed by the end of the first quarter of 2005. Stratagene’s Garden Grove and Edinburgh facilities support its Medical Diagnostics products, while its Texas facility supports the Research Supplies products. Stratagene has distribution and warehouse facilities in Scotland, Germany, the Netherlands and Japan. Stratagene also provides instrument service capabilities in its sites in Texas, Germany and the Netherlands. Manufacturing at both the California and Texas facilities are supported by an integrated planning, purchasing and warehousing system, which includes incoming materials inspection and quality assurance testing. New product introductions, and existing product and process improvements are supported by a biological process improvement department within the manufacturing sector. All products must meet or exceed rigid quality control testing specifications.

     The Company’s Garden Grove facility is registered as a manufacturer of medical devices and a licensed biological manufacturer with the Food and Drug Administration, or FDA. To comply with FDA requirements, the Company must manufacture its Medical Diagnostics products in conformance with the FDA’s medical device Good Manufacturing Practice regulations. The Company’s existing Medical Diagnostics products are also subject to certain pre-market notification requirements of the FDA.

Patents and Proprietary Technologies

     Stratagene considers the protection of its proprietary technologies and products to be important to the success of its business. Stratagene relies on a combination of patents, licenses, trade secrets and trademarks to establish and protect its proprietary rights in its technologies and products. Stratagene’s product portfolio includes many products in which it has a proprietary interest. As of December 31, 2004, Stratagene owned approximately 160 patents and had approximately 190 patent applications pending. Additionally, Stratagene has entered into over 60 licenses with academic, government or commercial entities, which provide it with access to additional technologies. To stimulate growth, Stratagene continued to invest in excess of 12% of revenues in research and development during each of the prior two years. This investment in research and development is designed to continue an accelerated rate of new intellectual property creation.

     Generally, patents issued in the U.S. have a term of 17 years from the date of issue for patents issued from applications submitted prior to June 8, 1995 and 20 years from the date of filing of the application in the case of patents issued from applications submitted on or after June 8, 1995. Patents in most other countries have a term of 20 years from the date of filing the patent application. Stratagene’s material patents expire at various times between 2010 and 2017. As the publication of discoveries in the scientific and/or patent literature tends to lag behind actual discoveries by at least several months, there may be patent applications or scientific discoveries Stratagene is not currently aware of. Accordingly, Stratagene cannot assure you that patents will issue from any of its patent applications or from applications licensed to it.

     Stratagene’s success depends to a significant degree upon its ability to develop proprietary products and technologies. It is important to Stratagene’s success that it adequately protects its intellectual property associated with these products and technologies. Stratagene intends to continue to file patent applications as it develops new products and technologies. Patents provide some degree of protection for Stratagene’s intellectual property. However, the assertion of patent protection involves complex legal and factual determinations and is therefore uncertain and expensive. See “Factors that May Affect Future Results — Inability to Secure and Maintain Intellectual Property Protection for Stratagene’s Products and Technologies Could Adversely Affect Stratagene’s Ability to Compete” and “— Intellectual Property Litigation Could Seriously Harm Stratagene’s Business.”

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Technology Licensing

     Products accounting for approximately 50% of Stratagene’s total revenues in 2004 were sold pursuant to license agreements. Under these agreements, Stratagene pays royalties to the licensor based upon a percentage of the sales of the products containing or utilizing the licensed technology and/or intellectual property rights. Stratagene believes that its ability to license new technologies from third parties is and will continue to be important to its ability to offer new products.

     There can be no assurance that Stratagene will be able to continue to successfully identify new technologies developed by others. Even if Stratagene is able to successfully identify new technologies of interest, it may not be able to negotiate a license on favorable terms, or at all. See “Factors that May Affect Future Results — Failure to License New Technologies Could Impair Stratagene’s New Product Development.” Some of Stratagene’s licenses may not run for the life of the applicable patent. Stratagene may not be able to renew its existing licenses on favorable terms, or at all. If Stratagene loses its rights to patented technology, it may need to redesign its products or it may lose a competitive advantage. Potential competitors could license technologies that Stratagene fails to license and potentially erode its market share for certain products. See “Factors that May Affect Future Results — Stratagene May Not be able to Renew its Existing Licenses, which Could Prevent Stratagene from Selling Some of its Products.”

Competition

     The markets for Stratagene’s products are highly competitive. Stratagene expects the intensity of competition to increase. Stratagene’s principal competitors in the Research Supplies segment consist of the following:

	•	Invitrogen Corporation
	•	GE (Amersham Pharmacia Biotech)
	•	Promega Corporation
	•	New England Biolabs
	•	Qiagen
	•	Roche Molecular Systems
	•	Applera (Applied Biosystems)
	•	Techne
	•	Biorad

     The Company’s Medical Diagnostics product lines have several different competitors. The KOVA Microscopic Urinalysis System has significant competition from at least two national diagnostic product manufacturing and distribution companies that market products that perform similar functions. Management believes that the Company is the leading supplier of standardized microscopic urinalysis systems.

     Pharmacia, Inc. and Diagnostic Product Corporation have products that compete with the Company’s allergy diagnostic products.

     Many of Stratagene’s competitors have greater financial, operational and sales and marketing resources and more experience in research and development than Stratagene. These competitors and other companies may have developed or could in the future develop new technologies that compete with Stratagene’s products or which could render its products obsolete. See “Factors that May Affect Future Results — 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.”

     Stratagene believes that customers in its markets display a significant amount of loyalty to their initial supplier of a particular product. Therefore, there is a significant competitive advantage in being the first to introduce a new product to market. Accordingly, Stratagene believes that to compete effectively, it will need to consistently be first to market with innovative new research products and services. See “Factors that May Affect Future Results — Stratagene’s Future Success Depends on the Timely Introduction of New Products and the Acceptance of These New Products in the Marketplace.”

Government Regulation

     Stratagene’s Research Supplies products are not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the jurisdictions in which it operates, including those governing the handling and disposal of hazardous wastes and other environmental matters. Stratagene’s research and development activities involve the controlled use of small amounts of hazardous materials, chemicals and radioactive compounds. Although Stratagene believes that its safety procedures for handling and disposing of such materials comply with applicable regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, Stratagene could be held liable for resulting damages. Any such liability could have a material adverse effect on Stratagene. However, Stratagene does not expect that compliance

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with the governmental regulations to which it is subject will have a material effect on its capital expenditures, earnings or competitive position.

     Stratagene’s Medical Diagnostics products are indirectly affected by government regulations directed towards containing the cost of medical services and limiting the amount of reimbursement to service providers. These types of regulations, which are applicable to both domestic and international markets, will tend to limit growth rates in the Company’s target markets for these products. The Company’s products, including the HY-TEC automated diagnostic system, are designed to provide a cost effective solution to service providers, thereby aiding in the cost containment efforts. However, the Company cannot predict the long-term effect on revenue growth resulting from these regulations.

     The Company’s Garden Grove facility 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 products in conformance with the FDA’s medical device Good Manufacturing Practice regulations. The Company’s existing Medical Diagnostics products are also subject to certain pre-market notification requirements of the FDA.

     The receipt, use, and disposal of radioactive materials are subject to licensing requirements of the Nuclear Regulatory Commission, or NRC. The Company holds a radioactive materials license from the NRC for its radioactive labeling activities and its facilities are inspected periodically by the NRC.

     The Company would be adversely affected if it were unable to maintain its governmental licenses or continue to comply with applicable federal and state regulations, but the Company does not expect this to occur. The Company cannot predict whether future changes in government regulations might substantially increase compliance costs, adversely affect the time required to develop and introduce products, or limit or preclude the sale of its new products.

Employees

     As of December 31, 2004, Stratagene employed 467 persons, of whom 55 hold Ph.D. or M.D. degrees. As of that date, 65 employees were engaged in research and development, 112 in sales and marketing, 220 in manufacturing and 70 in supporting business development, information services, intellectual property, legal, finance, human resources and other functions. None of Stratagene’s employees are covered by collective bargaining agreements and Stratagene believes that it maintains good relations with its employees.

Available Information

     Our Internet address is www.stratagene.com. We make available free of charge through our Internet web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

     Item 2. Properties

     At December 31, 2004, the Company had the following facilities:

     Owned Facilities

	•	Stratagene owns approximately 42 contiguous acres in the Austin, Texas area, where during 1998 and 1999 it constructed an 85,000 square foot facility to support product manufacturing activities, warehousing and distribution of its Research Supplies products.
	•	Stratagene also owns an approximately 6,000 square foot facility in Jackson Hole, Wyoming, operated exclusively for research and development activities.

     Leased Facilities

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San Diego, California – This facility is approximately 47,000 square feet and serves as the Company’s headquarters, as well as its base for marketing and product support operations and research and development activities. This lease expires in September 2008 and Stratagene has the right to renew this lease for an additional five-year period.

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	•	Garden Grove, California – This approximately 76,000 square foot facility is where the Company manufactures its Medical Diagnostics products. The lease has a ten-year term and expires in December 2007.
	•	Amsterdam, the Netherlands – This facility is approximately 7,300 square feet and supports European sales and distribution of the Company’s Research Supplies products. The lease expires in August 2007.
	•	Ontario, Canada – This facility is approximately 2,200 square feet and supports research and development. This lease expires in September 2005.
	•	Tokyo, Japan – This location has a small facility to support new sales and distribution channels in Asia, as well as a warehouse. The leases for this facility cover approximately 2,500 square feet of space and expire in August 2006 and August 2007, respectively.
	•	Kassel, Germany – This facility is approximately 12,900 square feet and is used for packaging, warehousing, and distributing the Company’s Medical Diagnostics products. This lease expires in March 2007.
	•	Edinburgh, Scotland – This facility is approximately 7,000 square feet and supports research and development, manufacturing, warehousing, and distributing the Company’s Medical Diagnostics products. This lease expires in September 2006.

     In management’s opinion, the Company’s facilities and equipment are adequately maintained, in good operating condition and adequate for the Company’s present needs. The Company upgrades and modernizes its facilities and equipment and expands its facilities as necessary to meet customer and regulatory requirements.

     Item 3. Legal Proceedings

     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 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

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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. The parties entered into a joint stipulation, effective as of December 1, 2004, to stay the proceedings to continue to pursue settlement of this action. 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 has also asserted affirmative defenses, including invalidity and unenforceability, and counterclaims of invalidity and non-infringement. Stratagene is seeking an award of its fees and costs incurred in defending itself in this action.

     Applera Corporation

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

     Ariadne Genomics

     In March 2005, the Company filed a demand for arbitration against Ariadne Genomics for declaratory relief and damages relating to the Exclusive Marketing and Distribution Agreement (the "Agreement") between the parties. In particular, Stratagene seeks to confirm that it holds the exclusive right to market, sell and distribute the software products covered by the Agreement and all upgrades thereof in any country or territory in the world, except Japan, for the duration of the term of the Agreement. Further, Stratagene seeks to confirm that it is the party entitled to ownership and use of the trademark "Pathway Assist" or, alternatively, that neither party may use that name. The matter is currently pending before the American Arbitration Association of San Diego, California; the respondent has not yet filed an answering statement or any cross claims.

     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 uncertainties in the collectibility of the remaining 11,763 shares, the Company has not recorded any gain related to these remaining shares as of December 31, 2004.

     Item 4. Submission of Matters to a Vote of Security Holders

          During the fourth quarter of the fiscal year ended December 31, 2004, there were no matters submitted to a vote of security holders.

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PART II.

     Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Market Price of Common Stock

     Stratagene’s common stock trades on The Nasdaq Stock Market’s National Market under the symbol STGN. The following table sets forth the range of high and low trading prices for the common stock for the periods indicated as reported on the Nasdaq National Market. Stratagene’s common stock did not begin trading on the Nasdaq National Market until June 3, 2004, therefore, there is no information provided for the first quarter of 2004. The prices do not include retail markups, markdowns, or commissions.

     On March 24, 2005, the last reported sale of the Company’s common stock on the Nasdaq National Market was $8.05. There were 891 stockholders of record as of March 24, 2005 with 22,037,743 shares outstanding. No dividends have been paid to Stratagene stockholders during the past five years, and the Company has no current intentions of paying cash dividends in the foreseeable future. The Company’s credit facilities also restrict the payment of dividends. Prior to June 2, 2004, the Company’s financials were presented on a combined basis with BioCrest Holdings, LLC, or BCH, since BCH was in common control with Stratagene and substantially all of the BCH membership units were held by certain Stratagene shareholders. The members of BCH did receive distributions. However, since Stratagene acquired the BCH assets on June 2, 2004, no further distributions have been made.

     Item 6. Selected Financial Data

     The following selected historical consolidated financial data as of and for the fiscal years ended December 31, 2000, 2001, 2002, 2003 and 2004, presented below under the captions “Operating Results” and “Financial Position,” have been derived from our audited consolidated financial statements as of those dates and for those periods. The selected historical consolidated financial data and notes should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements.

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     Item 7. Management’s Discussion and Analysis of Financial Condition and Result of Operations

     The following information should be read in conjunction with the financial statements and the related notes included in Item 8 of Part II of this Annual Report on Form 10-K and with the financial statements. The financial information for Stratagene includes the accounts and balances of Stratagene Corporation and subsidiaries on a consolidated basis, and includes the results of operations of Hycor Biomedical Inc. and subsidiaries since Stratagene’s acquisition of Hycor on June 2, 2004.

     This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this Annual Report on Form 10-K 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.”

     The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.

Overview

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

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

Merger with Hycor

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

BCH Asset Acquisition

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

     Prior to the acquisition date, Stratagene presented its financial statements on a combined basis with BCH. BCH was a limited

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

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

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

Basis of Presentation

     The financial information of the Company has been presented on a consolidated basis, and includes the results of operations of Hycor Biomedical Inc. and subsidiaries since Hycor was acquired by the Company on June 2, 2004. The financial information also includes the results of operations of BCH, whose assets were acquired by the Company on June 2, 2004 and accordingly is presented on a consolidated basis for all periods (See Note 3 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 amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results include the following:

     Use of Estimates

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

     Revenue Recognition

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

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

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

     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 products sold at the time of such determination. Likewise, if Stratagene’s inventory is determined to be undervalued, it may have over-reported its cost of products sold in previous periods and would be required to recognize such additional operating income at the time of sale.

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

     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 Statement of Financial Accounting Standards, or SFAS, No. 109, Accounting for Income Taxes.

     Long-lived Assets

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

     Royalties

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     Stratagene enters into license agreements in the ordinary course of its business, which require royalty payments based on specified product sales. These agreements cover the majority of Stratagene’s products. Since mid-2003, Stratagene has withheld payments to a license holder while Stratagene evaluates a possible overpayment in the royalties paid in prior periods. Stratagene has continued to record the estimated quarterly royalty payable under the patent license agreement and reports this amount to the license holder. Management believes the royalty payments accrued are determined in accordance with the patent license agreement. However, the Company’s calculations of royalty payments are subject to review by the license holder. Therefore, Stratagene’s financial position or results of operations could be materially affected if the license holder later determines that the royalty calculation differs significantly from the amounts recorded by Stratagene. As of December 31, 2004, the amount of accrued and unpaid royalties related to this patent license agreement was $4.1 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 $450,000 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 shipment of equipment sold that includes a warranty, Stratagene establishes, as part of cost of products sold, a provision for the expected costs of such warranty. While Stratagene’s warranty costs have historically not been significant, Stratagene cannot guarantee that it will continue to experience the same warranty return and repair rates that it has in the past. A significant increase in product return and repair rates could have a material adverse impact on operating results for the period or periods in which such items materialize.

     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 consolidated income statements.

     Research and Development

     Stratagene focuses its research and development efforts on developing products that use innovative technologies in both the Research Supplies and Medical Diagnostics product lines. Research and development costs are expensed as incurred. For the years ended December 31, 2004, 2003 and 2002, Stratagene’s research and development expenses totaled approximately $10.8 million, $10.5 million and $10.7 million, respectively, and it intends to spend between 12% and 14% of its revenues on research and development activities for at least the next few years.

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

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

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Results of Operations

     Twelve months ended December 31, 2004 compared to twelve months ended December 31, 2003

     Product Sales

     Revenue increased $15.1 million or 21.7% in 2004 compared to 2003. This increase was primarily attributable to the Company recording seven months of Hycor’s diagnostics product sales of $13.4 million as a result of the merger on June 2, 2004. Also contributing to the growth were increased sales in QPCR, Mutagenesis and Bioinformatics product sales of $8.9 million offset by declines in older technology products of $7.0 million. Sales in 2004 were also affected by the weakening dollar resulting in a positive foreign exchange impact to foreign sales of $1.7 million, or 10%, and a 2.5% increase to total worldwide revenue when compared to 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.

     Gross Margin

     Gross margin decreased 1.4% from 66.8% in 2003 to 65.4% in 2004 primarily due to the blending of the lower margin diagnostic products as a result of the merger with Hycor. In March 2005, a patent under a significant royalty obligation will expire in the United States, reducing the Company’s royalty payments by approximately $450,000 per quarter beginning in the second quarter of 2005. The corresponding foreign patents will expire in 2006 and 2007, resulting in an additional $150,000 per quarter reduction beginning in the second quarter of 2006.

     Research and Development

     Research and development expenses increased $0.3 million or 2.9% in 2004 compared to 2003. This increase was due to the Company incurring seven months of Medical Diagnostics research and development expenses of $0.9 million as a result of the merger with Hycor, offset by decreased Research Supplies research and development expense of $0.6 million due to transitioning the Mx3000 effort from research and development to manufacturing in the third quarter of 2003 as well as canceling certain research and development efforts. As a percentage of product sales, research and development expenses decreased from 15.0% in 2003 to 12.7% in 2004 as a result of recognizing seven months of Diagnostics revenue of $13.4 million in 2004 as a result of the Hycor merger. Stratagene intends to continue spending approximately 12% to 14% of total revenues on research and development for at least the next few years in an effort to accelerate new product introductions.

     Selling and Marketing

     Selling and marketing expenses increased $3.0 million or 20.1% in 2004 compared to 2003. As a percentage of total revenue, selling and marketing expenses decreased slightly from 21.7% in 2003 to 21.4% in 2004. The increase in selling and marketing expenses was partially a result of incurring $2.0 million of Hycor selling and marketing expenses during the seven month period since the merger. Also contributing to the increase was the Company’s continued build up of its Japanese operations as well as an unfavorable foreign exchange impact of approximately $0.3 million. Additionally, 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 selling and marketing expenses over various periods ranging from one to five years beginning in June of 2004. The related amortization expense included in selling and marketing was approximately $0.2 million for the year ended December 31, 2004. Also included is approximately $53,000 of non-cash stock compensation charges related to the amortization of unvested stock options assumed in the Hycor merger. See Note 3 to the Company’s consolidated financial statements for the year ended December 31, 2004.

     General and Administrative

     General and administrative expenses increased by $5.3 million or 48.5% in 2004 compared to 2003. As a percentage of total revenue, general and administrative expenses increased from 15.8% in 2003 to 19.3% in 2004. The increased spending was primarily due to expenses of $2.4 million related to bonuses Dr. Sorge received as a result of the merger with Hycor, $0.4 million of expenses related to increased legal fees associated with patent litigation, approximately $1.0 million of expense for additional costs related to public company oversight and seven months of general and administrative expenses related to the Hycor operations of $1.5 million, which includes approximately $0.2 million for the amortization of patents and non-cash stock compensation charges related to the unvested stock options assumed in the merger with Hycor.

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     Impairment of Long-Lived Assets

     Impairment of long-lived assets decreased by $49,000 or 37.2% in 2004 compared to 2003. This expense relates to writing-off the remaining unamortized balances of patents that management believes are not recoverable.

     Other Income (Expense), Net

     Total other income, net of expense, increased by $5.3 million or 112.0% in 2004 compared to 2003. As a result of the BCH asset acquisition, Stratagene has a 49% minority interest in a limited partnership, which the Company refers to as the LP, 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 year ended December 31, 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 fewer losses from its minority interest in the LP as a result of the LP’s normal operations when compared to the same period in 2003.

     On December 23, 2004, the Company’s rights and interests in the LP were redeemed by the LP. In return, the Company received cash consideration of approximately $1.0 million and recorded a non-operating loss of approximately $0.2 million for the difference between the carrying basis in the entity on December 23, 2004 and the consideration received. As a result of the redemption transaction, the Company has rights to additional amounts realized by the LP from future royalty streams and future clinical trial revenues. These amounts will be recorded as other non-operating income in future periods when the amounts are known and the collection is assured.

     Also contributing to the net increase of other income was a reduction in interest expense of $1.9 million in 2004 compared to 2003 resulting from the repayment of long-term debt obligations as well as 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, $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 net increase in other income was also attributable to a gain of $0.7 million as a result of payments in 2004 from a litigation settlement in 2002, as well as a decrease in foreign currency transaction losses of $0.9 million as a result of the Company’s hedging activities.

     Income Taxes

     Stratagene recorded $3.3 million of tax expense in 2004. The effective tax rate decreased from 36.7% in 2003 to 30.5% 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 $1.8 million 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 the effective tax rate was offset by non-deductible foreign entity losses, for which the company has established valuation allowances due to the uncertainty of recovery of these foreign net operating 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.

     Twelve months ended December 31, 2003 compared to twelve months ended December 31, 2002

     Product Sales

     Revenue increased $5.2 million or 8.1% in 2003 compared to 2002. This growth was primarily attributable to increases in QPCR and Mutagenesis product sales of $7.0 million offset by declines in sales of older technology products of $4.0 million. Increased license and royalty income also contributed $1.5 million to the revenue growth. Sales in 2003 were also affected by the weakening dollar resulting in a positive foreign exchange impact to foreign sales of 20% and a 4% increase to total worldwide revenue when compared to 2002. Stratagene expects that future revenue will depend on a number of factors, including the market acceptance of new

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products, competitive conditions, currency fluctuations and the continued funding of customer research budgets.

     Gross Margin

     Gross margin increased 1.8% from 65% in 2002 to 66.8% in 2003 primarily due to increased sales of higher margin products.

     Research and Development

     Research and development expenses decreased $0.3 million or 2.4% in 2003 compared to 2002. As a percentage of product sales, research and development expenses decreased from 16.6% in 2002 to 15.0% in 2003. The decrease resulted primarily from the cancellation of a research and development project.

     Selling and Marketing

     Selling and marketing expenses decreased $1.6 million or 9.7% in 2003 compared to 2002. As a percentage of total revenue, selling and marketing expenses decreased from 26.0% in 2002 to 21.7% in 2003. The decrease in selling and marketing expenses resulted primarily from the consolidation of instrumentation and biological sales initiatives of $1.3 million. In addition, the Company recorded a nonrecurring expense of $0.3 million in 2002 related to stock compensation expense in connection with the termination of an employee’s stock options. These savings were offset by an unfavorable foreign exchange impact to foreign selling and marketing expenses of approximately $0.5 million.

     General and Administrative

     General and administrative expenses increased by $0.6 million or 5.3% in 2003 compared to 2002. As a percentage of total revenue, general and administrative expenses decreased from 16.2% in 2002 to 15.8% in 2003. This increase in spending was primarily due to further investment in Stratagene’s Asian operations and patent litigation.

     Impairment of Long-Lived Assets

     Impairment of long-lived assets increased by $75,000 or 132% in 2003 compared to 2002. This expense relates to writing-off the remaining unamortized balances of patents that management believes are not recoverable.

     Other Income (Expense), Net

     Total other income (expense), net increased in expense by $2.1 million or 82.0% in 2003 compared to 2002, as a result of increased interest expense of $0.9 million due to the interest rate of the subordinated notes increasing from 10% to 15% in April 2003.

     In 2003 Stratagene also incurred increased losses on foreign currency transactions of $0.8 million as a result of its foreign currency hedging activities. Finally, Stratagene recognized a $0.3 million reduction in the amount of income recorded from the equity in a joint venture with the LP, which declined from income of $70,000 in 2002 to a loss of $0.2 million in 2003. The LP is a medical reference lab. A large portion of its revenue is under contract for clinical trials and is subject to fluctuations upon the expiration of the trials. The LP’s revenue declined $0.2 million in 2003 when compared to 2002 due to the expiration of the clinical trials, and the LP continues to look for additional clinical trial contracts to replace those that expired. Also in 2003, the LP incurred increased expenses in costs of product sold of $0.2 million, due to the increased cost of test kits and lab supplies, and in sales and marketing expenses of $0.2 million as a result of hiring a business development manager to focus on pharmaceutical sales and marketing initiatives. Stratagene’s financials reflect 49% of the LP’s net income (loss).

     Income Taxes

     Stratagene recorded $1.9 million of tax expense in 2003. The effective tax rate decreased from a 62.8% expense in 2002 to an expense of 36.7% in 2003. This decrease in the effective rate was primarily due to BCH incurring higher expenses in 2002 due to increased investment in bioinformatics, for which no income tax benefit can be recognized. BCH and its subsidiaries are limited liability companies; therefore, any related income tax liabilities are the responsibility of the members. As a result, the operations of BCH do not reflect a provision for income taxes. Therefore, income taxes were recorded only on Stratagene and its subsidiaries.

     Stratagene recognizes state research and development and other credits when they are generated. Excess credits 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.

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     Liquidity and Capital Resources

     Stratagene’s liquidity requirements have historically consisted of research and development expenses, selling 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.

     For the twelve months ended December 31, 2004 and 2003, Stratagene generated net cash from operating activities of $11.0 million and $7.7 million, respectively. Stratagene generated net cash from investing activities of $4.1 million and used $2.3 million of net cash in its investing activities for the twelve months ended December 31, 2004 and 2003, respectively. Cash acquired related to the merger with Hycor, net of acquisition costs of $1.8 million, totaled $4.5 million for the twelve months ended December 31, 2004. Cash distributions from a joint venture resulting from the sale of certain assets of the joint venture and the sale of the Company’s minority interest in the joint venture totaled $2.0 million and $0 for the years ended December 31, 2004 and 2003, respectively. Capital expenditures and additions to patents for the twelve months ended December 31, 2004 totaled $1.8 million and $1.3 million, respectively, as compared to $1.3 million and $1.0 million, respectively, for the twelve months ended December 31, 2003.

     Stratagene used $12.6 million and $3.9 million in net cash for financing activities for the twelve months ended December 31, 2004 and 2003, respectively, which included the repayment of $30.2 million and $4.9 million in debt offset by borrowings under the Company’s credit facilities of $18.0 million and $1.7 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 years ended December 31, 2004 and 2003 was minimal and the allowance decreased by approximately $0.3 million and $0.5 million, respectively. This decrease in expected uncollectible accounts was due in part to continued collection efforts. No significant change to future liquidity is anticipated.

     Collection efforts with respect to accounts receivable provided cash of $0.9 million for the twelve months ended December 31, 2004. For the twelve months ended December 31, 2003, strong sales of a new instrumentation product increased accounts receivable by $1.9 million.

     Prepaids and other current assets provided cash of $1.5 million for the year ended December 31, 2004 due to allocation of merger related expenses to goodwill and additional paid-in capital in connection with the Hycor merger. For the year ended December 31, 2003, prepaids and other current assets used cash of $1.3 million as a result of expenses incurred related to the merger with Hycor.

     Capital expenditures for property and equipment during the twelve months ended December 31, 2004 and 2003 were approximately $1.8 million and $1.3 million, respectively. The Company currently anticipates capital spending on property and equipment to be in the range of $1.5 million to $2.0 million in fiscal 2005.

     Stratagene had cash, cash equivalents and restricted cash totaling $5.7 million and $2.7 million at December 31, 2004 and 2003, respectively, and working capital of $17.9 million and $9.5 million at December 31, 2004 and 2003, respectively.

     As of December 31, 2004, BioCrest Manufacturing, L.P., a consolidated subsidiary of Stratagene, had approximately $9.7 million in total debt. This debt included approximately $5.0 million under a reducing revolving line of credit and $4.7 million in industrial revenue bonds.

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

     Borrowings under the reducing revolving line of credit bear interest at a variable rate equal to the one-month LIBOR rate plus 2.55%. The reducing revolving line of credit includes customary but significant restrictions on the incurrence of additional debt, the payment of dividends, acquisitions and capital expenditures above stated limits. The reducing revolving line of credit also contains restrictive covenants requiring the Company to maintain certain financial ratios, including minimum debt service coverage ratios, fixed charge coverage ratios and tangible net worth. As of December 31, 2004, the Company was not in compliance with its fixed charge coverage ratio as a result of its election to prepay its term loan, which had a maturity date in 2006. The Company obtained an amendment to the credit agreement subsequent to December 31, 2004, which cured the violation. The Company was in compliance with all other covenants at December 31, 2004.

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     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 1.44% and 1.68% for the years ended December 31, 2004 and 2003, respectively. 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 in April 2005, $240,000 per year through April 2021, and then $175,000 in April 2022 when the bonds mature.

     Stratagene leases certain facilities and equipment under noncancelable operating leases, with equipment leases expiring through January 2007 and facility leases for the Company’s headquarters in La Jolla and its offices in Garden Grove, California, Canada, the Netherlands, Germany, Scotland and Japan expiring on various dates between September 30, 2005 and September 30, 2008.

     Stratagene has entered into employment agreements with certain of its officers which expire from June 2006 to June 2007 and with salary ranges from approximately $181,000 to $450,000. These agreements generally provide for severance benefits if the officer is terminated by Stratagene other than for cause, as defined in the employment agreements. See Note 3 to the financial statements for a summary of Dr. Sorge’s new employment agreement.

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

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

     Assuming that long-term debt principal payments are made according to their respective payment schedules, the future aggregate interest expense on long-term debt would be approximately $1.3 million.

 Off-Balance Sheet Arrangements

     At December 31, 2004 and December 31, 2003, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, variable interest or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, the Company does not engage in trading activities involving non-exchange traded contracts. As such, the Company is not materially exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.

 Other Commitments and Contingencies

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

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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 2 to the Consolidated Financial Statements for the year ended December 31, 2004, which note is incorporated herein by this reference and is included as part of “Item 8. Financial Statements and Supplementary Data,” to this Form 10-K.

Cautionary Note Regarding Forward-Looking Statements

     Some of the statements in this Annual Report on Form 10-K, 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 Annual 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, potential declines in research and development budgets or funding and the Company’s ongoing ability to protect its own intellectual property rights and to avoid violating the intellectual property rights of third parties.

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

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

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

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

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

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	•	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. Many of Stratagene’s competitors have greater financial, operational and sales and marketing resources and more experience in research and development than it does. These and other companies may have developed or could in the future develop new technologies that compete with Stratagene’s products or even render Stratagene’s products obsolete. Competition in Stratagene’s markets is primarily driven by:

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

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

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

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

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

     Approximately 50% and 58% of Stratagene’s revenue in 2004 and 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.

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     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.

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

     As of December 31, 2004, Joseph A. Sorge, M.D., the founder, chairman of the board of directors, chief executive officer and president of Stratagene, beneficially owned approximately 62% of Stratagene’s outstanding common stock. As a result, Dr. Sorge controls all matters requiring approval of its stockholders, including the election of directors and the approval of mergers or other business combinations. Such a concentration of ownership may have the effect of delaying or preventing transactions resulting in a change of control of Stratagene, including transactions where stockholders might otherwise receive a premium for their shares over then current market prices.

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

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

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competitors, its customers and other companies throughout its industry. Stratagene does not generally enter into employment agreements requiring these employees to continue in its employment for any period of time. Any failure on Stratagene’s part to hire, train and retain a sufficient number of qualified professionals could seriously damage its business.

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

     As of December 31, 2004, Stratagene had approximately $9.7 million of outstanding indebtedness, including approximately $5.0 million of borrowings under its reducing revolving line of credit and approximately $4.7 million in principal amount of industrial revenue bonds. Stratagene’s indebtedness could have negative consequences for Stratagene, including the following:

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

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

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

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

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

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

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

     Stratagene’s success depends to a significant degree upon its ability to develop, maintain and protect proprietary products and technologies. Stratagene files patent applications in the United States and selectively in foreign countries as part of its strategy to protect its proprietary products and technologies. However, patents provide only limited protection of Stratagene’s intellectual property. The assertion of patent protection involves complex legal and factual determinations and is therefore uncertain and expensive. Stratagene cannot assure you that patents will be granted with respect to any of its patent applications, that the scope of any of its issued patents will be sufficiently broad to offer meaningful protection or that Stratagene will develop additional proprietary

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technologies that are patentable. Stratagene’s issued patents or patents licensed to it could be successfully challenged, invalidated or circumvented so that Stratagene’s patent rights would not create an effective competitive barrier. The loss of a significant patent or the failure of a patent to issue from a pending patent application that Stratagene considers significant could have a material adverse effect on Stratagene’s business.

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

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

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

     Intellectual property litigation could seriously harm Stratagene’s business.

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

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

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

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

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

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

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     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 may be subject to significant fluctuations. These fluctuations may occur, among other reasons, in response to:

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

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

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

     As of December 31, 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 11.3 million shares of Stratagene common stock held by them in specified situations. The shares held by Dr. Sorge and such trusts and partnerships and the remaining shares of Stratagene common stock held by the other stockholders of Stratagene prior to the Hycor merger may also be sold from time to time in the public market subject to the requirements of Rule 144 under the Securities Act. The sale by Stratagene’s current stockholders of a substantial number of shares, or the expectation that such sales may occur, could significantly reduce the market price of the Stratagene common stock.

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     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.

     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 50% and 58% of Stratagene’s revenues for 2004 and 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 attempt 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

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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 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 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.

     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:

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	•	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 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 2004 product sales outside the United States represented 27% of its total sales. In addition, approximately 12% of its total sales for 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’s activities involve hazardous materials and may subject it to costly environmental liability.

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

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future environmental laws and regulations.

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

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

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

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

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

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

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

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

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

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

     Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Stratagene’s financial instruments include cash and cash equivalents, investments and long-term debt. At December 31, 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 27%, 26% and 24% of Stratagene’s revenue for 2004, 2003 and 2002, 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 year ended December 31, 2004, the net impact to Stratagene’s reported sales from the effect of exchange rate fluctuations was an increase of approximately $1.7 million, when compared to the exchange rates for the year ended December 31, 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 December 31, 2003, Stratagene had outstanding foreign currency exchange contracts, with contract amounts of $14.1 million. All futures contracts entered into for fiscal year 2004 were settled by year end, and the Company had no pending futures contracts outstanding.

     Fair Value of Financial Instruments

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

     Interest Rates

     Stratagene’s cash and cash equivalents are generally invested in money market accounts and short-term debt instruments of highly rated credit issuers. Stratagene limits the amount of credit exposure to any one issuer and seeks to improve the safety and likelihood of preservation of its invested funds by limiting default risk and market risk. Based on the Company’s short-term investment portfolio at December 31, 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 year ended December 31, 2004 for each of Stratagene’s long-term debt obligations:

     Stratagene’s interest income on marketable securities is dependent on the interest rate attributable primarily to the debt securities

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purchased by Stratagene. Stratagene has categorized these securities as available for sale and, as a result, they 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.

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Item 8. Financial Statements

The following documents are filed as part of this report:

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Stratagene Corporation:

     We have audited the accompanying consolidated balance sheets of Stratagene Corporation and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stratagene Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

San Diego, California
March 30, 2005

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STRATAGENE CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

32

STRATAGENE CORPORATION AND SUBSIDIARIES

See accompanying notes to consolidated financial statements.

33

STRATAGENE CORPORATION AND SUBSIDIARIES

(Continued)

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STRATAGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
Years Ended December 31, 2004, 2003 and 2002

(Concluded)

See accompanying notes to consolidated financial statements.

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STRATAGENE CORPORATION AND SUBSIDIARIES

(Continued)

36

STRATAGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Concluded)

See accompanying notes to consolidated financial statements.

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STRATAGENE CORPORATION AND SUBSIDIARIES

1. The Company and Its Business

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

     Stratagene engages in business activity in two operating segments: Research Supplies and Medical Diagnostics. The Company has marketed and sold its Research Supplies products for over 20 years, while the Medical Diagnostics products are a new addition to Stratagene’s product portfolio as a result of a merger with Hycor Biomedical Inc. in June 2004. (See Note 3)

     Basis of Presentation -The financial information of the Company has been presented on a consolidated basis, and includes the results of operations of Hycor Biomedical Inc. and subsidiaries (“Hycor”) since Hycor was acquired by the Company on June 2, 2004. The financial information also includes the results of operations of 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 3)

2. Summary of Significant Accounting Policies

     Principles of Consolidation - The consolidated financial statements of Stratagene include the accounts of Stratagene Corporation and all of its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated as appropriate in the consolidation of Stratagene.

     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.

     Restricted Cash - Restricted cash totaled $582,995 and $658,587 at December 31, 2004 and 2003, respectively. Total interest earned on restricted cash was $2,623, $3,398 and $5,397 for the years ended December 31, 2004, 2003 and 2002, respectively. Restricted cash deposits relate to the sinking fund payments required under the reimbursement agreement relating to the Bastrop County bonds. The Company makes monthly deposits into the sinking fund account. Each April, the sinking fund deposits are then used to make the required annual payment. An annual payment of $735,000 is required in April 2005, reducing to $240,000 annually through April 2021 and to $175,000 in April 2022 when the bonds mature.

     Marketable Securities -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 December 31, 2004 and 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.

     Inventories - Inventories consist primarily of biological products and instruments and are stated at the lower of cost or market. Cost is determined on a first-in, first-out basis. 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 and obsolete inventories have historically been within expectations and the provisions established.

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     Inventories include the following at December 31,

     Research and Development Costs - Research and development costs are expensed in the period incurred.

     Property and Equipment — Property and equipment are stated at cost. Depreciation of furniture and equipment, autos and trucks is calculated using the straight-line method based upon an estimated useful life of three to five years. Buildings are depreciated over 25 years using the straight-line method. Leasehold improvements are amortized using the straight-line method over the shorter of the lease or estimated useful life of the asset, generally five years.

     Property and equipment are summarized as follows:

     Intangibles - Intangible assets include long-lived assets associated with the merger with Hycor in June 2004. Intangibles also include costs incurred in connection with patent applications, consisting principally of legal fees. Amortization is calculated using the straight-line method over the estimated useful lives of the patents, generally seven years. Amortization expense totaled $875,967, $359,419, and $403,824 for the years ended December 31, 2004, 2003 and 2002, respectively.

     Notes Receivable from Stockholders - At December 31, 2003, Stratagene had unsecured notes receivable totaling $3,356,309 from stockholders of Stratagene, primarily for the exercise of Stratagene options for common stock and to replace certain other previously outstanding notes. These notes bear interest at rates ranging from prime (4.00% at December 31, 2003) to 5.91%. All obligations under such stockholder notes were satisfied during 2004 and there were no amounts receivable under such stockholder notes at December 31, 2004.

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

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

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

Warranty - The Company warrants certain equipment against defects in workmanship or materials for a period of one year from the date of purchase. Upon shipment of equipment sold that includes a warranty, the Company establishes, as part of cost of products sold, a provision for the expected costs of such warranty.

     Accrued warranty activity for the years ended December 31, 2004 and 2003 is as follows:

     Income Taxes - Stratagene and its subsidiaries record income taxes using the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

     Historically, BCH consisted 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. As a result, the operations of BCH did not reflect a provision for income taxes until these limited liability companies were acquired when Stratagene acquired the assets of BCH in June 2004. Since June 2004, income taxes have been recorded based on the net income or loss of the limited liability companies.

     Foreign Currency Translation/Transaction - The accounts of foreign subsidiaries and affiliates of the Company 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. Realized gains or losses from foreign currency transactions are included in operations as incurred.

     Derivative Financial Instruments - As part of distributing its products, the Company regularly enters into intercompany transactions with its foreign subsidiaries. The Company’s currency exposures vary, but are primarily concentrated in the Euro, British Pound, Swiss Franc and Japanese Yen. Accordingly, the Company periodically enters into foreign currency exchange futures contracts to mitigate foreign currency risk on its European revenues. The Company manages its exposure over a maximum of twelve months. At December 31, 2003, the Company had outstanding foreign currency exchange contracts with contract amounts of $14,064,850. All futures contracts entered into for fiscal year 2004 were settled by year end, and the Company had no pending futures contracts outstanding as of December 31, 2004.

     In the past, the Company’s derivative instruments have not qualified for hedge accounting in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“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 statement of operations. The Company does not enter into derivative instruments for trading or speculative purposes.

     Fair Value of Financial Instruments - The carrying amounts of cash, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, other current liabilities, and line 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.

     Impairment of Long-Lived Assets - The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 142, Goodwill and Intangibles, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. These

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Statements require that long-lived assets and certain identifiable intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill and non-amortizable intangible assets are reviewed for impairment annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

     Accounting for Stock-Based Compensation - The Company accounts for its stock-based compensation in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, as amended, and 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 value for Stratagene employee stock options was estimated at the dates of grant using the minimum value method of SFAS No. 123 from the inception date of the applicable stock option plan through June 2, 2004 and fair value for all option grants made subsequent to that date using the Black-Scholes pricing model. Fair value for Hycor employee stock options assumed by Stratagene in the Hycor merger was estimated at the dates of grant using the Black-Scholes pricing model for all option grants. The following weighted average assumptions were used for the years ended December 31, 2004, 2003 and 2002:

     If the computed fair values of the stock options granted in 2004, 2003 and 2002 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.

     Segment Reporting - The Company currently operates in two operating segments: Research Supplies and Medical Diagnostics.

     Recent Accounting Pronouncements -In December 2003, the Securities and Exchange Commission released 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 Emerging Issues Task Force (“EITF”) No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. The adoption of SAB No. 104 did not have a

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material impact on the Company’s revenue recognition policies, or its financial position or results of operations.

     In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that such items be recognized as current-period charges regardless of whether they meet the “so abnormal” criterion outlined in Accounting Research Bulletin (“ARB”) No. 43. SFAS No. 151 also introduces the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Unallocated overhead must be recognized as an expense in the period in which such costs are incurred. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company expects that the adoption of SFAS No. 151 will not have a material impact on its financial position or results of operations.

     In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which will be effective for public companies as of the first interim or annual reporting period that begins after June 15, 2005. SFAS No. 123R replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The new standard requires that the compensation cost relating to share-based payments be recognized in financial statements at fair value. As such, reporting employee stock options under the intrinsic value-based method prescribed by APB No. 25 will no longer be allowed. The Company has historically elected to use the intrinsic value method and has not recognized expense for employee stock options granted. The Company has not yet determined the impact that adopting SFAS No. 123R will have on the financial results of the Company in future periods.

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

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

     Reclassification — Certain reclassifications have been made to conform prior period financial information to the current presentation.

3. 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:

	•	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 medical diagnostics market;
	•	potential growth from increased earnings and revenue;
	•	expanded access to capital markets; and

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•

diversified customer base and product lines.

     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

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

•	the Hycor Biomedical Inc. 2001 Stock Option Plan;
•	the Hycor Biomedical Inc. 1992 Incentive Stock Plan; and
•	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:

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     The following represents an 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 completed its final analysis of the purchase price allocation related to the Hycor merger in the fourth quarter of 2004 and recorded an adjustment to increase deferred tax assets by $619,509 based on the completion of the tax returns as of the merger date. The offset of $619,509 was reflected in goodwill.