Prepared by MERRILL CORPORATION

Indicate 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 and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

As of November 5, 2001, the number of shares of common stock outstanding was 23,243,401 consisting of 23,505,305 shares issued less 261,904 shares of Treasury Stock.

		Page No.
PART I. FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000	1
	Consolidated Statements of Operations for the Three Months ended and Nine Months ended September 30, 2001 and 2000	2
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2001 and 2000	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
PART II. OTHER INFORMATION	16
Item 1.	Legal Proceedings	16
Item 2.	Changes in Securities and Use of Proceeds	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
Item 6.	Exhibits and Reports on Form 8-K	16
Signatures	18

Transgenomic, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands except share and per share data)

Transgenomic, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share data)

Transgenomic, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
(In thousands)

Transgenomic, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited)
(In thousands except share and per share data)

The accompanying unaudited consolidated financial statements of Transgenomic, Inc. and Subsidiaries (the "Company") have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. In the opinion of management of the Company, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the financial position, results of operations and cash flows for the periods presented. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2000 that are included in the Company's Annual Report on Form 10-K.

In June 2001, the Financial Accounting Standards Board ("FASB") approved the issuance of Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. These standards, issued in July 2001, establish accounting and reporting for business combinations. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. SFAS No. 142 is effective for the Company beginning on January 1, 2002. The historical impact of not amortizing goodwill would have been to increase net income for the three months ended September 30, 2001 and 2000 by $387 and $32, respectively, and for the nine months ended September 30, 2001 and 2000 by $686 and $95, respectively. The Company has not quantified the impact resulting from the adoption of the other provisions of SFAS No. 142.

In August 2001, the FASB issued SFAS No. 143, Accounting For Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and is effective for the Company's fiscal year beginning January 1, 2003. Management is in the process of evaluating the impact this standard will have on the Company's consolidated financial statements.

In addition, in October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS 144 develops one accounting model based upon the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The accounting model applies to all long-lived assets, including discontinued operations, and it replaces the provisions of APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for a disposal of segments of a business. SFAS 144 requires that long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. SFAS 144 also broadens the definition of discontinued operations. SFAS 144 is effective for the Company's fiscal year beginning January 1, 2002. Management is currently in the process of evaluating the impact this standard will have on the Company's consolidated financial statements.

At September 30, 2001 and December 31, 2000, short-term investments consisted of the following:

At September 30, 2001 and December 31, 2000, inventories consist of the following:

	2001			2000
Finished goods	$	2,319		$	703
Raw materials and work in progress		2,693			1,557
Demonstration inventory		590			503

		5,602			2,763
Less long-term demonstration inventory		(158	)		(196	)

	$	5,444		$	2,567

Other Comprehensive Income. Results of operations for the Company's foreign subsidiaries are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. These translation adjustments, along with

unrealized gains and losses on available-for-sale securities, are the Company's only components of other comprehensive income.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2001			2000			2001			2000
Net loss	$	(1,910	)	$	(2,077	)	$	(4,685	)	$	(8,289	)
Unrealized gain (loss) on available for sale securities		(32	)		—			29			—
Currency translation adjustments		143			(136	)		(27	)		(112	)

Total comprehensive loss	$	(1,799	)	$	(2,213	)	$	(4,683	)	$	(8,401	)

Stock Options. On May 23, 2001, the Company's stockholders approved an amendment to the 1997 Stock Option Plan to increase the number of shares for which common stock options can be granted to 7.0 million shares. During the nine months ended September 30, 2001, the Company granted 1,304,200 options with exercise prices ranging from $5.625 to $10.00 per share. Of the total granted during the first nine months, 27,500 options were granted to non-employees under consulting and other service agreements and compensation expense of approximately $22 was recorded associated with these grants. These expense amounts were calculated using the Black-Scholes option pricing model with the following assumptions: no common stock dividends, risk-free interest rates of 5.50% to 5.65%, volatility of 35%, and an expected option life of 3 years.

The following table summarizes activity under the 1997 Stock Option Plan during the nine months ended September 30, 2001.

		Number of Options	Weighted Average Exercise Price
Balance at December 31, 2000		4,034,881	$	6.43
	Granted	1,304,200	$	8.58
	Exercised	92,900	$	5.00
	Canceled	166,500	$	9.40

Balance at September 30, 2001		5,079,681	$	6.92

Exercisable at September 30, 2001		2,664,731	$	5.87

The weighted average fair value of options granted during the first nine months of fiscal 2001 was $2.65. At September 30, 2001, the weighted average remaining contractual life of options outstanding was 7.6 years. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in the first nine months of fiscal 2001: no common stock dividends; risk-free interest rates of 5.50% to 5.65%; 35% volatility; and an expected option life of 3 years.

Pro forma net loss and loss per share for the nine months ended September 30, 2001 and 2000, assuming compensation expense for the Stock Option Plan had been determined under SFAS 123, is as follows:

		Nine Months Ended September 30, 2001			Nine Months Ended September 30, 2000
Net Loss:
	As reported	$	(4,685	)	$	(8,289	)
	Pro forma	$	(6,572	)	$	(9,185	)
Basic and diluted loss per share:
	As reported	$	(0.21	)	$	(0.55	)
	Pro forma	$	(0.29	)	$	(0.61	)

Due to the Company's cumulative losses in recent years, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company has not provided for an income tax benefit during the three months or nine months ended September 30, 2001, based on management's determination that it was more likely than not that such benefits would not be realized. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. During the three months and nine months ended September 30, 2001, the Company recorded current tax expense related to its Japan branch operations.

As of September 30, 2001 and December 31, 2000, the Company's deferred tax assets were offset by a valuation allowance of approximately $10.5 million and $7.6 million, respectively, due to the Company's cumulative losses in recent years, expected losses in future years and inability to utilize any additional losses as carrybacks.

Effective May 1, 2001, the Company acquired Annovis, Inc, a privately held company, for approximately $15.5 million through the issuance of approximately 1.9 million shares of Transgenomic, Inc. common stock and the payment of approximately $0.6 million in cash in lieu of common stock to certain Annovis stockholders. The acquisition was structured as a merger of Annovis with a subsidiary of the Company and resulted in Annovis becoming a wholly-owned subsidiary of the Company. A total of 15% of the total shares of common stock issued in the merger is held in an escrow account with a bank. Delivery of the escrowed shares to the former shareholders of Annovis is subject to certain other conditions described in the merger agreement. Annovis is a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid based products and service for the life sciences industry. Annovis's results of operations have been included in the accompanying financial statements beginning on May 1, 2001.

The Company accounted for this transaction as a purchase. The Company has preliminarily allocated the excess of the purchase price over the net assets acquired to goodwill. The purchase price

allocation will be completed upon finalization of asset and liability valuations. The costs assigned to intangible assets are being amortized on a straight-line basis over a period averaging 10 years. As of September 30, 2001, all identifiable tangible and intangible assets acquired and liabilities assumed have preliminarily been allocated a portion of the cost equal to their estimated fair values as follows:

Net tangible assets and liabilities	$	1,319
Intangible assets		14,198
Total Purchase Price (including direct expenses)	$	15,517

On May 19, 2000, the Company sold the assets related to its non-life science instrument product line to a company controlled by Stephen F. Dwyer, a director and principal stockholder of the Company. The effective date of the sale was April 1, 2000. The Company's unaudited pro forma results of operations for the nine months ended September 30, 2001 and 2000, assuming the acquisition of Annovis, Inc. and the sale of the non-life science instrument product line occurred as of the beginning of the periods presented are as follows:

	Nine Months Ended September 30,
	2001			2000
Net Sales	$	31,844		$	22,237
Net Loss	$	(5,048	)	$	(8,810	)
Basic and diluted loss per share	$	(0.22	)	$	(0.52	)

The unaudited pro forma results of operations are not necessarily indicative of the actual results of operations had the acquisition and sale occurred on the dates indicated nor are they indicative of the results of operations for future periods.

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

The following discussion should be read in conjunction with our consolidated financial statements and notes included elsewhere in this filing.

We provide innovative tools and consumable products to the life science industry. Our WAVE® System is a versatile system that can be used for variation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. Our business plan is to focus on the genomics segment of the life sciences industry and the development, marketing and support of our proprietary technology for the automated separation and analysis of DNA. Our initial focus has been on marketing to researchers seeking to discover and understand variations in the human genetic code and the relationship of these variations to disease. Effective May 1, 2001, we acquired Annovis, Inc, a privately held company, for approximately $15.5 million through the issuance of approximately 1.9 million shares of Transgenomic, Inc. common stock and the payment of approximately $0.6 million in cash in lieu of common stock to certain Annovis stockholders. The acquisition was structured as a merger of Annovis with a subsidiary of the Company and resulted in Annovis becoming a wholly-owned subsidiary of the Company. A total of 15% of the total shares of common stock issued in the merger is held in an escrow account with a bank. Delivery of the escrowed shares to the former shareholders of Annovis is subject to certain other conditions described in the merger agreement. We accounted for this transaction as a purchase. Annovis is a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid-based products and service for the life sciences industry. This acquisition expands our consumable product offerings. Annovis's results of operations have been included in the accompanying financial statements beginning on May 1, 2001.

Revenues for our life science products are generated from the sale of our principal product, the WAVE® System, WAVE related consumable products and non-WAVE related consumable products. Through September 30, 2001, we have sold WAVE® Systems to major academic research centers and commercial biopharmaceutical companies in over 25 countries. Prior to the acquisition of Annovis, revenues from the sale of consumable products had historically represented approximately 20% of our net sales derived from our life sciences business. Subsequent to the acquisition of Annovis, revenues from the sale of consumable products as a percentage of our net sales has increased and we expect that sales from consumable products will continue to increase as a percentage of our net sales.

We have incurred significant losses resulting principally from costs incurred in research and development and selling, general and administrative costs associated with our operations. At September 30, 2001, we had an accumulated deficit of $25.7 million. Although we expect to continue to incur substantial research and development and selling, general and administrative costs as we continue to expand our operations we also expect these costs as a percentage of sales to decline.

Net Sales. Net sales increased 64%, from $6.2 million in 2000 to $10.3 million in 2001. The increase was a result of increased sales of WAVE related consumables and non-WAVE related consumables. Total consumable sales increased 415%, from $1.1 million in 2000 to $5.6 million in 2001. WAVE related consumables increased 48%, from $577,000 in 2000 to $851,000 in 2001. Sales of WAVE related consumable products increased as the installed base of WAVE® Systems has increased and as researchers begin to use them more extensively in place of other methods of DNA analysis. Non-WAVE related consumable sales increased 834%, from $507,000 in 2000 to $4.7 million in 2001. Sales of non-WAVE related consumables increased largely due to sales of specialty chemical products

added through the acquisition of Annovis. Total revenues from sales of WAVE® Systems decreased 9%, from $5.2 million in 2000 to $4.7 million in 2001. Although difficult to quantify the current or potential future impact, the world events of September 2001 negatively impacted our third quarter sales. Shipping disruptions subsequent to the events created delays in order fulfillment. While these events have impacted our entire business, the most significant impact has been to our WAVE system sales.

Cost of Goods Sold. Cost of goods sold increased 55% from $3.0 million in 2000 to $4.6 million in 2001. This increase was attributable to increased sales. Cost of goods sold represented 45% of net sales in 2001, as compared to 47% in 2000. Cost of goods sold as a percent of sales improved year over year due to lower combined material and manufacturing costs for our WAVE systems and fixed production costs for our consumable products being spread over a larger revenue base. We anticipate that this percentage will continue to improve in the future as we refine our systems configurations potentially reducing material costs and as consumables become a greater percent of our revenues.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 70%, from $3.5 million in 2000 to $5.9 million in 2001. The increase is the result of higher personnel and personnel-related expenses, professional service fees, goodwill amortization and real estate rent expenses. Direct personnel expenses accounted for approximately 46% of the overall increase and were the result of our expanded employee base. Professional services fees accounted for approximately 7% of the total increase. Professional service fees increased as the Company has engaged professionals to aid in our expanded sales, marketing, public relations and corporate infrastructure projects. Amortization of goodwill related to the Annovis acquisition was approximately $355,000, or 15% of the overall increase. Increased real estate rent expense accounted for 7% of the overall increase. Real estate rents increased as the Company has expanded existing facilities and added new locations in order to be more accessible to the Company's expanding customer base. The remaining increase is attributable to the costs associated with the expanded activities of the staff. Selling, general and administrative expenses as a percent of net sales was approximately 56% in 2000 and 58% in 2001. We anticipate selling, general and administrative expenses to increase, in absolute dollars, over the next several years to support our growing marketing, sales and business activities and costs associated with operating a public company.

Research and Development Expenses. Research and development expenses increased 14%, from $1.9 million in 2000 to $2.2 million in 2001. The increase in these expenses is attributable to increased personnel and personnel related expenses, professional service fees and real estate rent. Direct personnel expenses accounted for approximately 8% of the total increase and were due our expanded employee base. Professional service fees accounted for approximately 46% of the total increase. Professional service fees increased as the Company has engaged professionals to supplement the activities of our internal research and development personnel. Increased real estate rent expense accounted for 24% of the overall increase. Real estate rents increased as the Company has expanded existing facilities and added new locations in order to be more accessible to the Company's expanding customer base. The remaining increase is attributable to the costs associated with the expanded activities of the staff and the Annovis operations. These expenses represented approximately 30% of net sales in 2000 and approximately 21% of net sales in 2001. We expect research and development spending to increase significantly, in absolute dollars, over the next several years as we expand our development efforts.

Stock Based Compensation. Stock based compensation expense was $10,000 in 2001 and $41,000 in 2000. This expense reflects the amortization of deferred compensation related to stock options issued.

Other Income. Other income, which consist of net interest income and expense, improved from $43,000 in 2000 to $516,000 in 2001. Interest expense for the quarter was $0 as compared to $874,000

in 2000. The interest expense in 2000 included accelerated interest charges related to the Company's convertible notes. Interest income for the quarter was $507,000 as compared to $918,000 in 2000. The changes in interest expense and interest income are a result of our initial public offering. Proceeds from our IPO were used to pay all outstanding debt in fiscal year 2000 and the remaining proceeds were invested in income producing investments. The decrease in interest income is a result of declining interest rates on investments and changes in our short term investments balances.

Income Taxes. No income tax benefit was recorded in 2001 or 2000. No further tax benefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. During the three months ended September 30, 2001, the Company recorded current tax expense related to its Japan branch operations. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized.

Net Sales. Net sales increased 48%, from $18.8 million in 2000 to $27.7 million in 2001. The increase was a result of increased sales of our WAVE system, WAVE related consumables and non-WAVE related consumables offset by the divestiture of our non-life science instrument product line. The effective date of this divestiture was April 1, 2000 and, as a result, we recorded no sales from these non-life science products after March 31, 2000. Sales of non-life science products in the first quarter of 2000 were approximately $2.2 million.

Sales of our life sciences products increased 67%, from $16.6 million in 2000 to $27.7 million in 2001. Total revenues from sales of WAVE® Systems increased 32%, from $13.0 million in 2000 to $17.3 million in 2001. Total consumable sales increased 193%, from $3.6 million in 2000 to $10.4 million in 2001. WAVE related consumables increased 64%, from $1.3 million in 2000 to $2.2 million in 2001. Sales of WAVE related consumable products increased as the installed base of WAVE® Systems has increased and as researchers begin to use them more extensively in place of other methods of DNA analysis. Non-WAVE related consumable sales increased 269%, from $2.3 million in 2000 to $8.3 million in 2001. Sales of non-WAVE related consumables increased due to sales of specialty chemical products added through the acquisition of Annovis.

Cost of Goods Sold. Cost of goods sold increased 32% from $9.4 million in 2000 to $12.4 million in 2001. This increase was attributable to the increased sales. Cost of goods sold represented 45% of net sales in 2001, as compared to 50% in 2000. Cost of goods sold as a percent of sales improved year over year due to lower combined material and manufacturing costs for our WAVE systems, fixed production costs being spread over a larger revenue base and the sale of our non-life science product line. We anticipate that this percentage will continue to improve in the future as we refine our systems configurations potentially reducing material costs and as consumables become a greater percent of our revenues.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 49%, from $10.4 million in 2000 to $15.5 million in 2001. The increase is the result of higher personnel and personnel-related expenses, professional service fees, real estate rents and goodwill amortization. Direct personnel expense and increased travel and travel related expenses associated with the activities of our expanded staff accounted for approximately 47% of the overall increase. Professional services fees accounted for approximately 18% of the total increase. Professional service fees increased as the Company has engaged professionals to aid in our expanded sales, marketing, public relations and corporate infrastructure projects. Increased real estate rent expense accounted for

10% of the overall increase. Real estate rents increased as the Company has expanded existing facilities and added new locations in order to be more accessible to the Company's expanding customer base. Amortization of goodwill related to the Annovis acquisition was approximately $591,000, or 12% of the overall increase. The remaining increase is attributable to the costs associated with the expanded activities of the staff. Selling, general and administrative expenses as a percent of net sales was approximately 55% in 2000 and 56% in 2001. We anticipate selling, general and administrative expenses to increase over the next several years to support our growing marketing, sales and business activities and costs associated with operating a public company.

Research and Development Expenses. Research and development expenses increased 14%, from $5.7 million in 2000 to $6.4 million in 2001. The increase in these expenses is attributable to increased personnel and personnel related expenses, professional service fees and real estate rent. Direct personnel expense accounted for approximately 26% of the total increase and was due to our expanded employee base. Professional service fees accounted for approximately 58% of the total increase. Professional service fees increased as the Company has engaged professionals to supplement the activities of our internal research and development personnel. Increased real estate rent expense accounted for 12% of the overall increase. Real estate rents increased as the Company has expanded existing facilities and added new locations in order to be more accessible to the Company's expanding customer base. The remaining increase is attributable to the costs associated with the expanded activities of the staff and the Annovis operations. These expenses represented approximately 30% of net sales in 2000 and approximately 23% of net sales in 2001. We expect research and development spending to increase significantly over the next several years as we expand our development efforts.

Stock Based Compensation. Stock based compensation expense was $94,000 in 2001. This expense reflects the amortization of deferred compensation related to stock options issued. Stock based compensation expense was $791,000 in 2000. The expense in 2000 is attributable to the acceleration of vesting of 71,700 options held by former employees associated with the non-life science product line, the issuance of options to non-employee advisors and the amortization of deferred compensation. The acceleration of vesting resulted in the recording of $574,000 of stock based compensation expense during the first quarter of 2000.

Other Income/Expenses. Other income/expenses, which consist of net interest income and expense, improved from an expense of $869,000 in 2000 to income of $2.0 million in 2001. Interest expense for the first nine months of 2001 was $72,000 as compared to $1.8 million in 2000. Interest income was $2.1 million in 2001 as compared to $920,000 in 2000. The decrease in interest expense and the increase in interest income is a direct result of our initial public offering. Proceeds were used to pay all outstanding debt in fiscal year 2000 and the remaining proceeds were invested in income producing investments. Interest expense recorded during the 2001 resulted from the Annovis acquisition. All outstanding bank debt of Annovis was paid during the second quarter.

Income Taxes. No income tax benefit was recorded in 2001 or 2000. No further tax benefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. During the nine months ended September 30, 2001, the Company recorded current tax expense related to its Japan branch operations. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized.

We have experienced net losses and negative cash flows from operations in recent years. As a result, we had an accumulated deficit of $25.7 million as of September 30, 2001. On July 21, 2000, we issued 5,152,000 shares of common stock in our initial public offering at $15.00 per share. After payment of the underwriters' discounts and commissions and other expenses, we received net proceeds of approximately $69.9 million from this offering. In addition, the holder of a warrant to purchase 300,000 shares of common stock exercised the warrant at the time of our initial public offering thus providing us with an additional $1.5 million in cash. As of September 30, 2001, we had approximately $47.1 million in cash and cash equivalents and short-term investments. The decline in cash and cash equivalents and short-term investments from December 31, 2000, is a result of our operating activities, investments in property and equipment and our acquisition of Annovis.

Our operating activities resulted in net outflows of $7.8 million in the first nine months of 2001 as compared to outflows of $3.7 million in 2000. The operating cash outflows for 2001 were impacted in part by increased accounts receivable and inventory balances. Accounts receivable increased due to increased sales and the timing of sales during the third quarter. The average number of days to collect accounts receivable in the first nine months of 2001 was consistent with 2000 to approximately 75 days. Inventory balances increased due to the Annovis operations and an increase in WAVE instruments on-hand at the end of the quarter. The operating cash outflows for this period were also impacted by significant investments in research and development, and sales and marketing, which resulted in operating losses.

Our investing activities resulted in net cash outflows of $20.9 million for the nine months ended September 30, 2001, compared net cash outflows of $3.5 million in 2000. The investing cash flow outflows in 2001 is the result of the purchase of short-term investments, investments in property and equipment and payments associated with our acquisition of Annovis. Significant investments in property and equipment include research and development equipment, production equipment, customer resource management software, enterprise resource planning software, software and facilities improvements.

Net cash inflows in financing activities were $10,000 for the nine months ended September 30, 2001, and $67.3 million in 2000. The financing cash inflows in 2000 are the result of our initial public offering offset by the payment of outstanding debt. The financing cash inflows in 2001 are the result of proceeds received from the issuance of common stock for the exercise of stock options offset by the repayment of debt acquired in the Annovis transaction.

Our capital expenditures budget for 2001 is approximately $5.0 million, excluding any capital expenditures related to acquisitions. Capital expenditures for the current year are expected to relate to facility and equipment improvements related to our life sciences business. Research and development expenses are budgeted at approximately $8.9 million for 2001. We expect to devote substantial capital resources to continue our research and development efforts, to expand our marketing, sales and customer support activities, and for other general corporate activities. Our capital requirements depend on a number of factors, including the level of our research and development activities, market acceptance of our products, the resources we devote to developing and supporting our products, and other factors.

We believe that our current cash balances will be sufficient to fund operations through at least fiscal year 2003. During or after this period, if cash generated by operations is insufficient to satisfy our liquidity requirement, we may need to sell additional equity or debt securities, or obtain additional credit arrangements.

Historically, approximately 50% of our net sales have been to customers in the United States. While we do sell products in many foreign countries, most of these sales are completed by our wholly-owned subsidiaries, Transgenomic, Ltd., or Cruachem, Ltd., and are made in their operating currency. Results of operations for the Company's foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. To further limit our exposure to exchange rate risk all sales quotes issued by Transgenomic, Ltd. are now based upon the United States dollar pricing converted at prevailing exchange rates at the time of the quote. Additionally, such quotes have short expiration periods. As a result, although we are subject to exchange rate risk, management feels we do not have a material exposure to foreign currency rate fluctuations at this time.

In June 2001, the Financial Accounting Standards Board ("FASB") approved the issuance of Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. These standards, issued in July 2001, establish accounting and reporting for business combinations. SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. SFAS No. 142 is effective for the Company beginning on January 1, 2002. The historical impact of not amortizing goodwill would have been to increase net income for the three months ended September 30, 2001 and 2000 by $387,000 and $32,000, respectively, and for the nine months ended September 30, 2001 and 2000 by $686,000 and $95,000, respectively. The Company has not quantified the impact resulting from the adoption of the other provisions of these standards.

This report contains a number of "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. Many of these forward-looking statements refer to our plans, objective, expectations and intentions, as well as our future financial results. You can identify

these forward-looking statements by forward-looking words such as "expects," anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates," and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors would include the growth of the markets for DNA analysis technology, the acceptance of our technology by genomics researchers, our ability to continue to improve our products, the development of competing technologies, and our ability to protect our intellectual property rights.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments in 2001 was less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is presented.

We are not a party to, and none of our assets or properties are subject to, any material legal proceedings.

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

Delaware		911789357
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
12325 Emmett Street, Omaha, Nebraska		68164
(Address of principal executive offices)		(Zip Code)

				September 30, 2001			December 31, 2000
ASSETS
Current Assets
	Cash and cash equivalents			$	9,447		$	38,193
	Short term investments				37,701			23,728
	Accounts receivable—net				10,234			4,733
	Inventories				5,444			2,567
	Prepaid expenses and other current assets				1,238			948

		Total current assets			64,064			70,169
Property & Equipment
	Equipment				9,896			6,359
	Furniture & fixtures				2,740			1,068

		Total property & equipment			12,636			7,427
	Less: accumulated depreciation				4,863			2,836

		Net property & equipment			7,773			4,591
Goodwill—net					14,248			789
Intangible and other assets					3,334			2,314

Total Assets				$	89,419		$	77,863

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
	Accounts payable			$	2,934		$	1,961
	Accrued expenses and other liabilities				2,894			1,367
	Accrued compensation				663			569

		Total current liabilities			6,491			3,897
Commitments and contingencies
Stockholders' Equity
	Preferred stock $.01 par value, 15,000,000 shares authorized, none outstanding				—			—
	Common stock $.01 par value, 60,000,000 shares authorized, 23,455,305 and 21,472,816 issued and outstanding in 2001 and 2000				235			215
	Additional paid-in capital				111,331			97,965
	Unearned compensation				(203	)		(463	)
	Accumulated other comprehensive income				5			4
	Accumulated deficit				(25,690	)		(21,005	)

					85,678			76,716
	Less: Treasury stock, at cost, 261,904 shares				(2,750	)		(2,750	)

		Total stockholders' equity			82,928			73,966

			Total liabilities and stockholders' equity	$	89,419		$	77,863

		Three Months Ended September 30,						Nine Months Ended September 30,
		2001			2000			2001			2000
Net sales		$	10,254		$	6,249		$	27,729		$	18,785
Cost of goods sold			4,591			2,955			12,395			9,401

	Gross profit		5,663			3,294			15,334			9,384
Operating expenses:
	Selling, general and administrative		5,902			3,475			15,462			10,363
	Research and development		2,172			1,898			6,437			5,650
	Stock based compensation expense		10			41			94			791

	Total operating expenses		8,084			5,414			21,993			16,804
Loss from operations			(2,421	)		(2,120	)		(6,659	)		(7,420	)
Interest income			507			918			2,053			920
Interest expense			—			(874	)		(72	)		(1,776	)
Other income (expense), net			9			(1	)		14			(13	)

			516			43			1,995			(869	)
Loss before income taxes			(1,905	)		(2,077	)		(4,664	)		(8,289	)
Income tax expense			5			—			21			—

	Net loss	$	(1,910	)	$	(2,077	)	$	(4,685	)	$	(8,289	)

Basic and diluted weighted average shares outstanding			23,183,637			19,030,546			22,310,017			15,021,504
Net loss per common share—basic and diluted		$	(0.08	)	$	(0.11	)	$	(0.21	)	$	(0.55	)

			Nine Months Ended September 30,
			2001			2000
Cash Flows from Operating Activities
	Net loss		$	(4,685	)	$	(8,289	)
	Adjustments to reconcile net loss to net cash flows from operating activities:
		Depreciation and amortization		2,497			1,289
		Accrued interest and redemption premium		—			1,516
		Non-cash compensation expense		94			791
		Other		(9	)		4
	Changes in operating assets and liabilities net of acquisitions:
		Accounts receivable		(3,534	)		449
		Inventories		(1,548	)		(280	)
		Prepaid expenses and other current assets		(455	)		(312	)
		Accounts payable		(109	)		600
		Accrued expenses		(7	)		537

	Net cash flows from operating activities			(7,756	)		(3,694	)
Cash Flows from Investing Activities
	Purchase of property and equipment			(4,349	)		(1,630	)
	Proceeds from asset sales			15			3,621
	Increase in notes receivable			—			(4,807	)
	Purchase of available for sale securities			(13,944	)		—
	Purchase of business, net of cash acquired			(1,854	)		—
	Increase in other assets			(804	)		(670	)

	Net cash flows from investing activities			(20,936	)		(3,486	)
Cash Flows from Financing Activities
	Issuance of common stock and common stock warrants			468			72,365
	Net change in note payable—bank			—			(4,340	)
	Proceeds from notes payable—other			—			204
	Repayment of acquired businesses debt			(458	)		—
	Payments on notes payable—other			—			(901	)

	Net cash flows from financing activities			10			67,329
Effect of foreign currency exchange rates on cash				(64	)		130

Net change in cash and cash equivalents				(28,746	)		60,278
Cash and cash equivalents at beginning of period				38,193			153

Cash and cash equivalents at end of period			$	9,447		$	60,431

Non-cash financing activity:
	Issuance of common stock as acquisition consideration		$	13,084		$	—
	Conversion of notes payable into common stock		$	—		$	13,909

September 30, 2001	Amortized		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial paper	$	15,569	$	16	$	—	$	15,585
U.S. government agencies		12,706		—		9		12,697
Corporate debt		9,373		46		—		9,419

Total securities available-for-sale	$	37,648	$	62	$	9	$	37,701

December 31, 2000	Amortized		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Commercial paper	$	14,697	$	—	$	—	$	14,697
U.S. government agencies		2,949		—		1		2,948
Corporate debt		6,069		14		—		6,083

Total securities available-for-sale	$	23,715	$	14	$	1	$	23,728

(2.1)		Asset Purchase Agreement, dated May 16, 2000 between the Registrant and SD Acquisition Inc. (incorporated by reference to Exhibit 2 to Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on May 17, 2000)
(2.2)		Agreement and Plan of Merger, dated as of April 30, 2001 among Transgenomic, Inc., TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.1 to Report on Form 8-K (Registration No. 000-30975) as filed on May 31, 2001)
(2.3)		Addendum to Agreement and Plan of Merger, dated as of May 18, 2001 among Transgenomic, Inc., TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.2 to Report on Form 8-K (Registration No. 000-30975) as filed on May 31, 2001)
(3.1)		Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 2 to Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on May 17, 2000)
(3.2)		Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on March 10, 2000)

(4)		Form of Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on March 10, 2000)
(10.1)		Third Amended and Restated 1997 Stock Option Plan of the Registrant (incorporated by reference to Exhibit 10.1 of the Registrant's Report on Form 10-Q filed on August 14, 2001)
(10.2)		Second Amended and Restated 2001 Employee Stock Purchase Plan of the Registrant (incorporated by reference to Exhibit 4(b) of the Registrant's Registration Statement on Form S-8 (Registrant No. 333-71866) as filed on October 19, 2001)

		TRANSGENOMIC, INC.
November 8, 2001		By:	/s/ Gregory J. Duman Gregory J. Duman, Chief Financial Officer (authorized officer and principal financial officer)