10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

OR

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

For the transition period from              to             

Commission File Number 000-30975

TRANSGENOMIC, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	91-1789357
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification Number)
12325 Emmet Street Omaha, NE 68164	68164
(Address of Principal Executive Offices)	(Zip Code)

(402) 452-5400

(Registrant’s Telephone Number, Including Area Code)

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

Title of Each Class	Name of Each Exchange On Which Registered
None	N/A

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

Common Stock, par value $.01 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerate filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨            Accelerated Filer  ¨            Non-Accelerated Filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported closing price per share of Common Stock as reported on The Nasdaq National Market on the last business day of the registrant’s most recently completed second quarter was approximately $23.28 million.

At March 30, 2006, the registrant had 49,189,672 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant Proxy Statement relating to its 2006 Annual Meeting of Stockholders (the “Proxy Statement”) have been incorporated into Parts II and II of this Report on Form 10-K.

TRANSGENOMIC, INC.

Index to Form 10-K for the Fiscal Year Ended December 31, 2005

PART I			2
	Item 1.	Business	2
	Item 1A.	Risk Factors	6
	Item 1B.	Unresolved Staff Comments	9
	Item 2.	Properties	9
	Item 3.	Legal Proceedings	10
	Item 4.	Submission of Matters to a Vote of Security Holders	10
	Item 4A.	Executive Officers	10
PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	11
	Item 6.	Selected Consolidated Financial Data	12
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	24
	Item 8.	Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm	25
		Consolidated Balance Sheets as of December 31, 2005 and 2004	26
		Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003	27
		Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2005, 2004 and 2003	28
		Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003	29
		Notes to the Consolidated Financial Statements for the Years Ended December 31, 2005, 2004 and 2003	30
	Item 9.	Changes in and Disagreement with Accountants on Accounting and Financial Disclosure	46
	Item 9A.	Controls and Procedures	46
	Item 9B.	Other Information	46
PART III			46
	Item 10.	Directors and Executive Officers of the Registrant	46
	Item 11.	Executive Compensation	46
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	46
	Item 13.	Certain Relationships and Related Transactions	46
	Item 14.	Principal Accountant Fees and Services	46
PART IV			46
	Item 15.	Exhibits and Financial Statement Schedules	46
SIGNATURES			50

This Annual Report on Form 10-K references the following registered trademarks which are the property of Transgenomic: DNASEP^® Columns, WAVE^® System, WAVEMAKER^® Software, TRANSFORMING THE WORLD^® for Laboratory Equipment, TRANSGENOMIC^® and the Globe Logo^®; MutationDiscovery.com^® Website, OLIGOSEP^® for Systems and Reagents, OPTIMASE^® Polymerase, RNASEP^® Columns, WAVE OPTIMIZED^® reagents, and WAVE^® MD Systems. Additionally, this Annual report on Form 10-K references the following trademarks which are the property of Transgenomic: MitoScreen™ Kits, ProtocolWriter™ Software, Navigator™ Software, THE POWER OF DISCOVERY™ for Lab Reagents and Educational Programs, and Surveyor™ Nuclease. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.

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PART I

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements. Many of these forward-looking statements refer to our plans, objectives, expectations and intentions, as well as our future financial results and are subject to risk and uncertainty. You can identify these forward-looking statements by 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 many factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including those discussed under “Risks Related to Our Business” and other factors identified by cautionary language used elsewhere in the Annual Report on Form 10-K.

Item 1. Our Business

We develop, assemble, manufacture and market versatile products and provide analytical services to the medical research, clinical and pharmaceutical markets for use in genetic variation analysis. Products and services are sold through a direct sales force in the United States and throughout much of Western Europe. For the rest of the world, products and services are sold through more than 25 dealers and distributors located in those local markets. Net sales are categorized as bioinstruments, bioconsumables and discovery services.

• Bioinstruments. The flagship product is the WAVE^® system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of nearly 1,300 WAVE^® systems as of December 31, 2005. We utilize our sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.

• Bioconsumables. The installed WAVE^® base generates a demand for consumables that are required for the system’s continued operation. We develop, manufacture and sell these products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range of HPLC separation columns.

• Discovery Services. We provide various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska that operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.

Historically, we operated a segment (the “Nucleic Acids operating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and oligonucleotide synthesis companies and research institutions throughout the world. In the fourth quarter of 2005, we implemented a plan to exit this operating segment. Accordingly, results of this business are reflected as discontinued operations for all periods presented.

Business Strategy

Since inception, our business strategy has been to provide products and services to biomedical researchers, medical institutions, diagnostic and pharmaceutical companies that are tied to advancements in the field of genomics. Advances in genomics have fueled efforts to understand individual differences in disease susceptibility, disease progression, and response to therapy. Accordingly, a principal component of our strategy has been to establish our WAVE® system as an industry standard in the biomedical research market and to develop additional markets for the WAVE® system such as clinical research and diagnostics. Through an expanding base of installed systems, we expect to increase the sales of consumable products used with the WAVE® system and create opportunities to market additional products to this customer base. In addition, through our Discovery Services offerings, we have gained exposure to the translational and clinical research markets, laying the foundation for increasing our participation in the full value chain associated with activities ranging from basic biomedical research to development of diagnostic and therapeutic products.

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Significant 2005 Events

We decided to exit our former Nucleic Acids operating segment.

On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell this operating segment as a going concern are being evaluated, we have commenced procedures, including notification of affected employees, which may lead to closure and liquidation of the facility in Glasgow, Scotland. During 2006, we expect to incur costs of approximately $0.72 million related to statutory payments to affected employees and other costs specifically attributable to closure of the facility which have been accrued at December 31, 2005. In addition, the Company expects to incur additional period costs of approximately $0.25 million in each of the first two quarters of 2006 attributable to closure of the facility that will be recorded in discontinued operations in 2006. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8.02 million consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value. We now reflect the results of this operating segment as discontinued operations for all periods presented.

We completed a private placement of our common stock in the fourth quarter.

On October 31, 2005, we issued securities to institutional investors in a private placement (the “2005 Private Placement”). The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share. The aggregate purchase price for the securities sold was $1.01 per share of common stock initially being sold or $15.08 million. In conjunction with this transaction, we issued a warrant to Oppenheimer & Co., Inc. to purchase 932,859 shares at $1.20 per share as part of their placement fee.

The net proceeds from the 2005 Private Placement were $13.90 million after transaction costs of $1.18 million. These proceeds were partially used to repay all outstanding principal and accrued interest on our loans to Laurus Master Funds, Ltd. (“Laurus”) including fees paid to Laurus to facilitate the 2005 Private Placement and prepayment penalties to Laurus in the sum of $0.82 million. The remaining proceeds of $5.35 million will be used for future working capital needs.

One of our laboratories was certified under the Clinical Laboratory Improvement Amendment, and we began to offer molecular-based testing to physicians and third-party laboratories.

During the fourth quarter of 2005, our laboratory in Omaha, Nebraska was certified under the Clinical Laboratory Improvement Amendments and we received our first patient samples for molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories. We believe there is a significant opportunity for us to capitalize on the increasing demand for molecular-based personalized medicine by leveraging on our technologies and experience gained from the genomic biomarker analysis that our Discovery Services Group has and will continue to provide to pharmaceutical and biopharmaceutical companies.

We introduced the newest generation of our flagship product, the WAVE^® system 4500.

During September 2005, we introduced the newest version of our WAVE^® platform, the WAVE^® system 4500. The WAVE^® 4500 includes enhancements that are designed to optimize sensitivity and throughput for our customers while reducing our overall product and maintenance cost. In addition to new product sales, certain enhanced components of the WAVE^® 4500, including the oven and software, will provide modular upgrade opportunities for our existing customers.

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In the first quarter, Laurus converted $2.52 million of its loans into shares of our common stock.

On March 18, 2005, we allowed Laurus to convert $1.87 million of the outstanding principal balance under our convertible line of credit (the “Credit Line”) into 3,600,000 shares of our common stock. In addition, on March 24, 2005 we allowed Laurus to convert $0.65 million of the outstanding principal balance of our convertible term note (the “Term Note”) into 1,250,000 shares of our common stock. The Credit Line and Term Note (collectively, the “Laurus Loans”) were subsequently repaid in September 2005 and are no longer available to us.

Sales and Marketing

We have sold our products to customers in over 30 countries. We use a direct sales and support staff for sales in the U.S., U.K. and most countries in Western Europe. For the rest of the world, we sell our products through dealers and distributors located in those local markets. We have over 25 dealers and distributors. We also maintain regionally-based technical support staffs and applications scientists to support our sales and marketing activities throughout the U.S. and Europe.

Customers

Customers include numerous leading academic and medical institutions in the U.S. and abroad. In addition, our customers also include a number of large, established U.S. and foreign pharmaceutical, biotech and commercial companies. No customer accounts for more than 10% of consolidated net sales.

Research and Development

We maintain an active program of research and development primarily directed toward the improvement of the DNA separation media used in our WAVE^® system, the refinement of the hardware and software components of the WAVE^® system, the creation of unique enzymes and WAVE-Optimized^® enzymes, and the development of assays on the WAVE^® system.

For the years ended December 31, 2005, 2004 and 2003, our research and development expenses were $2.20 million, $4.50 million and $6.83 million, respectively. We will need to continue to invest in research and development activities in order to remain competitive and to take advantage of new business opportunities as they arise. During 2006, we expect research and development expense to be approximately equal to the 2005 levels.

In addition to the amounts reflected above, our discontinued operations incurred no research and development expenses during the year ended December 31, 2005 and $2.18 million and $2.47 million during the years ended December 31, 2004 and 2003, respectively.

Manufacturing

We manufacture bioconsumable products including our separation columns, liquid reagents, and enzymes. The major components of our WAVE^® systems are manufactured for us by a third party. We integrate our own hardware and software with these third party manufactured components. Our manufacturing facilities for our WAVE^® systems and bioconsumables are located in Omaha, Nebraska, San Jose, California, and Cramlington, England. The nature of our instruments and bioconsumables business does not generally lend itself to tracking and reporting sales backlog.

Intellectual Property

To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade-secret laws, as well as confidentiality provisions in our contracts. We presently own rights to more than 40 issued patents and 20 pending applications in both the U.S. and abroad. Our WAVE^® System and related

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consumables, are protected by patents and in-licensed technologies that expire in various periods beginning in 2013 through 2022. We will continue to file patent applications and seek new licenses as warranted to protect and develop new technologies of interest to our customer base in the coming years.

Competition

The markets in which we operate are highly competitive and characterized by rapidly changing technological advances. A number of our competitors possess substantial resources and are able to develop and offer a much greater breadth of products and/or services, coupled with significant marketing and distribution capabilities. We compete principally on the basis of uniquely enabling technical advantages in specific but significant market segments.

Competition for our WAVE^® systems arises primarily from DNA sequencing and genotyping technologies. Competitors in these areas include Applied Biosystems, Beckman Coulter, Amersham (now part of GE Healthcare), Affymetrix, Agilent Technologies, Nanogen, Illumina, Sequenom, Pyrosequencing (now part of Biotage AB), Varian, and others. Competition for some of our non-WAVE^® consumable products comes from numerous well-diversified life sciences reagents providers, including, among others, Invitrogen, Qiagen, Roche, Stratagene, and Promega. Our discovery services product line faces competition from a number of companies offering contract DNA sequencing and other genomic analysis services, including Genaissance Pharmaceuticals, GeneLogic, Agencourt, SeqWright, Gentris, and Perlagen. In addition, several clinical diagnostics service providers, such as Labcorp, Quest, and Specialty Laboratories, also offer related laboratory services in support of clinical trials. Finally, additional competition arises from academic core laboratory facilities.

Employees

As of December 31, 2005, 2004 and 2003, we had employees focused in the following areas of our operation:

	December 31,
	2005	2004	2003
Manufacturing	56	52	54
Sales, Marketing and Administration	73	75	90
Research and Development	10	19	31
	139	146	175
Personnel associated with discontinued operations	17	32	69
	156	178	244

Our employees were employed in the following geographical locations.

	December 31,
	2005	2004	2003
United States	94	106	166
Europe (other than the United Kingdom)	23	22	20
United Kingdom	39	50	58
	156	178	244

We supplement our workforce through the use of independent contractors and consultants. At December 31, 2005, 2004 and 2003, we have engaged independent contractors or consultants who provide services to us approximately equivalent to one, five and four full-time employees, respectively.

General Information

We were incorporated in Delaware on March 6, 1997. Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164 (telephone: 402-452-5400). We maintain manufacturing facilities in Omaha, Nebraska, San Jose, California, and Cramlington, England. We maintain research and development offices in Gaithersburg, Maryland and Omaha, Nebraska. Additionally, our discontinued operation includes a manufacturing facility in Glasgow, Scotland.

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We make reports filed by us with the SEC available free of charge on our website as soon as reasonably practicable after these reports are filed. The address of our website is www.transgenomic.com. Information on our website, including any SEC report, is not part of this Annual Report on Form 10-K.

Item 1A. Risk Factors

We may not have adequate financial resources to execute our business plan.

At December 31, 2005, we had cash and cash equivalents of $6.74 million. While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2006, we have experienced recurring net losses and have an accumulated deficit totaling $122.09 million at December 31, 2005 and have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To the extent necessary, we believe that we can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of our business plan. Ultimately, we must achieve sufficient revenues in order to generate positive net earnings and cash flows from operations. However, we cannot assure you that we will be able to increase our revenues.

We have a history of operating losses and may incur losses in the future.

We have experienced annual losses from continuing operations since inception of our operations. Our losses from continuing operations for the years ended December 31, 2005, 2004 and 2003 were $4.98 million, $13.75 million, and $9.51 million, respectively. These losses have been due principally to the high levels of research and development expenses and sales and marketing expenses that we have incurred in order to develop and market our products, restructuring charges and impairment charges. In addition, markets for our products have developed more slowly than expected in many cases and may continue to do so. As a result, we may incur operating losses in the future.

Markets for our products and services may develop slowly.

There are many factors that affect the market demand for our products and services that we cannot control. Demand for our WAVE^® system is affected by the needs and budgetary resources of research institutions, universities, hospitals and others who use the WAVE^® system for genetic-variation research. The WAVE^® system represents a significant expenditure by these types of customers and often requires a long sales cycle. If revenues from the sales of our products and services continue at current levels, we may need to take steps to further reduce operating expenses or raise additional working capital. We cannot assure you that sales will increase or that we will be able to reduce operating expenses or raise additional working capital.

One customer accounted for a significant portion of sales.

No customer accounted for more than 10% of consolidated net sales for any period presented. However, sales to a large pharmaceutical company totaled $2.19 million, $1.66 million and $0.39 million during the years ended December 31, 2005, 2004 and 2003, respectively, and represented 9%, 7%, and 2% of consolidated net sales. Sales to this customer are governed by a non-binding master services agreement dated August 22, 2002. Accordingly, the amount of sales to this customer is subject to change.

The sale of our products and business operations in international markets subjects us to additional risks.

During the past several years, international sales have represented approximately 55-68% of our total net sales. As a result, a major portion of our revenues and expenses are subject to risks associated with international sales and operations. These risks include:

• payment cycles in foreign markets are typically longer than in the U.S., and capital spending budgets for research agencies can vary over time with foreign governments;

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• changes in foreign currency exchange rates can make our products more costly and operating expenses higher in local currencies since our foreign sales and operating expenses are typically paid for in U.S. Dollars, British Pounds or the Euro; and

• the potential for changes in U.S. and foreign laws or regulations that result in additional import or export restrictions, higher tariffs or other taxes, more burdensome licensing requirements or similar impediments to our ability to sell products and services profitably in these markets.

Our WAVE^® system includes hardware components and instrumentation manufactured by a single supplier and if we are no longer able to obtain these components and instrumentation our ability to manufacture our products could be impaired.

We rely on a single supplier, Hitachi High Technologies America, to provide the basic instrument used in our WAVE^® systems. While other suppliers of instrumentation and computer hardware are available, we believe that our arrangement with Hitachi offers strategic advantages. Hitachi is replacing its current instrument line with a new instrument line. While we presently plan to convert our technology and applications to this new instrument line, such conversion may not be successful and, therefore, we may incur additional costs for the custom manufacturing of the current instrument line. If we were required to seek alternative sources of supply, it could be time consuming or expensive or require significant and costly modification of our WAVE^® system. Also, if we were unable to obtain instruments from Hitachi in sufficient quantities or in a timely manner, our ability to manufacture our products could be impaired, which could limit our future revenues.

We may not have adequate personnel to execute our business plan.

In order to reduce our operating costs, we have significantly reduced the number of employees, including reductions in our research and development staff and our sales and marketing personnel. In addition, we may lose other key management, scientific, technical, sales and manufacturing personnel from time to time. It may be very difficult to replace personnel if they are needed in the future, and the loss of key personnel could harm our business and operating results. We cannot assure you that our employee reductions will not impair our ability to continue to develop new products and refine existing products in order to remain competitive. In addition, these reductions could prevent us from successfully marketing our products and developing our customer base.

Our markets are very competitive.

Many of our competitors have greater resources than we do and/or may enjoy other competitive advantages. This may allow them to more effectively market their products to our customers or potential customers, to develop products that make our products obsolete or to produce and sell products less expensively than us. As a result of these competitive factors, demand for and pricing of our products and services could be negatively affected.

Our patents may not protect us from others using our technology that could harm our business and competitive position.

Patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, we cannot be certain that others will not independently develop similar or alternative products or technology, duplicate any of our products, or, if patents are issued to us, design around the patented products developed by us. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were adverse to us, our competitors could be free to use our technology. We may not be able to obtain additional patents for our technology, or if we are able to do so, patents may not provide us with substantial protection or be commercially beneficial. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.

We cannot be certain that other measures taken to protect our intellectual property will be effective.

We rely upon trade secret protection, copyright and trademark laws, non-disclosure agreements and other contractual provisions for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If such measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced.

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We are dependent upon our licensed technologies and may need to obtain additional licenses in the future to offer our products and remain competitive.

We have licensed key components of our technologies from third parties. If these agreements were to terminate prematurely due to our breach of the terms of these licenses or we otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell a substantial portion of our products. In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive. If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new products that we need to remain competitive.

The protection of intellectual property in foreign countries is uncertain.

A significant percentage of our sales are to customers located outside the U.S. The patent and other intellectual property laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may need to bring proceedings to defend our patent rights or to determine the validity of our competitors’ foreign patents. These proceedings could result in substantial cost and diversion of our efforts. Finally, some of our patent protection in the U.S. is not available to us in foreign countries due to the laws of those countries.

Our products could infringe on the intellectual property rights of others.

There are a significant number of U.S. and foreign patents and patent applications submitted for technologies in, or related to, our area of business. As a result, any application or exploitation of our technology could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. This may lead others to assert patent infringement or other intellectual property claims against us.

Our failure to comply with any applicable government regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that we use may adversely affect our results of operations.

Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state, local and international laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot assure you that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.

The price for our common stock is volatile and may drop.

The trading price for our common stock has fluctuated significantly over recent years. The volatility in the price of our stock is attributable to a number of factors, not all of which relate to our operating results and financial position. Nevertheless, continued volatility in the market price for our stock should be expected and we cannot assure you that the price of our stock will not decrease in the future. Fluctuations or further declines in the price of our stock may affect our ability to sell shares of our stock and to raise capital through future equity financing.

If we are unable to maintain our Nasdaq listing, your ability to trade shares of our common stock could suffer.

In order for our common stock to remain listed on the Nasdaq National Market (“Nasdaq”), we must meet the minimum listing requirements for continued listing, including, among other requirements, minimum bid price and market value of public float requirements. On February 15, 2006, we were notified that the bid price for our common stock over a 30-day period was below the $1.00 minimum required for continued listing of our common stock on the Nasdaq. In order to remain listed, the minimum bid price for our common stock must be at least $1.00 per share over ten consecutive business days before August 14, 2006. If we are not able to regain compliance with this listing requirement, we may be

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delisted from the Nasdaq. If our common stock is delisted from the Nasdaq, transactions in our common stock would likely be conducted only in the over-the counter market, or potentially on regional exchanges, which could negatively impact the trading volume and price of our common stock, and investors may find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, our common stock. In addition, if our common stock were not listed on the Nasdaq and the trading price of our common stock fell below $1.00 per share, trading in our common stock would also be subject to the requirements of certain rules which require additional disclosures by broker-dealers in connection with any trades involving a stock defined as a “penny stock.” In such event, the additional burdens imposed on broker-dealers to effect transactions in our common stock could further limit the market liquidity of our common stock and the ability of investors to trade our common stock.

We may issue a substantial amount of our common stock to holders of options and warrants and this could reduce the market price for our stock.

At December 31, 2005, we had obligations to issue 13,625,675 shares of common stock including outstanding stock options representing 5,563,098 shares and warrants representing 8,062,577 shares. The issuance of these additional shares of common stock may be dilutive to our current shareholders and could negatively impact the market price of our common stock.

Our common stock is thinly traded and a large percentage of our shares are held by a small group of unrelated, institutional owners.

At March 30, 2006, we had 49,189,672 shares of common stock outstanding. Fewer than ten unrelated, institutional holders own 50% to 70% of these shares. The sale of significant shares into the public market has potential to cause significant downward pressure on the price of our common stock. This is particularly the case if the shares being placed into the market exceed the market’s ability to absorb the stock. Such an event could place further downward pressure on the price of our common stock. This presents an opportunity for short sellers to contribute to the further decline of our stock price. If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We own one facility in Glasgow, Scotland and lease 10 facilities throughout the world under non-cancelable leases with various terms. The following table summarizes occupied locations. Annual rent amounts presented in the table are reflected in thousands.

Location	Function	Square Footage	2006 Scheduled Rent		Lease Term Expires
Owned
Glasgow, Scotland	Phosphoramidite Manufacturing (1)	44,212		N/A	N/A
Leased and Occupied
Omaha, Nebraska	WAVE®and Consumable Manufacturing	25,000	$	132	June 2007
San Jose, California	Consumable Manufacturing	14,360	$	148	October 2010
Cramlington, England	Consumable Manufacturing	8,500	$	14	March 2006
Omaha, Nebraska	Multi Functional (2)	18,265	$	191	July 2007
Paris, France	Multi Functional (2)	4,753	$	81	January 2014
Gaithersburg, Maryland	Multi Functional (2)	6,560	$	45	May 2006
Cambridge, Massachusetts	Multi Functional (2)	2,500	$	70	January 2007
Leased and Not Occupied (3)	Multi Functional (2)	12,290	$	340	2006 – 2007

(1) This facility is associated with the discontinued Nucleic Acids operating segment. We are currently assessing alternatives for this facility, including closure and sale.

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(2) Multi Functional facilities include functions related to manufacturing, services, sales and marketing, research and development and/or administration.

(3) Leased and not occupied facilities consist of leases on facilities in San Diego, California that expire in January 2007 and a lease on a facility in Berlin, Germany that expires in May 2006. A number of these facilities are sublet to independent third parties. Annual rents from these subtenants are expected to total $0.17 million in 2006.

Item 3. Legal Proceedings

We are subject to a number of claims of various amounts, which arise out of the normal course of business. In our opinion, the disposition of pending claims will not have a material adverse effect on our financial position, results of operations or cash flows.

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

We did not submit any matters to our stockholders for a vote or other approval during the fourth quarter of the fiscal year covered by this report.

Item 4A. Executive Officers

Our executive officers are appointed annually by the Board of Directors at the first meeting following the annual stockholders’ meeting. Other officers are appointed by the Board of Directors from time to time. Each officer holds office until a successor has been duly appointed and qualified or until the death, resignation or removal of such officer. Our executive officers and their ages are listed below followed by a brief biography.

Name	Age	Position
Collin J. D’Silva	48	Chairman of the Board, Chief Executive Officer and Director
Michael A. Summers	41	Chief Financial Officer
Mitchell L. Murphy	49	Vice President, Secretary and Treasurer

Collin J. D’Silva. Mr. D’Silva has served as our Chairman of the Board and Chief Executive Officer since 1997 and is also a Director. Mr. D’Silva, a co-founder of Transgenomic, has worked for the Company and its predecessors since 1988. Mr. D’Silva was employed by AT&T from 1980 to 1988. At AT&T, he held various positions in engineering, materials management, sales support and business development. His last position at AT&T was Business Unit Manager and Engineering Manager for a network distribution products division. Mr. D’Silva holds a B.S. degree and a M.Eng. degree in industrial engineering from Iowa State University and an M.B.A. from Creighton University.

Michael A. Summers. Mr. Summers joined Transgenomic, Inc. in August 2004 and serves as Chief Financial Officer. Mr. Summers was employed with C&A Industries, Inc. from 2003 to 2004 where as General Manager he was responsible for the operations of various divisions that provided human capital management and consulting services. From 2001 to 2003, he was Executive Vice President and Chief Financial Officer for Nexterna, Inc., a wholly-owned technology subsidiary of Union Pacific Corporation. From 2000 to 2001, he was the Chief Accounting Officer for Able Telcom Holding Corp., a publicly-owned project management and construction company. Prior to 2000, Mr. Summers held various positions including eight years as an auditor for the Omaha, Nebraska office of Deloitte & Touche, LLP. Mr. Summers graduated from Creighton University in 1987 with a B.S. degree in business administration with an accounting major. He is a Certified Public Accountant.

10

Mitchell L. Murphy. Mr. Murphy joined us in 1992. His current duties include the overall corporate administration and shareholder relations. Prior to joining Transgenomic, he held accounting and financial management positions for 15 years with companies involved in manufacturing, steel distribution and rebar fabrication. He spent over two years as an auditor for the Omaha, Nebraska office of Deloitte, Haskins & Sells (now Deloitte & Touche LLP) working in a broad range of industries. Mr. Murphy graduated with honors from Creighton University in 1978 with a B.S. degree in business administration with an accounting major.

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

(a) Market Information. Our common stock is listed for trading on the Nasdaq under the symbol TBIO. The following table sets forth the high and low closing prices for our common stock during each of the quarters of 2004 and 2005.

	High		Low
Year Ended December 31, 2004
First Quarter	$	3.23	$	1.96
Second Quarter	$	1.87	$	1.24
Third Quarter	$	1.58	$	1.07
Fourth Quarter	$	1.52	$	1.06
Year Ended December 31, 2005
First Quarter	$	1.11	$	0.53
Second Quarter	$	0.90	$	0.45
Third Quarter	$	1.24	$	0.70
Fourth Quarter	$	1.11	$	0.80

(b) Holders. At March 30, 2006, there are 49,189,672 shares of our common stock outstanding and approximately 3,475 holders of record.

(c) Dividends. We have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We expect to retain all earnings, if any, for investment in our business. Dividends on our common stock will be paid only if and when declared by our Board of Directors. The Board’s ability to declare a dividend is subject to limits imposed by Delaware corporate law. In determining whether to declare dividends, the Board may consider our financial condition, results of operations, working capital requirements, future prospects and other relevant factors.

(d) Securities authorized for issuance under equity compensation plans. The information required by this item is incorporated herein by reference to the section of the Proxy Statement relating to our 2006 Annual Meeting of Shareholders captioned “Equity Compensation Plan Information.”

Sale of Unregistered Securities

Information regarding sales of equity securities by the Company during the year ended December 31, 2005 that were not registered under the Securities Act of 1933 have been previously reported by the Company on Form 8-Ks filed on March 18, 2005, March 30, 2005 and October 31, 2005.

Issuer Purchase of Equity Securities

The Company made no purchases of its common stock during the quarter ended December 31, 2005. Therefore, tabular disclosure is not presented.

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Item 6. Selected Consolidated Financial Data

The selected consolidated balance sheet data at December 31, 2005 and 2004 and the selected consolidated statements of operations data for each year ended December 31, 2005, 2004 and 2003 have been derived from our audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The selected consolidated balance sheet data at December 31, 2003, 2002 and 2001 and the selected consolidated statements of operations data for each year ended December 31, 2002 and 2001 have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Dollar amounts, except per share data, are presented in thousands.

	Year Ended December 31,
	2005			2004			2003			2002			2001(1)
Statement of Operations Data:
Net sales	$	25,828		$	25,243		$	26,044		$	24,235		$	28,040
Cost of good sold		13,497			11,997			11,374			9,935			11,831
Gross profit		12,331			13,246			14,670			14,300			16,209
Selling, general and administrative		12,218			15,961			16,586			20,539			17,666
Research and development		2,199			4,501			6,834			11,173			9,372
Restructuring charges (2)		—			1,267			516			3,282			—
Impairment charges (3)		425			—			—			—			—
Operating expenses		14,842			21,729			23,936			34,994			27,038
Other income (expense) (4)		(2,447	)		(5,263	)		(181	)		512			2,401
Loss before income taxes		(4,958	)		(13,746	)		(9,447	)		(20,182	)		(8,428	)
Income tax expense		26			4			65			105			24
Loss from continuing operations (5)		(4,984	)		(13,750	)		(9,512	)		(20,287	)		(8,452	)
(Loss) income from discontinued operations, net of tax		(10,009	)		(20,622	)		(13,446	)		(1,078	)		1,051
Net loss	$	(14,993	)	$	(34,372	)	$	(22,958	)	$	(21,365	)	$	(7,401	)
Basic and diluted (loss) income per share: (5)
From continuing operations	$	(0.14	)	$	(0.47	)	$	(0.39	)	$	(0.86	)	$	(0.37	)
From discontinued operations (5)		(0.28	)		(0.72	)		(0.55	)		(0.05	)		0.04
	$	(0.42	)	$	(1.19	)	$	(0.94	)	$	(0.91	)	$	(0.33	)
Basic and diluted weighted average shares outstanding		35,688			29,006			24,484			23,583			22,560
	As of December 31,
	2005			2004			2003			2002			2001
Balance Sheet Data:
Total assets	$	25,340		$	37,458		$	57,306		$	74,035		$	89,286
Borrowings under credit line (6)		—			6,514			2,142			—			—
Current portion of long-term debt (6)		—			825			1,693			63			—
Long-term debt, less current portion (6)		—			2,199			—			1,499			—
Total stockholders’ equity		17,906			16,535			45,058			61,515			82,104

(1) In May 2001, we acquired Annovis, Inc., a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid-based products and services for the life science industry, for a total purchase price of approximately $16,910. Annovis’ results of operations have been included in the accompanying financial statements beginning on May 1, 2001.

(2) Restructuring plans were implemented in 2002 and 2004 to reduce and align our expenses with current business prospects. The plans included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. As a result, restructuring charges were recorded and are included in operating expenses. Refer to the Notes to the accompanying consolidated financial statements.

(3) Impairment charges in 2005 relate to the impairment of patent pursuits and inventory. Refer to the Notes to the accompanying consolidated financial statements.

(4) Other income (expense) for all years presented primarily includes interest expense, interest income, loss on debt extinguishment in 2005 related to the repayment of our Laurus Loans of $541, and loss on debt extinguishment of $2,859 in 2004 resulting from certain modifications to our Laurus Loans that were treated as extinguishments for financial reporting purposes. Refer to the Notes to the accompanying consolidated financial statements.

(5) During 2005, we decided to sell or close and liquidate the former Nucleic Acids operating segment, which now consists primarily of a manufacturing facility in Glasgow, Scotland. In conjunction with the decision to exit this operating segment, we recorded impairment and exit charges of $8,888 consisting of valuation adjustments to reflect the carrying value of related net assets at estimated fair market value. We now reflect the results of this business as discontinued operations for all periods presented. Refer to the Notes to the accompanying consolidated financial statements.

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(6) The Laurus Loans were repaid during 2005 resulting in a loss on debt extinguishment of $541. Refer to the Notes to the accompanying consolidated financial statements.

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

The following discussion should be read in conjunction with the Consolidated Financial Statements and applicable Notes to Consolidated Financial Statements and other information in this report, including Risk Factors set forth in Item 1A and Critical Accounting Policies at the end of this Item 7.

The Company has one reportable operating segment. Although revenue is analyzed by type, net financial results are analyzed as one segment due to the integrated nature of the products. The Consolidated Financial Statements also include discontinued operations. In the fourth quarter of 2005, the Company implemented a plan to exit the former Nucleic Acids operating segment. Accordingly, results of this operating segment are reflected as discontinued operations for all periods presented.

Executive Summary

2005 Results

We have experienced recurring net losses and had an accumulated deficit at December 31, 2005 of $122.09 million. To respond to changes in the overall business climate for our products, our liquidity position and capital structure, we have instituted significant change that began in the fourth quarter of 2004 with the sale of our specialty oligonucleotide manufacturing facility and a wide-reaching restructuring plan. We continued implementing positive change during 2005 by executing on the following:

We decided to exit our former Nucleic Acids operating segment.

On December 22, 2005, we decided to sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell the operating segment as a going concern are being evaluated, procedures have commenced, including notification to affected employees, which is expected to lead to closure of the facility in Glasgow, Scotland. During 2006, we expect to incur costs of approximately $0.72 million related to statutory payments to affected employees and other costs specifically attributable to closure of the facility which have been accrued at December 31, 2005. In addition, the Company expects to incur additional period costs of approximately $0.25 million in each of the first two quarters of 2006 attributable to closure of the facility that will be recorded in discontinued operations in 2006. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8.02 million consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value. We now reflect the results of this operating segment as discontinued operations for all periods presented.

We completed a private placement of our common stock in the fourth quarter.

On October 31, 2005, we issued securities to institutional investors in a private placement (the “2005 Private Placement”). The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share. The aggregate purchase price for the securities sold was $1.01 per share of common stock initially being sold or $15.08 million. In conjunction with this transaction, we issued a warrant to Oppenheimer & Co., Inc. to purchase 932,859 shares at $1.20 per share as part of their placement fee.

The net proceeds from the 2005 Private Placement were $13.90 million after transaction costs of $1.18 million. These proceeds were partially used to repay all outstanding principal and accrued interest on our Laurus Loans including fees paid to Laurus to facilitate the 2005 Private Placement and prepayment penalties to Laurus in the sum of $0.82 million. The remaining proceeds of $5.35 million will be used for future working capital needs.

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In the first quarter, Laurus converted $2.52 million of its loans into shares of our common stock.

On March 18, 2005, we allowed Laurus to convert $1.87 million of the outstanding principal balance under our Credit Line into 3,600,000 shares of our common stock. In addition, on March 24, 2005 we allowed Laurus to convert $0.65 million of the outstanding principal balance of our Term Note into 1,250,000 shares of our common stock. The Credit Line and Term Note (collectively, the “Laurus Loans”) were subsequently repaid in September 2005 and are no longer available to us.

In summary, the 2005 results reflected improvement, but we are not satisfied.

As a result of the actions undertaken since the fourth quarter of 2004, loss from continuing operations has gone from $9.51 million and $13.75 million in 2003 and 2004, respectively, to $4.98 million in 2005. Net cash flows used by operating activities have gone from $13.02 million and $12.75 million in 2004 to $3.63 million in 2005. Additionally, sales of Geron stock received as payment for goods and services and included in net cash flows from investing activities provided $2.15 million in positive cash flows. Because these shares are considered available-for-sale securities, related sales are recorded as investing activities.

2006 Outlook

Timing of the demand for our products, particularly our flagship WAVE^® systems, has been difficult to predict due largely to ongoing changes in the market place and the funding arrangements of our customers. Because our net sales are largely dependent upon sales of a limited number of products, including WAVE^® systems, and our cost structure is largely fixed, historical results have been somewhat sporadic. For these reasons, it is not our practice to provide prospective financial guidance related specifically to revenues, costs, net income (loss) or cash flows. However, our financial objectives are to generate income from continuing operations and positive cash flows from continuing operations. To accomplish these goals we must generate sequential growth in net sales, convert manufacturing expenses from fixed to variable costs and continue to better control operating expenses.

Develop sequential growth in net sales.

We will work to continue to leverage on and strengthen our core instrument business. Challenges exist for WAVE^® system and consumable growth in traditional markets. However, we intend to continue to diversify into new markets, including the personalized medicine market (particularly in oncology), where the sensitivities of our technologies are essential. In the short-term, we believe that the introduction of the newest generation of our flagship product, the WAVE^® system 4500 will provide upgrade opportunities to our current installed base. In the intermediate to longer-term, we believe that newly developed “targeted” consumable products will increase usability of our installed base and enhance net sales of consumables. Additionally, we have developed credibility and momentum with several third-party platforms that will allow us to leverage on our direct sales force and distribution network.

On the discovery services front, we will seek to leverage on past customer successes with pharmaceutical customers to diversify our customer base. Challenges also exist for these service offerings. While our large pharmaceutical customer representation has increased steadily with pilot or “proof of concept” projects, the lead time to major contracts has proven lengthy. To mitigate this risk, we believe there is a significant opportunity for us to capitalize on the increasing demand for molecular-based personalized medicine by leveraging on our technologies and experience gained from the genomic biomarker analysis that discovery services has and will continue to provide to pharmaceutical and biopharmaceutical companies. During the fourth quarter of 2005, our laboratory in Omaha, Nebraska was certified under the Clinical Laboratory Improvement Amendments, and we received our first patient samples from physicians and third-party laboratories for molecular-based testing for hematology, oncology and certain inherited diseases. This capability also allows us to offer a vertically-integrated suite of services that can support activities ranging from discovery research to clinical trials to diagnostic testing. As the need for drug/diagnostic combination products increases, we believe this suite of service offerings will prove attractive to various customers.

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Convert manufacturing expenses from fixed to variable costs.

A significant portion of our manufacturing costs relate to fixed overhead associated with personnel and facilities. We continue to evaluate consolidation and outsourcing opportunities designed to convert these costs from fixed to variable costs.

Continue to control operating expenses.

Operating expenses include selling, general and administrative expenses and research and development expenses. We will need to continue to invest in research and development activities in order to remain competitive and to take advantage of new business opportunities as they arise. During 2006, we expect operating expenses, including research and development expense, to be approximately equal to 2005 levels.

Results of Continuing Operations

Years Ended December 31, 2005 and 2004

Net Sales. Net sales for the years ended December 31, 2005 and 2004 consisted of the following (dollars in thousands):

					Change
	2005		2004		$		%
Bioinstruments	$	14,427	$	14,385	$	42	1	%
Bioconsumables		8,981		8,838		143	2	%
Discovery Services		2,420		2,020		400	20	%
Net sales	$	25,828	$	25,243	$	585	2	%

WAVE^® systems sold totaled 97 during the year ended December 31, 2005 compared to 107 during the same period of 2004. Although the number of WAVE^® systems sold declined, overall bioinstrument net sales increased slightly due primarily to net sales increases from product upgrades and service contracts. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of 1,290 units at December 31, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments was primarily responsible for the 2% increase in sales of bioconsumables. The increase in discovery services revenue during 2005 was primarily attributable to the discovery services agreements that we entered into with a large pharmaceutical company to support their clinical development of oncology therapeutics. We plan to continue to seek opportunities to provide genetic variation discovery and analysis services to pharmaceutical and other customers and believe that these services provide us a significant opportunity to expand revenues in the future.

Costs of Goods Sold. Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs and supplies) associated with our discovery services operations. Cost of goods sold for the years ended December 31, 2005 and 2004 consisted of the following (dollars in thousands):

					Change
	2005		2004		$		%
Bioinstruments	$	6,442	$	6,382	$	60	1	%
Bioconsumables		4,762		4,012		750	19	%
Discovery Services		2,293		1,603		690	43	%
Cost of goods sold	$	13,497	$	11,997	$	1,500	13	%

Gross profit was $12.33 million or 43% of total net sales during the year ended December 31, 2005 compared to $13.25 million and 52% during the same period of 2004. The decrease in gross profit as a percent of revenue is largely attributable to changes in the composition of products sold. Generally, sales of WAVE^® systems and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from discovery services have been less than expected due to the continuing build out of capacity and expansion of product offerings.

15

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $12.22 million during the year ended December 31, 2005 compared to $15.96 million during the same period of 2004, a decrease of $3.74 million or 23%. As a percentage of revenue, selling, general and administrative expenses totaled 43% and 63% during the year ended December 31, 2005 and 2004, respectively. This decrease resulted primarily from termination of personnel and the elimination of facilities related costs in conjunction with the 2004 Restructuring Plan. Foreign currency transaction adjustments increased operating expenses by approximately $0.33 million during the year ended December 31, 2005 compared to the same period of 2004 when foreign currency transaction adjustments reduced operating expenses by approximately $0.45 million.

Research and Development Expenses. Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled $2.20 million during the year ended December 31, 2005 compared to $4.50 million during the same period of 2004, a decrease of $2.30 million or 51%. The decrease related primarily to the 2004 Restructuring Plan.

As a percentage of revenue, research and development expenses totaled 8% and 18% of revenue during the year ended December 31, 2005 and 2004, respectively. We expect to continue to invest up to 10% of our revenues in research and development activities. Research and development costs are expensed in the year in which they are incurred.

Impairment Charges. Impairment charges totaled $0.43 million during the year ended December 31, 2005 and consisted of $0.25 million associated with certain international patent pursuits that were no longer consistent with our strategic plan and $0.18 million related to certain inventory associated with third party platforms.

Other Income (Expense). Other expense during the year ended December 31, 2005 of $2.45 million consisted of interest expense of $1.98 million, loss on debt extinguishment of $0.54 million net of other income of $0.07 million. Other expense during the year ended December 31, 2004 consisted of interest expense of $2.37 million, loss on debt extinguishment of $2.86 million and other expense of $0.38 million.

Interest expense consisted of the following for the years ended December 31, 2005 and 2004 (dollars in thousands):

	2005			2004
Interest paid or accrued on outstanding debt	$	553		$	542
Amortization of debt premiums		(857	)		—
Amortization of debt discounts – warrants		28			—
Amortization of debt discount – beneficial conversion feature		725			1,641
Fair value of incremental shares received by Laurus		1,365			—
Other		164			183
	$	1,978		$	2,366

On March 18, 2005, we allowed Laurus to convert $1.87 million of the outstanding principal balance under our Credit Line into 3,600,000 shares of our common stock at $0.52 per share. In addition, on March 24, 2005 we allowed Laurus to convert $0.65 million of the outstanding principal balance of our Term Note into 1,250,000 shares of our common stock at $0.52 per share. Laurus agreed to apply this Term Note conversion against substantially all remaining 2005 scheduled principal payments on such loan. The closing market price of our common stock the day before each of these conversions was $0.58 per share. No other provisions of our Credit Line or Term Note were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions we accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $1.37 million related to the fair value of incremental shares received by Laurus.

16

Contemporaneously with the closing of the 2005 Private Placement our common stock on October 31, 2005, we repaid all outstanding principal and accrued interest on the Laurus Loans which have been cancelled and are no longer available to us. In conjunction with this prepayment, we recorded a loss on debt extinguishment of $0.54 million. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $0.84 million offset by the elimination of associated net debt premiums of $0.30 million.

Loss on debt extinguishment totaled $2.86 million during the year ended December 31, 2004. As described in the Notes to the accompanying consolidated financial statements, certain August 31, 2004 modifications to our Laurus Loans were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. As such, we recorded a loss on extinguishment of debt of $2.86 million at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7.43 million and (ii) the fair value of the new debt instrument of $10.29 million plus the fair value of the new warrants of $0.11 million. The difference between the fair value of the new debt of $10.29 million and the face value of the debt of $8.57 million represents a premium, which will be reflected as a reduction of interest expense over the life of the new debt.

Income Tax Expense. Income tax expense recorded during the years ended December 31, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions. Due to the our cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, we did not provide for an income tax benefit during the years ended December 31, 2005 or 2004 based on our determination that it was more likely than not that such benefits would not be realized. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate taxable income in future periods and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. Our net operating loss carryforwards from continuing and discontinued operations of $99.64 million will expire at various dates from 2008 through 2025, if not utilized. We also had state income tax loss carryforwards from continuing and discontinued operations of $39.00 million at December 31, 2005. These carryforwards will also expire at various dates beginning in 2006 if not utilized.

Years Ended December 31, 2004 and 2003

Net Sales. Net sales for the years ended December 31, 2004 and 2003 consisted of the following (dollars in thousands):

					Change
	2004		2003		$			%
Bioinstruments	$	14,385	$	17,916	$	(3,531	)	(20	)%
Bioconsumables		8,838		7,260		1,578		22	%
Discovery Services		2,020		868		1,152		133	%
Net sales	$	25,243	$	26,044	$	(801	)	(3	)%

WAVE^® systems sold totaled 107 during the year ended December 31, 2004 compared to 122 during the same period of 2003. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of 1,193 units at December 31, 2004 compared to 1,086 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in Discovery Services revenue during 2004 was primarily attributable to the discovery services agreements that we entered into with pharmaceutical companies to support their clinical development of oncology therapeutics.

Costs of Goods Sold. Cost of goods sold for the years ended December 31, 2004 and 2003 consisted of the following (dollars in thousands):

					Change
	2004		2003		$			%
Bioinstruments	$	6,382	$	7,343	$	(961	)	(13	)%
Bioconsumables		4,012		3,474		538		15	%
Discovery Services		1,603		557		1,046		188	%
Cost of goods sold	$	11,997	$	11,374	$	623		5	%

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Overall, our cost of goods sold increased despite an overall decline in net sales due to the fixed-cost burden associated with our manufacturing facilities.

Gross profit was $13.25 million or 52% of total net sales during the year ended December 31, 2004 compared to $14.67 million and 56% during the same period of 2003. The decrease in gross profit as a percent of revenue is largely attributable to changes in the composition of products sold. Generally, sales of WAVE^® systems and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from discovery services have been less than expected due to the continuing build out of capacity and expansion of product offerings.

Selling, General and Administrative Expenses. Selling, general and administrative expenses totaled $15.96 million in 2004 compared to $16.59 million in 2003, a decrease of $0.63 million or 4%. As a percentage of revenue, selling, general and administrative expenses totaled just over 63% in both 2004 and 2003.

Research and Development Expenses. Research and development expenses totaled $4.50 million in 2004 compared to $6.83 million in 2003, a decrease of $2.33 million or 34%. As a percentage of revenue, research and development expenses totaled 18% and 26% of revenue in 2004 and 2003, respectively. These decreases related to our focus on expense control and the restructuring plan implemented in November 2004. Research and development costs are expensed in the year in which they are incurred.

Restructuring Charges. On November 13, 2004, our Board of Directors approved a restructuring plan designed to refocus and to better align the Company’s cost structure with anticipated revenues. The plan included a workforce reduction and the closure of various facilities and field offices. In conjunction with these changes, we incurred a charge of $1.23 million during the quarter ending December 31, 2004.

Other Income (Expense). Other expense during 2004 of $5.26 million consisted of interest expense of $2.37 million, loss on debt extinguishment of $2.86 million, and other net expense of $0.04 million. Other expense during 2003 of $0.18 million consisted of interest expense of $0.17 million and other net expense of $0.01 million.

Interest expense consisted of the following for the years ended December 31, 2004 and 2003 (dollars in thousands):

	2004		2003
Interest paid or accrued on outstanding debt	$	542	$	89
Amortization of debt discount – beneficial conversion feature		1,641		—
Other		183		85
	$	2,366	$	174

Loss on debt extinguishment totaled $2.86 million during 2004. As described in the Notes to the accompanying consolidated financial statements, certain August 31, 2004 modifications to our Laurus Loans were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. As such, we recorded a loss on extinguishment of debt of $2.86 million at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7.43 million and (ii) the fair value of the new debt instrument of $10.29 million plus the fair value of the new warrants of $0.11 million. The difference between the fair value of the new debt of $10.29 million and the face value of the debt of $8.57 million represented a premium, which was reflected as a reduction of interest expense over the life of the new debt.

18

Income Tax Expense. Income tax expense recorded during the years ended December 31, 2004 and 2003 related to income taxes in states, foreign countries and other local jurisdictions. Due to our cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, we did not provide for an income tax benefit during the years ended December 31, 2004 or 2003 based on our determination that it was more likely than not that such benefits would not be realized. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate taxable income in future periods and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

Results of Discontinued Operations

In the fourth quarter of 2005, we implemented a plan to exit our Nucleic Acids operating segment. Accordingly, we now reflect the results of these businesses as discontinued operations for all periods presented. Expenses that are not directly identified to this operating segment or are considered corporate overhead have not been allocated in arriving at loss from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows (dollars in thousands):

	Years Ended December 31,
	2005			2004			2003
NET SALES	$	3,881		$	8,546		$	7,821
COST OF GOODS SOLD		4,004			12,599			12,941
Gross loss		(123	)		(4,053	)		(5,120	)
OPERATING EXPENSES:
Selling, general and administrative		1,054			1,538			737
Research and development		—			2,184			2,471
Restructuring charges		—			2,303			222
Exit and disposal charges		866			—			—
Impairment charges		8,022			11,965			4,772
Gain on sale of facility		—			(1,466	)		—
		9,942			16,524			8,202
LOSS FROM OPERATIONS		(10,065	)		(20,577	)		(13,322	)
OTHER INCOME (EXPENSE)		56			(143	)		(124	)
LOSS BEFORE INCOME TAXES		(10,009	)		(20,720	)		(13,446	)
INCOME TAX BENEFIT		—			(98	)		—
LOSS FROM DISCONTINUED OPERATIONS	$	(10,009	)	$	(20,622	)	$	(13,446	)

On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell the operating segment as a going concern are being evaluated, procedures have commenced, including notification to affected employees, which may lead to closure of the facility in Glasgow, Scotland. During 2006, we expect to incur costs of approximately $0.72 million related to statutory payments to affected employees and other costs specifically attributable to closure of the facility which have been accrued at December 31, 2005. In addition, the Company expects to incur additional period costs of approximately $0.25 million in each of the first two quarters of 2006 attributable to closure of the facility that will be recorded in discontinued operations in 2006. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8.02 million consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value.

The former Nucleic Acids operating segment accepted common stock from one of its customers, Geron Corporation (“Geron”) as payment for goods and services. These shares were classified as available-for-sale securities. Net realized gains on these securities during 2005 and 2003 of $0.05 million and $0.11 million, respectively, and realized losses on these securities of $0.13 million during 2004 were reflected as other expense on the consolidated statement of operations.

19

Proceeds from the sales of these available for sale securities are reflected within net cash flows from investing activities. During 2005 and 2004, sales to Geron totaled $1.95 million and $4.15 million, respectively, representing 50% and 49%, respectively, of net sales within this operating segment.

On November 11, 2004, the former Nucleic Acids operating segment sold the assets associated with its specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3.00 million in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2.38 million. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2.70 million. In conjunction with this transaction, the Nucleic Acids operating segment recorded a gain on sale of $1.47 million in the fourth quarter of 2004.

There was no goodwill associated with the former Nucleic Acids operating segment at December 31, 2005 and 2004. The former Nucleic Acids operating segment recorded charges of $9.87 million and $4.77 million during 2004 and 2003, respectively, related to the impairment of goodwill. The 2003 charge resulted from an annual impairment test that was performed in the fourth quarter of 2003. The 2004 charge resulted from an interim period impairment test performed during the second quarter of 2004.

The interim period impairment test became necessary after the Company’s Directors directed management during the second quarter of 2004 to explore strategic alternatives for the former Nucleic Acids operating segment. This process included significant due diligence by management, third-party advisors and prospective independent buyers and other interested parties. Information obtained through this process indicated that it was more likely than not that the assets associated with the Nucleic Acids operating segment were impaired.

The former Nucleic Acids operating segment also recorded a charge of $2.10 million during the second quarter of 2004 related to the impairment of property and equipment associated with this operating segment.

Liquidity and Capital Resources

Our working capital positions at December 31, 2005 and 2004 were as follows (in thousands):

	December 31,
	2005		2004			Change
Current assets (including cash and cash equivalents of $6,736 and $1,002, respectively)	$	18,118	$	17,908		$	210
Current liabilities		7,434		18,724			(11,290	)
Working capital	$	10,684	$	(816	)	$	11,500

The improvement in our working capital position was due principally to proceeds received from the 2005 Private Placement and conversions in March 2005 of Laurus Loans to equity.

While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2006, we have experienced recurring net losses and have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To the extent necessary, we believe that we can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of our business plan. Ultimately, we must achieve sufficient revenues in order to generate positive net earnings and cash flows from operations.

Analysis of Cash Flows

Years Ended December 31, 2005 and 2004

Net Change in Cash and Cash Equivalents. Cash and cash equivalents increased $5.73 million during the year ended December 31, 2005 as a result of net cash from investing activities and financing activities of $1.65 million and $7.92 million, respectively, offset by net cash used in operating activities of $3.63 million, and changes in foreign currency exchange rates of $0.20 million.

20

Cash Flows from Operating Activities. Cash flows used in operating activities totaled $3.63 million during the year ended December 31, 2005 compared to $12.75 million during the same period of 2004. The use in 2005 related primarily to a net loss of $14.99 million offset by non-cash charges of $13.66 million. Non-cash charges consisted primarily of depreciation and amortization, impairment charges and certain financing costs. Working capital and other adjustments decreased cash flows from operating activities by $2.29 million.

Cash Flows from Investing Activities. Cash flows provided by investing activities totaled $1.65 million during the year ended December 31, 2005 compared to $6.03 million during the same period of 2004. The principal source of cash flows from investing activities in 2005 were sales of available for sale securities (Geron stock) of $2.15 million that were offset by purchases of $0.64 million of property and equipment. The principal source of cash flows from investing activities in 2004 were sales of available for sale securities (Geron Stock) of $4.27 million and the $3.00 million sale of our manufacturing facility in Boulder, Colorado offset by purchases of $1.76 million of property and equipment.

Cash Flows from Financing Activities. Cash flows from financing activities totaled $7.92 million during the year ended December 31, 2005 compared to $6.00 million during 2004. The principal source of cash flows from financing activities in 2005 was the 2005 Private Placement offset by repayment of the Laurus Loans.

Years Ended December 31, 2004 and 2003

Net Change in Cash and Cash Equivalents. Cash and cash equivalents decreased $0.24 million during the year ended December 31, 2004 as net cash used in operating activities of $12.75 million was offset by net cash from investing activities and financing activities of $6.03 million and $6.00 million, respectively and changes in foreign currency exchange rates of $0.48 million.

Cash Flows Used in Operating Activities. Cash flows used in operating activities totaled $12.75 million during 2004 compared to $13.02 million during 2003. The use in 2004 related primarily to a net loss of $34.37 million offset by non-cash charges of $21.80 million. Non-cash charges consisted of depreciation and amortization, certain restructuring charges, impairment charges, certain financing costs and loss on debt extinguishment. Working capital and other adjustments decreased cash flows from operating activities by $0.18 million.

Cash Flows from Investing Activities. Cash flows from investing activities totaled $6.03 million during 2004 compared to cash flows used in investing activities of $2.95 million during 2003. The investing cash flows generated in 2004 were from the sale of Geron stock received for goods and services and the sale of our specialty oligoneucleotide manufacturing facility and reductions in other assets that were offset by purchases of property and equipment.

Cash Flows from Financing Activities. Cash flows from financing activities totaled $6.00 million during 2004 compared to $7.30 million during 2003. The cash from financing activities in 2004 related primarily to net draws on our Credit Line and proceeds from the Term Note that were offset by payments of long-term debt.

21

Obligations and Commitments

We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2010. The future minimum lease payments required under these leases are approximately $1.18 million in 2006, $0.54 million in 2007, $0.28 million in 2008, $0.28 million in 2009, and $0.25 million in 2010.

At December 31, 2005, firm commitments to vendors to purchase components used in WAVE^® systems totaled $0.88 million. We expect to pay the majority of these purchase commitments during 2006.

Off Balance Sheet Arrangements

At December 31, 2005 and 2004, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance 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.

Critical Accounting Policies

Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgment or estimates may vary under different assumptions or circumstances. The following are certain critical accounting policies that may involve the use of judgment or estimates.

Allowance for Doubtful Account. Accounts receivable are shown net of an allowance for doubtful accounts. In determining an allowance for doubtful accounts, we consider the following.

• The age of the accounts receivable,

• Customer credit history,

• Customer financial information,

• Reasons for non-payment, and

• Our knowledge of the customer.

If our customers’ financial condition were to deteriorate, resulting in a change in their ability to make payment, additional allowances may be required.

Inventories. Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional write-downs of the inventory may be required.

Depreciation and Amortization of Long-Lived Assets. Our long-lived assets consist primarily of equipment, patents, intellectual property and capitalized software development costs. We believe the useful lives we assigned to these assets are reasonable. If our assumptions about these assets change as a result of events or circumstances and we believe the assets may have declined in value we may record impairment charges resulting in an increase to operating expenses.

22

Property and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets ranging from 3 to 15 years. We capitalize external and in-house legal costs and filing fees associated with obtaining patents on our new discoveries and amortize these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful life.

Impairment of Long-Lived Assets. We evaluate goodwill for impairment on an annual basis. We assess the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in our estimate of future undiscounted and discounted cash flows to determine recoverability of these assets. If our assumptions about these assets were to change as a result of events or circumstances, we may be required to record an impairment loss.

Revenue Recognition. Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” SFAS No.123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. We adopted this standard on January 1, 2006 using the modified prospective method. With regard to share-based payment transactions (primarily employee stock options) that existed at December 31, 2005, the Company does not expect the adoption of this standard will have a material impact on its financial position, results of operations or cash flows. With regard to future share-based payment transactions, the Company is evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overhead to be based on the normal capacity of the production facilities. SFAS No. 151 is effective for us beginning January 1, 2006. We are assessing the final impact of this standard on our financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.” This statement addresses the prospective measurement for nonmonetary exchanges of nonmonetary assets. It specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS is 153 will be effective for us beginning January 1, 2007. We are assessing the final impact of this standard on our financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It carries forward without change the previous guidance for reporting the correction of an error and a change in accounting estimate. SFAS 154 is effective for us beginning January 1, 2006.

23

Impact of Inflation

We do not believe that price inflation had a material adverse effect on our financial condition or results of operations during the periods presented.

Foreign Currency Rate Fluctuations

During the last three fiscal years, our international sales have represented approximately 70% of our net sales. These sales of products in foreign countries are mainly completed in either British Pounds Sterling or the Euro. Additionally, we have two wholly owned subsidiaries, Transgenomic, LTD., and Cruachem, LTD., whose operating currency is British Pounds Sterling and the Euro. 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. As a result we are subject to exchange rate risk. The operational expenses of our foreign subsidiaries help to reduce the currency exposure we have based on our sales denominated in foreign currencies by converting foreign currencies directly into goods and services. As such, we feel do not have a material exposure to foreign currency rate fluctuations at this time.

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

Previously, our principal market risk was interest rate risk on our variable-rate borrowings under the Laurus Loans. During the fourth quarter of 2005, we repaid the entire principal balance of the Laurus Loans with the proceeds from the 2005 Private Placement and have terminated these loans. Accordingly, we no longer have any borrowings which subject us to material interest rate risk.

24

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Transgenomic, Inc.

Omaha, Nebraska

We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included 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, as well as 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 Transgenomic, Inc. and subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Omaha, Nebraska

March 30, 2006

25

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2005, and 2004

(Dollars in thousands except per share data)

	2005			2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	6,736		$	1,002
Accounts receivable (net of allowances for bad debts of $615 and $701, respectively)		7,542			9,867
Inventories		2,990			3,570
Prepaid expenses and other current assets		653			1,262
Current assets of discontinued operations		197			2,207
Total current assets		18,118			17,908
PROPERTY AND EQUIPMENT:
Equipment		10,108			10,943
Furniture and fixtures		3,797			3,867
		13,905			14,810
Less: accumulated depreciation		11,328			10,481
		2,577			4,329
OTHER ASSETS:
Goodwill		638			638
Other assets		1,074			2,528
Non-current assets of discontinued operations		2,933			12,055
	$	25,340		$	37,458
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,796		$	2,464
Other accrued expenses		3,114			6,498
Accrued compensation		602			595
Line of credit		—			6,514
Current portion of long-term debt		—			825
Current liabilities of discontinued operations		1,922			1,828
Total current liabilities		7,434			18,724
Long-term debt		—			2,199
Total liabilities		7,434			20,923
COMMITMENTS AND CONTINGENCIES (Note F)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding		—			—
Common stock, $.01 par value, 100,000,000 and 60,000,000 shares authorized, respectively, 49,182,121 and 29,330,874 shares outstanding, respectively		497			299
Additional paid-in capital		138,800			120,798
Accumulated other comprehensive income		703			2,539
Accumulated deficit		(122,094	)		(107,101	)
Total stockholders’ equity		17,906			16,535
	$	25,340		$	37,458

See notes to consolidated financial statements.

26

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

	2005			2004			2003
NET SALES	$	25,828		$	25,243		$	26,044
COST OF GOODS SOLD		13,497			11,997			11,374
Gross profit		12,331			13,246			14,670
OPERATING EXPENSES:
Selling, general and administrative		12,218			15,961			16,586
Research and development		2,199			4,501			6,834
Restructuring charges		—			1,267			516
Impairment charges		425			—			—
		14,842			21,729			23,936
LOSS FROM OPERATIONS		(2,511	)		(8,483	)		(9,266	)
OTHER INCOME (EXPENSE):
Interest expense		(1,978	)		(2,366	)		(174	)
Loss on debt extinguishment		(541	)		(2,859	)		—
Other, net		72			(38	)		(7	)
		(2,447	)		(5,263	)		(181	)
LOSS BEFORE INCOME TAXES		(4,958	)		(13,746	)		(9,447	)
INCOME TAX EXPENSE		26			4			65
LOSS FROM CONTINUING OPERATIONS		(4,984	)		(13,750	)		(9,512	)
DISCONTINUED OPERATIONS:
Loss from discontinued operations before income tax		(10,009	)		(20,720	)		(13,446	)
Income tax benefit of discontinued operations		—			(98	)		—
LOSS FROM DISCONTINUED OPERATIONS		(10,009	)		(20,622	)		(13,446	)
NET LOSS	$	(14,993	)	$	(34,372	)	$	(22,958	)
BASIC AND DILUTED LOSS PER SHARE:
From continuing operations	$	(0.14	)	$	(0.47	)	$	(0.39	)
From discontinued operations		(0.28	)		(0.72	)		(0.55	)
	$	(0.42	)	$	(1.19	)	$	(0.94	)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING		35,687,580			29,006,241			24,483,861

See notes to consolidated financial statements.

27

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

	Common Stock			Additional Paid in Capital		Unearned Compensation			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	Outstanding Shares	Par Value
Balance, January 1, 2003	23,512,045	$	240	$	113,934	$	(78	)	$	(49,771	)	$	378		$	(3,188	)	$	61,515
Net loss	—		—		—					(22,958	)		(22,958	)		—			(22,958	)
Other comprehensive income (loss):
Foreign currency translation adjustment	—		—		—		—			—			1,219			—			1,219
Comprehensive loss	—		—		—		—			—			(21,739	)		—			—
Issuance of stock options and warrants	—		—		386		—			—			—			—			386
Beneficial conversion premium	—		—		480		—			—			—			—			480
Issuance of shares	4,500,000		45		969		—			—			—			3,188			4,202
Issuance of shares for employee stock purchase plan	107,077		1		135		—			—			—			—			136
Amortization of unearned compensation	—		—		—		78			—			—			—			78
Balance, December 31, 2003	28,119,122		286		115,904		—			(72,729	)		1,597			—			45,058
Net loss	—		—		—		—			(34,372	)		(34,372	)					(34,372	)
Other comprehensive income (loss):
Foreign currency translation adjustment	—		—		—		—			—			942			—			942
Comprehensive loss	—		—		—		—			—			(33,430	)		—			—
Issuance of stock options and warrants	—		—		189		—			—			—			—			189
Beneficial conversion premium	—		—		2,420		—			—			—			—			2,420
Conversion of Laurus Loans	1,134,850		12		2,198		—			—			—			—			2,210
Issuance of shares for employee stock purchase plan	76,902		1		87		—			—			—			—			88
Balance, December 31, 2004	29,330,874		299		120,798		—			(107,101	)		2,539			—			16,535
Net loss	—		—		—		—			(14,993	)		(14,993	)					(14,993	)
Other comprehensive income (loss):
Foreign currency translation adjustment	—		—		—		—			—			(1,836	)		—			(1,836	)
Comprehensive loss	—		—		—		—			—			(16,829	)		—			—
Beneficial conversion premium	—		—		399		—			—			—			—			399
Conversion of Laurus Loans	4,900,000		49		2,507		—			—			—			—			2,556
Fair value of incremental shares issued	—		—		1,365		—			—			—			—			1,365
Issuance of shares in private placement, net of expenses of $1,213	14,925,743		149		13,713		—			—			—			—			13,862
Issuance of shares for employee stock purchase plan	25,504		—		18		—			—			—			—			18
Balance, December 31, 2005	49,182,121	$	497	$	138,800	$	—		$	(122,094	)	$	703		$	—		$	17,906

See notes to consolidated financial statements.

28

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands)

	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(14,993	)	$	(34,372	)	$	(22,958	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		4,283			4,625			4,597
Non-cash restructuring charges		—			2,027			364
Impairment charges		8,447			11,965			4,772
Gain on sale of facility		—			(1,466	)		—
Non-cash financing costs		1,281			1,642			—
Non-cash debt extinguishment charges		(303	)		2,859			—
(Gain)/loss on sale of securities		(50	)		128			(64	)
Other		—			18			93
Changes in operating assets and liabilities:
Purchase of trading securities		—			—			(1,566	)
Proceeds from sale of trading securities		—			—			1,519
Accounts receivable		139			(3,334	)		342
Inventories		514			2,611			2,887
Prepaid expenses and other current assets		574			(130	)		334
Accounts payable		(1,129	)		(268	)		(1,509	)
Accrued expenses		(2,390	)		941			(1,828	)
Net cash flows from operating activities		(3,627	)		(12,754	)		(13,017	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities and sale of available for sale securities		2,151			4,269			4,000
Purchase of property and equipment		(641	)		(1,758	)		(6,413	)
Change in other assets		(3	)		522			(543	)
Proceeds from sale of specialty oligonuceotide manufacturing facility		—			3,000			—
Proceeds from asset sales		139			—			9
Net cash flows from investing activities		1,646			6,033			(2,947	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in line of credit		(4,069	)		4,956			2,992
Proceeds from long-term debt		—			2,750			—
Payments on long-term debt		(1,850	)		(1,779	)		(35	)
Issuance of common stock, net of expenses		13,836			71			4,338
Net cash flows from financing activities		7,917			5,998			7,295
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH		(202	)		484			175
NET CHANGE IN CASH AND CASH EQUIVALENTS		5,734			(239	)		(8,494	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,002			1,241			9,735
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	6,736		$	1,002		$	1,241
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest	$	553		$	560		$	314
Income taxes, net		12			(94	)		70
Non-cash transactions:
Available for sale securities acquired for goods and services		2,099			4,397			277
Conversions of debt to equity		2,536			2,226			—

See notes to consolidated financial statements.

29

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description.

Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the “Company”) provide innovative products and services for the synthesis, purification and analysis of nucleic acids. The Company’s products and services include automated instrument systems, associated consumables, and genetic variation discovery services. The Company develops, assembles, manufactures and markets its products and services to the life sciences industry to be used in research focused on molecular genetics of humans and other organisms. Such research could lead to development of new diagnostics and therapeutics. The Company’s business plan is to participate in the value chain associated with these activities by providing key technology, tools, consumables, biochemical reagents and services to those entities engaged in basic biomedical research and the development of diagnostics and therapeutic agents.

The Company develops, assembles, manufactures and markets versatile products and provides analytical services to the medical research, clinical and pharmaceutical markets for use in genetic variation analysis. Products and services are sold through a direct sales force in the United States and throughout much of Western Europe. For the rest of the world, products and services are sold through more than 25 dealers and distributors located in those local markets. Net sales are categorized as bioinstruments, bioconsumables and discovery services.

• Bioinstruments. The flagship product is the WAVE^® system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of nearly 1,300 WAVE^® systems as of December 31, 2005. The Company utilizes its sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.

• Bioconsumables. The installed WAVE^® base generates a demand for consumables that are required for the system’s continued operation. The Company develops, manufactures and sells these products. In addition, the Company manufactures and sells consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range of HPLC separation columns.

• Discovery Services. The Company provides various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska that operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.

Historically, the Company operated a segment (the “Nucleic Acids operating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and oligonucleotide synthesis companies and research institutions throughout the world. In the fourth quarter of 2005, the Company implemented a plan to exit this operating segment. Accordingly, results of this operating segment are reflected as discontinued operations for all periods presented.

The Company has experienced recurring net losses and had an accumulated deficit of $122,094 at December 31, 2005. Based on the Company’s operating plan, management believes its existing sources of liquidity will be sufficient to meet its cash needs during 2006. If necessary, the Company’s management believes they can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions during 2006 would likely delay implementation of the Company’s business plan. Additionally, management may pursue additional financing alternatives. Ultimately, the Company must achieve sufficient revenue levels to support its cost structure.

30

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

Principles of Consolidation.

The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents.

For purposes of reporting cash flows, cash and cash equivalents include cash and temporary investments with original maturities at acquisition of three months or less.

Short Term Investments.

The Company classifies all of its short-term investments with maturities at acquisition of greater than three months as available for sale securities. Such short-term investments consist primarily of United States government and federal agency securities, corporate commercial paper and corporate debt that are stated at market value, with unrealized gains and losses on such securities reflected, net of tax, as other comprehensive income in stockholders’ equity. Realized gains and losses on short term investments are included in earnings and are derived using the specific identification method for determining the cost of securities. It is the Company’s intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available for sale and are classified as current assets.

Accounts Receivable.

Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful accounts during each of the three years ended December 31, 2005:

	Beginning Balance		Additional Charges to Income		Deductions from Reserve		Ending Balance
Year Ended December 31, 2005	$	701	$	—	$	86	$	615
Year Ended December 31, 2004	$	359	$	374	$	32	$	701
Year Ended December 31, 2003	$	351	$	83	$	75	$	359

While payment terms are generally 30 days, the Company has also provided extended payment terms of up to 90 days in certain cases.

Inventories.

Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process.

Property and Equipment.

Property and equipment are carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets as follows:

Buildings	15 years
Leasehold improvements	3 to 7 years
Furniture and fixtures	5 to 7 years
Production equipment	5 to 7 years
Computer equipment	3 to 5 years
Research and development equipment	3 to 5 years
Demonstration equipment	3 to 5 years

31

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

Depreciation of property and equipment totaled $1,786, $3,330 and $3,298 in 2005, 2004 and 2003, respectively.

Goodwill and other Intangible Assets

Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment annually. Impairment occurs when the carrying value is not recoverable and the fair value of the asset is less than the carrying value. If impaired, the asset’s carrying value is reduced to its fair value. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and tested for impairment as events or changes in circumstances indicate the carrying amount of the asset may be impaired.

Other Assets.

Other assets include capitalized software, intellectual property, patents, deferred financing costs and other long-term assets.

Capitalized Software. The Company capitalized software development costs for products offered for sale in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. This Standard allows for the capitalization of certain development costs once a software product has reached technological feasibility. The Company capitalized no software development costs during the three years ended December 31, 2005.

Intellectual Property. Initial costs paid to license intellectual property from independent, third parties is capitalized and amortized using the straight line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.

Patents. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued.

Deferred Financing Costs. Certain financing costs are capitalized and amortized to interest expense over the life of the related financing.

Other Long-Term Assets. Other long-term assets consist primarily of demonstration inventory that has been at customer or prospective customer sites for greater than one year and security deposits on leased facilities. Long-term demonstration inventory is stated at the lower of cost or market.

Stock Based Compensation.

The Company accounts for its employee stock option grants under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s common stock at the date of grant over the stock option exercise price.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to stock-based employee compensation.

	2005			2004			2003
Net Loss:
As reported	$	(14,993	)	$	(34,372	)	$	(22,958	)
Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		957			1,060			1,836
Pro forma	$	(15,950	)	$	(35,432	)	$	(24,794	)
Basic and diluted loss per share:
As reported		(0.42	)		(1.19	)		(0.94	)
Pro forma		(0.45	)		(1.22	)		(1.01	)

32

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

Income Taxes.

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized.

Revenue Recognition.

Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE^® systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At December 31, 2005 and 2004, deferred revenue, mainly associated with the Company’s service contracts, included on the Company’s balance sheet was approximately $2,124 and $1,478, respectively.

Research and Development.

Research and development costs are charged to expense when incurred.

Translation of Foreign Currency.

Financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. The adjustments to translate those amounts into U.S. dollars are accumulated in a separate account in stockholders’ equity and are included in accumulated other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net income. Foreign currency transaction adjustments increased net loss by $332 during the year ended December 31, 2005 and decreased net loss by $445 and $674 during the years ended December 31, 2004 and 2003, respectively.

Comprehensive Income.

Accumulated other comprehensive income at December 31, 2005 and 2004 consisted of foreign currency translation adjustments, net of applicable tax of $0. For all previous periods presented, accumulated other comprehensive income consists of foreign currency translation adjustments and unrealized gains or losses on available for sale investments, net of applicable tax of $0. The Company deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting its investments in a foreign currency to U.S. dollars.

Fair Value of Financial Instruments.

The carrying amount of the Company’s cash and cash equivalents, receivables, accounts payable and accrued expenses approximate fair value because of the short maturity of those instruments. The Company derives the fair value of its short-term investments based on quoted market prices. The carrying value of long-term debt and the line of credit approximates fair value based upon existing interest rates available to the Company for similar debt.

33

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

Earnings Per Share.

Basic earnings per share are calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options and warrants or conversion of convertible notes, where dilutive. Potentially dilutive securities totaling 13,625,675 at December 31, 2005, 13,484,072 at December 31, 2004 and 7,671,771 at December 31, 2003 have been excluded from the computation of diluted earnings per share as they have an antidilutive effect.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuace of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company adopted this standard on January 1, 2006 using the modified prospective method. With regard to share-based payment transactions (primarily employee stock options) that existed at December 31, 2005, the Company does not expect the adoption of this standard will have a material impact on its financial position, results of operations or cash flows. With regard to future share-based payment transactions, the Company is evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs – an amendment of ARB No. 43. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective on January 1, 2006. The Company is currently assessing the final impact of this standard on its financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets.” This statement addresses the prospective measurement for nonmonetary exchanges of nonmonetary assets. It specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS is 153 will be effective for the Company beginning January 1, 2007. We are assessing the final impact of this standard on our financial position, results of operations or cash flows.

In May 2005, the FASB issued SFAS 154, “Accounting Changes and Error Corrections.” This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. It carries forward without change the previous guidance for reporting the correction of an error and a change in accounting estimate. SFAS 154 is effective for the Company beginning January 1, 2006.

Use of Estimates.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In particular, estimates of the valuation of long-term inventory are subject to considerable estimation error due to the inherent uncertainty in projecting sales of this product over a period of years. In addition, estimates and assumptions associated with the determination of fair value of certain assets and related impairments, and the determination of goodwill impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these financial statements.

34

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

B. DISCONTINUED OPERATIONS AND DIVESTITURES

In the fourth quarter of 2005, the Company implemented a plan to exit the Nucleic Acids operating segment. Accordingly, the Company now reflects the related results as discontinued operations for all periods presented. Expenses that are not directly identified to the Nucleic Acids operating segment or are considered corporate overhead have not been allocated in arriving at loss from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows:

	Years Ended December 31,
	2005			2004			2003
NET SALES	$	3,881		$	8,546		$	7,821
COST OF GOODS SOLD		4,004			12,599			12,941
Gross loss		(123	)		(4,053	)		(5,120	)
OPERATING EXPENSES:
Selling, general and administrative		1,054			1,538			737
Research and development		—			2,184			2,471
Restructuring charges		—			2,303			222
Exit and disposal charges		866			—			—
Impairment charges		8,022			11,965			4,772
Gain on sale of facility		—			(1,466	)		—
		9,942			16,524			8,202
LOSS FROM OPERATIONS		(10,065	)		(20,577	)		(13,322	)
OTHER INCOME (EXPENSE)		56			(143	)		(124	)
LOSS BEFORE INCOME TAXES		(10,009	)		(20,720	)		(13,446	)
INCOME TAX BENEFIT		—			(98	)		—
LOSS FROM DISCONTINUED OPERATIONS	$	(10,009	)	$	(20,622	)	$	(13,446	)

On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell the operating segment as a going concern are being evaluated, procedures have commenced, including notification to affected employees, which is expected to lead to closure of the facility in Glasgow, Scotland. During 2006, the Company expects to incur costs of approximately $715 related to statutory payments to affected employees and other costs specifically attributable to closure of the facility which have been accrued at December 31, 2005. In addition, the Company expects to incur additional period costs attributable to closure of the facility that will be recorded in discontinued operations in 2006. In conjunction with the decision to exit this operating segment, the Company recorded an impairment charge of $8,022 consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value.

There was no goodwill associated with the former Nucleic Acids operating segment at December 31, 2005 and 2004. The former Nucleic Acids operating segment recorded charges of $9,865 and $4,772 during 2004 and 2003, respectively, related to the impairment of goodwill. The 2003 charge resulted from an annual impairment test that was performed in the fourth quarter of 2003. The 2004 charge resulted from an interim period impairment test performed during the second quarter of 2004.

The interim period impairment test became necessary after the Company’s Directors directed management during the second quarter of 2004 to explore strategic alternatives for the former Nucleic Acids operating segment. This process included significant due diligence by management, third-party advisors and prospective independent buyers and other interested parties. Information obtained through this process indicated that it was more likely than not that the assets associated with the Nucleic Acids operating segment were impaired.

35

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

The former Nucleic Acids operating segment also recorded a charge of $2,100 during the second quarter of 2004 related to the impairment of property and equipment associated with this operating segment.

On November 13, 2004, the former Nucleic Acids operating segment sold the assets associated with its specialty oligonucleotides manufacturing facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). The sale price was $3,000 in cash plus the assumption of the lease on the Boulder facility and of certain equipment leases with a gross value of $2,377. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and fees paid to our investment advisors) equaled approximately $2,700. In conjunction with this transaction, the Nucleic Acids operating segment recorded a gain on sale of $1,466 in the fourth quarter of 2004.

The Company implemented restructuring plans in 2004 and 2002 designed to better align its cost structure with anticipated revenues. In conjunction with these plans, the former Nucleic Acids operating segment recorded restructuring charges in 2004 and 2003 of $2,303 and $222, respectively, related primarily to employee severance agreements, office closures, property and equipment and intellectual property. There were accrued expenses associated with these restructuring plans of $191 and $1,393 at December 31, 2005 and 2004, respectively.

The Company accepted common stock from a customer of the former Nucleic Acids operating segment, Geron Corporation (“Geron”) as payment for goods and services. These shares were classified as available-for-sale securities. Net realized gains on these securities during 2005 and 2003 of $52 and $111, respectively, and realized losses on these securities of $128 during 2004 were reflected as other expense. Proceeds from the sales of these available for sale securities are reflected within net cash flows from investing activities. During 2005 and 2004, sales to Geron totaled $1,949 and $4,151, respectively, representing 50% and 49%, respectively, of net sales within this operating segment. Sales to Geron were not significant during 2003.

The assets and liabilities of the former Nucleic Acids operating segment were as follows:

	December 31,
	2005		2004
Accounts receivable (net of allowances for bad debts of $393 and $350, respectively)	$	51	$	330
Inventories		86		1,796
Prepaid expenses and other current assets		60		81
Current assets of discontinued operations	$	197	$	2,207
Property, plant and equipment, net	$	2,933	$	9,196
Other assets		—		2,859
Non-current assets of discontinued operations	$	2,933	$	12,055
Accounts payable	$	434	$	967
Other accrued expenses		863		820
Accrued compensation		625		41
Current liabilities of discontinued operations	$	1,922	$	1,828

36

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

The former Nucleic Acids operating segment inventory consisted primarily of phosphoramadites and the raw materials to produce phosphoramadites which are used and produced at the Company’s facility in Glasgow, Scotland. At December 31, 2004, the Company classified a portion of this inventory as a long-term other asset based on its existing sales forecasts for these products.

C. INVENTORIES

Inventories consisted of the following:

	2005		2004
Finished goods	$	2,062	$	2,637
Raw materials and work in process		653		780
Demonstration inventory		275		153
	$	2,990	$	3,570

The Company recorded a charge of $178 during the fourth quarter of 2005 related to the impairment of certain inventory associated with third party platforms.

D. OTHER ASSETS

Finite lived intangible assets and other assets consisted of the following:

	December 31,
	2005						2004
	Cost		Accumulated Reserve		Net Book Value		Cost		Accumulated Reserve		Net Book Value
Capitalized software	$	2,132	$	2,132	$	—	$	2,132	$	1,468	$	664
Intellectual property		765		534		231		765		476		289
Patents		636		135		501		1,071		194		877
Deferred financing costs		576		576		—		576		183		393
Other		838		496		342		775		470		305
Total	$	4,947	$	3,873	$	1,074	$	5,319	$	2,791	$	2,528

During the year ended December 31, 2005, management determined that certain international patent pursuits were no longer consistent with the Company’s strategic plan. Accordingly, the Company recorded an impairment charge of $247 related to the abandonment of such pursuits.

Amortization expense for intangible assets was $1,159, $1,197 and $825 during years ended December 31, 2005, 2004 and 2003, respectively. Amortization expense for intangible assets is expected to be approximately $58 in each of the next five years.

E. DEBT

The Company had no debt at December 31, 2005. Debt consisted of the following at December 31, 2004:

Credit Line
Gross amount due (2% above prime, contractually due December 2006)	$	5,948
Debt premium		1,004
Debt discount - warrants		(85	)
Debt discount – beneficial conversion premium		(353	)
	$	6,514
Long-Term Debt
Convertible debt (2% above prime, contractually due February 2007)	$	2,550
Debt Premium		474
Mortgage debt		—
Less current portion		(825	)
	$	2,199

37

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

In December 2003, the Company entered into a $7,500 line of credit (the “Credit Line”) with Laurus Master Fund, Ltd. (“Laurus”). The term of the Credit Line was three years carrying an interest rate of 2.0% over the prime rate or a minimum of 6.0% (7.25% at December 31, 2004). Funds available under the Credit Line were determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1,000 related to inventory balances. The Credit Line was secured by most of the Company’s assets. Prior to amendments to the Credit Line discussed below, payment of interest and principal could, under certain circumstances, be made with shares of the Company’s common stock at a fixed conversion price of $2.20 per share. Conversion of this debt to common stock could have been made at the election of Laurus or the Company. The Company could elect to convert only if its shares traded at a price exceeding $2.42 per share for ten consecutive trading days, and such conversion was further subject to trading volume limitations and a limitation on the total beneficial ownership by Laurus of the Company’s common stock. Upon entering into the Credit Line, the Company issued warrants to Laurus to acquire 550,000 shares of the Company’s common stock at an exercise price exceeding the average trading price of the Company’s common stock over the ten trading days prior to the date of the warrant. The amount available under the Credit Line at December 31, 2004 and 2003 was $1,552 and $4,508, respectively.

In February 2004, the Company entered into a separate $2,750 convertible note with Laurus (the “Term Note”). The Term Note carried an interest rate of 2.0% over the prime rate or a minimum of 6.0% (7.25% at December 31, 2004) and had a term of 3 years. Prior to amendments to the Term Note discussed below, the principal and interest on the Term Note could be converted into common stock of the Company at a fixed conversion price of $2.61 per share. Upon entering the Term Note, the Company issued warrants to Laurus to acquire 125,000 shares of its common stock. Borrowings under the Term Note were primarily used to retire the mortgage debt on the Company’s Glasgow facility. Remaining borrowings of approximately $750 were used to complete the build-out of the Glasgow facility, complete the consolidation the Company’s Glasgow operations into the new facility and provide funds for operations.

Certain features of the Credit Line and Term Note (collectively, the “Laurus Loans”) required the Company to separately account for the value of certain amounts related to the warrants issued and the conversion feature of the Laurus Loans. Specifically, Emerging Issues Task Force (“EITF”) No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, requires the Company to separately value the warrants issued and the “beneficial conversion premium” related to the Laurus Loans. The values of the warrants and the beneficial conversion premium were recorded on the balance sheet as a debt discount and an increase to additional paid in capital. The debt discount recorded for these items was amortized as expense to the income statement over the terms of the Laurus Loans or as the debt was converted into common stock thereby increasing the effective interest rate on the Laurus Loans. In January and February 2004, Laurus exercised its conversion rights on the Credit Line and converted $2,000 of amounts outstanding on the Credit Line into approximately 910,000 shares of common stock of the Company. In connection with this conversion, the Company accelerated the amortization of approximately $480 of the beneficial conversion premium.

In February 2004, Laurus waived the borrowing base limitation on the Credit Line, thereby making the full $7,500 facility available to the Company regardless of the available collateral. On August 31, 2004, Laurus agreed to extend the borrowing base waiver on the Credit Line through March 19, 2005. In addition, Laurus deferred certain payments due under the Term Note and reduced the interest rate on both of the Laurus Loans to 0% for any day the closing sale price of the Company’s common stock was at or above $1.75 per share. In return, the Company lowered the conversion price on each of the Laurus Loans to $1.00 per share and issued a warrant to Laurus covering an additional 400,000 common shares at an exercise price of $1.25 per share. The closing price of the Company’s common stock on August 31, 2004 was $1.20 per share.

The August 31, 2004 Laurus modifications were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. As such, the Company recorded a loss on extinguishment of debt of $2,859 at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7,427 and (ii) the fair value of

38

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

the new debt instrument of $10,287 plus the fair value of the new warrants of $111. The difference between the fair value of the new debt of $10,287 and the face value of the debt of $8,572 represented a premium, which was reflected as a reduction of interest expense over the life of the new debt.

On March 18, 2005, Laurus agreed to further extend the borrowing base waiver on the Credit Line until March 31, 2006. In connection with this waiver, the Company agreed to allow Laurus to convert $1,872 of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $650 of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock. As a result, the Company increased the amount available under the Credit Line by $1,872 and eliminated substantially all remaining 2005 scheduled principal payments on the Term Loan. The closing market price of the Company’s common stock the day before each of these conversions was $0.58 per share. No other provisions of the Credit Line or Term Note were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions the Company’s accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $1.37 million related to the fair value of incremental shares received by Laurus.

Contemporaneously with the closing of a private placement of the Company’s common stock on October 31, 2005 (the “2005 Private Placement”), the Company repaid all outstanding principal and accrued interest on the Laurus Loans which have been cancelled and are no longer available to the Company. In conjunction with this prepayment, the Company recorded a loss on debt extinguishment of $541. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $844 offset by the elimination of associated net debt premiums of $303.

During 2002, Cruachem Ltd., a wholly owned subsidiary of the Company, entered into a mortgage loan with The Royal Bank of Scotland. The original principal amount of the loan was £1.0 million. Principal and interest were payable in quarterly installments. The loan carried a 15-year term and a fixed annual interest rate of 6.77%. Security for this loan was the Company’s 45,000 square foot manufacturing facility located in Glasgow, Scotland. The loan carried certain financial and non-financial covenants that included a minimum net cash flow requirement. The net book value of the facility was approximately $2,000 at December 31, 2003. During February 2004, the Company repaid the principal balance of the mortgage loan.

Interest expense consisted of the following:

	Years Ended December 31,
	2005			2004		2003
Interest paid or accrued on outstanding debt	$	553		$	542	$	89
Amortization of debt premiums		(857	)		—		—
Amortization of debt discounts – warrants		28			—		—
Amortization of debt discount – beneficial conversion feature		725			1,641		—
Fair value of incremental shares received by Laurus		1,365			—		—
Other		164			183		85
	$	1,978		$	2,366	$	174

F. COMMITMENTS AND CONTINGENCIES

The Company is subject to a number of claims of various amounts, which arise out of the normal course of business. In the opinion of management, the disposition of pending claims will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

The Company leases certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2010. The future minimum lease payments required under these leases are approximately $1,176 in 2006, $539 in 2007, $276 in 2008, $277 in 2009, and $250 in 2010. Rent expense related to all operating leases for the years ended December 31, 2005, 2004 and 2003 was approximately $1,283, $2,007 and $2,487, respectively.

At December 31, 2005, firm commitments to vendors to purchase components used in WAVE^® systems totaled $879. The Company expects to pay the majority of these purchase commitments during 2006.

39

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

G. INCOME TAXES

The Company’s provision for income taxes for the years ended December 31, 2005, 2004 and 2003 relates to income taxes in states, foreign countries and other local jurisdictions, is all current and differs from the amounts determined by applying the statutory Federal income tax rate to loss before income taxes for the following reasons:

	2005			2004			2003
Benefit at Federal Rate	$	(1,687	)	$	(4,674	)	$	(3,212	)
Increase (decrease) resulting from:
State income taxes—net of federal benefit		(192	)		(428	)		(326	)
Foreign subsidiary tax rate difference		(81	)		(151	)		(576	)
Research and development tax credit		—			(76	)		(155	)
Other—net		191			145			81
Valuation allowance		1,795			5,188			4,253
Current income tax expense	$	26		$	4		$	65

The Company’s deferred income tax asset from continuing and discontinued operations at December 31, 2005 and 2004 is comprised of the following temporary differences:

	2005			2004
Net operating loss carryforward	$	38,730		$	35,587
Research and development credit carryforwards		1,328			1,328
Deferred revenue		341			708
Accrued vacation		78			81
Other		2,084			583
		42,561			38,287
Less valuation allowance		(42,561	)		(38,287	)
	$	—		$	—

At December 31, 2005, the Company had total unused federal tax net operating loss carryforwards from continuing and discontinued operations of $99,641 of which $1,770 expire in 2008, $3,698 expire in 2009, $2,970 expire in 2010, $943 expire in 2011, $3,425 expire in 2012, $1,838 expire in 2018, $8,182 expire in 2019, $9,662 expire in 2020, $8,228 expire in 2021, $16,862 expire in 2022; $16,173 expire in 2023, $17,390 expire in 2024 and $8,500 expire in 2025. Of these federal net operating loss carryforwards, $11,820 were obtained in the acquisition of Annovis, Inc. and may be subject to certain restrictions. At December 31, 2005, the Company had unused state tax net operating loss carryforwards from continuing and discontinued operations of approximately $39,002 that expire at various times between 2006 and 2025. At December 31, 2005, the Company had unused research and development credit carryforwards from continuing and discontinued operations of $1,328 that expire at various times between 2008 and 2024. A valuation allowance has been provided for the remaining deferred tax assets, due to the Company’s cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. 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 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 at such time.

40

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

H. EMPLOYEE BENEFIT PLAN

The Company maintains an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. The Company matches the employees’ contributions at the rate of 50% on the first 6% of contributions. The Company may, at the discretion of its Board of Directors, make additional contributions on behalf of the Plan’s participants. For the years ended December 31, 2005, 2004 and 2003, Company contributions to the 401(k) plan were $172, $279, and $343, respectively.

I. STOCKHOLDERS’ EQUITY

Preferred Stock.

The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Company has no current plans to issue any series of preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.

Common Stock.

On October 31, 2005, the Company completed the 2005 Private Placement of securities to institutional investors. The securities issued consisted of: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share (the “Offering”). The aggregate purchase price for the securities sold in the 2005 Private Placement was $1.01 per share of common stock initially being sold (the “Purchase Price”) or $15,075. In conjunction with the 2005 Private Placement, the Company issued a warrant to Oppenheimer & Co., Inc. to purchase 932,859 shares at $1.20 per share as part of their placement fee.

During 2005 and 2004, the Company issued 4,900,000 and 1,134,850 shares, respectively, of common stock in conjunction with conversions under the Laurus Loans as follows.

Date	Price		Shares Issued	Net Proceeds		Facility	Applied To
January 2005	$	1.00	50,000	$	50	Term Note	Principal
March 2005	$	0.52	3,600000		1,835	Credit Note	Principal
March 2005	$	0.52	1,250,000		650	Term Note	Principal
Total 2005			4,900,000	$	2,535
January 2004	$	2.20	650,000	$	1,422	Credit Line	Principal
February 2004	$	2.20	259,091		570	Credit Line	Principal
December 2004	$	1.00	150,000		146	Term Note	Principal
December 2004	$	1.00	75,759		72	Term Note	Interest
Total 2004			1,134,850	$	2,210

In September 2003, the Company issued 1,780,000 shares of its common stock and in November 2003, the Company issued 2,720,000 shares of its common stock in privately-negotiated sales. These shares were sold pursuant to the terms of a Securities Purchase Agreement, dated August 27, 2003. The net proceeds to the Company, after payment of transaction fees and other expenses of the offering, were approximately $4,202.

41

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

Each of the foregoing stock sales was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) as a sale not involving a public offering. These shares have been registered for resale under the Securities Act.

In May 2001, Company shareholders approved the adoption of the Transgenomic, Inc. 2001 Employee Stock Purchase Plan that was subsequently implemented in November 2001 and terminated in December 2005. Substantially all of the Company’s U.S. employees were eligible to participate in the Plan. Eligible employees authorize payroll deductions to be made for the purchase of shares. Such deductions were accumulated during a defined participation period at the end of which each participant was deemed to have been granted an option to purchase shares of stock from the Company at 85% of the fair market value of the Company stock as measured by the closing price of the stock on either the first or last business day of the participation period, whichever was lower. The number of shares purchased under the option was based upon the participant’s elected withholding amount. At the end of the participation period such option was automatically exercised. This plan was structured to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1986, as amended. The Company issued 25,504, 76,902, and 107,077 shares under this plan, during the years ended December 31, 2005, 2004 and 2003, respectively.

Common Stock Warrants.

Warrants covering 6,903,156 shares of common stock were issued during 2005. At December 31, 2005, we had 8,062,577 common stock warrants outstanding.

Warrant Holder	Issue Year	Expiration Year	Underlying Shares	Exercise Price
Various Institution Holders (1)	2005	2010	6,903,156	$	1.20
Laurus Master Fund, Ltd. (2)	2003	2010	200,000	$	1.92
Laurus Master Fund, Ltd. (2)	2003	2010	200,000	$	2.07
Laurus Master Fund, Ltd. (2)	2003	2010	150,000	$	2.35
Laurus Master Fund, Ltd. (2)	2004	2011	125,000	$	2.57
Laurus Master Fund, Ltd. (2)	2004	2011	400,000	$	1.18
TN Capital Equities, Ltd. (2)	2003	2008	45,918	$	2.94
TN Capital Equities, Ltd. (2)	2004	2009	15,566	$	3.18
GE Capital (3)	2002	2007	13,762	$	3.27
GE Capital (3)	2003	2008	9,175	$	3.27

(1) These warrants were issued in conjunction with the 2005 Private Placement described earlier in this Note.

(2) These warrants were issued in conjunction with the Laurus Loans and subsequent modifications. In conjunction with the 2005 Private Placement, the exercise prices of these warrants were adjusted according to repricing provisions contained in the original warrant agreements. Refer to Note E.

(3) These warrants were issued in conjunction with operating leases with GE Capital. While the leases have since been terminated, the warrants are still outstanding.

J. STOCK OPTIONS

The Company’s 1997 Stock Option Plan, as amended (the “Stock Option Plan”), allows the Company to grant both incentive stock options and nonqualified stock options to acquire shares of the Company’s common stock to employees and directors of the Company and to nonemployee advisors. Either incentive or non-qualified stock options may be granted to employees of the Company, but only nonqualified stock options may be granted to nonemployee directors and advisors. The maximum number of shares for which options may be granted under the Stock Option Plan is 7,000,000. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”) which has the authority to set the number, exercise price, term and vesting provisions of the options granted under the Stock Option Plan, subject to the terms thereof. The options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. While

42

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

vesting periods vary, stock options generally vest at a rate of either 20% per year over a five-year period or 33 ¹/3% per year over a three-year period and expire 10 years after the date the option was granted. If the option holder ceases to be employed by the Company, the Company will have the right to terminate any outstanding but unexercised options.

The following table summarizes activity under the Stock Option Plan during the three years ended December 31, 2005:

	Number of Options		Weighted Average Exercise Price
Balance at January 1, 2003:	5,144,910			6.62
Granted	1,282,000			1.64
Exercised	—			—
Forfeited	(733,994	)		7.25
Balance at December 31, 2003:	5,692,916			6.62
Granted	360,000			1.70
Exercised	—			—
Forfeited	(964,879	)		5.24
Balance at December 31, 2004:	5,088,037			5.09
Granted	1,183,500			1.04
Exercised	—			—
Forfeited	(708,439	)		4.48
Balance at December 31, 2005:	5,563,098		$	4.31
Exercisable at December 31, 2005	5,563,098		$	4.31

The weighted average fair value per share of options granted during the years ended December 31, 2005, 2004 and 2003 was $0.63, $0.40 and $0.93, respectively.

The Company has elected to follow the measurement provisions of APB No. 25, under which no recognition of expense is required in accounting for stock options granted to employees for which the exercise price equals or exceeds the deemed fair market value of the stock at the grant date. Stock-based compensation expense recorded by the Company represents amortization of unearned compensation related to options granted to employees with an exercise price less than the deemed fair market value at the date of grant and options granted to non-employees. There was no such expense in 2005 and 2004 and $93 for the year ended December 31, 2003.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rates ranging from 3.10% to 6.53%, volatility ranging from 35% to 100%, an expected option life of 3 years and no common stock dividends.

On December 28, 2005, the Company’s Directors approved a plan to accelerate the vesting of all outstanding stock options. Aside from the acceleration of the vesting date, the terms and the conditions of the stock option award agreements governing the underlying stock option grants remained unchanged. As a result of this plan, options to purchase approximately 1,081,845 shares became immediately exercisable. All such options were out-of-the money, and accordingly, the accelerated vesting resulted in no compensation expense since there was no intrinsic value associated with these fixed awards at the date of modification. Accelerating the vesting of these options allows the Company to avoid recognition of compensation expense associated with these options in future periods.

43

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

The following table summarizes information about options outstanding as of December 31, 2005:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable	Weighted- Average Exercise Price
		(in years)
$ 1.00—$ 1.30	1,412,834	9.0	$	1.08	1,412,834	$	1.08
$ 1.31—$ 2.60	797,333	7.4	$	1.91	797,333	$	1.91
$ 2.61—$ 3.90	35,000	6.8	$	2.90	35,000	$	2.90
$ 3.91—$ 5.20	2,075,700	2.1	$	5.00	2,075,700	$	5.00
$ 5.21—$ 6.50	680,000	5.5	$	6.15	680,000	$	6.15
$ 6.51—$ 9.10	10,000	5.4	$	9.00	10,000	$	9.00
$ 9.11—$10.40	290,000	5.2	$	9.89	290,000	$	9.89
$10.41—$13.00	262,231	4.4	$	12.80	262,231	$	12.80
	5,563,098	5.3	$	4.31	5,563,098	$	4.31

K. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

The Company has one reportable operating segment. Although revenue is analyzed by type, net financial results are analyzed as one segment due to the integrated nature of the products. Net sales by product were as follows:

	Years Ended December 31,
	2005		2004		2003
Bioinstruments	$	14,427	$	14,385	$	17,916
Bioconsumables		8,981		8,838		7,260
Discovery Services		2,420		2,020		868
	$	25,828	$	25,243	$	26,044

Net sales by geographic region were as follows:

	Years Ended December 31,
	2005		2004		2003
United States	$	7,069	$	7,036	$	7,968
Europe		14,979		13,959		13,380
Pacific Rim		2,297		2,325		2,403
Other		1,483		1,923		2,293
Total	$	25,828	$	25,243	$	26,044

No customer accounted for more than 10% of consolidated net sales for any period presented. However, sales to a large pharmaceutical company totaled $2,188 and $1,658 and $393 during the years ended December 31, 2005, 2004 and 2003, respectively, and represented 9%, 7% and 2% of consolidated net sales. Sales to this customer are governed by a non-binding master services agreement dated August 22, 2002. Accordingly, the amount of sales to this customer is subject to change.

Substantially all long-lived assets are within the United States.

L. RESTRUCTURING PLANS

The Company implemented restructuring plans in 2004 and 2002 designed to better align the Company’s cost structure with anticipated revenues. In conjunction with these plans, the Company recorded restructuring charges in 2004 and 2003 of $1,267 and $516, respectively, related primarily to employee severance agreements, office closures, property and equipment and intellectual property. There were no accrued expenses associated with these restructuring plans at December 31, 2005 and $516 at December 31, 2004.

44

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Years Ended December 31, 2005, 2004 and 2003

(Dollars in thousands except per share data)

M. QUARTERLY RESULTS (UNAUDITED)

Unaudited quarterly consolidated statements of operations data was as follows:

	Year Ended December 31, 2005
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Net Sales	$	6,927		$	6,889		$	6,663		$	5,349		$	25,828
Gross Profit	$	3,399		$	3,486		$	3,115		$	2,331		$	12,331
Loss from continuing operations	$	(2,162	)	$	(473	)	$	(526	)	$	(1,823	)	$	(4,984	)
Income (loss) from discontinued operations		(730	)		(525	)		637			(9,391	)		(10,009	)
Net loss	$	(2,892	)	$	(998	)	$	111		$	(11,214	)	$	(14,993	)
Basic and diluted earnings (loss) per share:
From continuing operations	$	(0.07	)	$	(0.01	)	$	(0.02	)	$	(0.04	)	$	(0.14	)
From discontinued operations		(0.03	)		(0.02	)		0.02			(0.21	)		(0.28	)
	$	(0.10	)	$	(0.03	)	$	—		$	(0.25	)	$	(0.42	)
Basic and Diluted Weighted Average Shares Outstanding (in thousands)		29,984			34,237			34,243			44,366			35,688
	Year Ended December 31, 2004
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Net Sales	$	6,385		$	6,563		$	5,502		$	6,793		$	25,243
Gross Profit	$	3,590		$	3,599		$	2,840		$	3,217		$	13,246
Loss from continuing operations	$	(2,308	)	$	(1,736	)	$	(5,368	)	$	(4,338	)	$	(13,750	)
Loss from discontinued operations		(1,551	)		(13,396	)		(3,074	)		(2,601	)		(20,622	)
Net loss	$	(3,859	)	$	(15,132	)	$	(8,442	)	$	(6,939	)	$	(34,372	)
Basic and diluted loss per share:
From continuing operations	$	(0.08	)	$	(0.06	)	$	(0.18	)	$	(0.15	)	$	(0.47	)
From discontinued operations		(0.05	)		(0.46	)		(0.11	)		(0.09	)		(0.72	)
	$	(0.13	)	$	(0.52	)	$	(0.29	)	$	(0.24	)	$	(1.19	)
Basic and Diluted Weighted Average Shares Outstanding (in thousands)		28,728			29,053			29,078			29,338			29,006

Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share losses may not equal the annual loss per share.

45

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures. A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report. Based on that review and evaluation, the CEO and CFO concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective in assuring that information required to be disclosed is recorded, processed, summarized and reported in the reports the Company submits under the Securities Exchange Act of 1934.

(b) Change in Internal Control Over Financial Reporting. There have been no changes in the Company’s internal control over financial reporting during the year that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

None.

Part III

Item 10. Directors and Executive Officers of the Registrant.

Information required by this item is incorporated by reference to the Proxy Statement under the caption “Board of Directors and Committees.” Information regarding our executive officers is set forth in Item 4A of this report.

Item 11. Executive Compensation.

Information required by this Item is incorporated by reference to the Proxy Statement under the caption “Executive Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information required by this Item is incorporated by reference to the Proxy Statement under the caption “Voting Securities and Beneficial Ownership by Principal Stockholder and our Directors and Officers.”

Item 13. Certain Relationships and Related Transactions

None.

Item 14. Principal Accountant Fees and Services

Information required by this Item is incorporated by reference to the Proxy Statement under the caption “Accounting Fees and Services.”

Part IV

Item 15. Exhibits and Financial Statement Schedules.

(a) The following documents are filed as part of this report:

46

1. Financial Statements. The following financial statements of the Registrant are included in response to Item 8 of this report:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets of the Registrant and Subsidiaries as of December 31, 2005 and 2004.

Consolidated Statements of Operations of the Registrant and Subsidiaries for the years ended December 31, 2005, 2004 and 2003.

Consolidated Statements of Stockholders’ Equity of the Registrant and Subsidiaries for the years ended December 31, 2005, 2004 and 2003.

Consolidated Statements of Cash Flows of the Registrant and Subsidiaries for the years ended December 31, 2005, 2004 and 2003.

Notes to Consolidated Financial Statements of the Registrant and Subsidiaries.

2. Financial Statement Schedules.

None

3. Exhibits. The following exhibits were filed as required by Item 15(a)(3) of this report. Exhibit numbers refer to the paragraph numbers under Item 601 of Regulation S-K:

2.1 Agreement and Plan of Merger, dated as of April 30, 2001, by and among Registrant, TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.1 to Registrant’s Report on Form 8-K filed on May 31, 2001)

2.2 Addendum to Agreement and Plan of Merger, dated as of May 18, 2001, by and among Registrant, TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.2 to Registrant’s Report on Form 8-K filed on May 31, 2001)

2.3 Asset Purchase Agreement, dated as of November 8, 2004, by and between Registrant and Eyetech Boulder Inc. (incorporated by reference to Exhibit 2.3 to Registrant’s Report on Form 10-K (Registration No. 000-30975) filed on April 15, 2005)

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) 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) filed on March 10, 2000)

4.1 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) filed on March 10, 2000)

10.1 Fourth Amended and Restated 1997 Stock Option Plan of the Registrant (incorporated by reference to Exhibit 10.1 to Registrant’s Report on Form 10-K (Registration No. 000-30975) filed on April 15, 2005)

10.2 1999 UK Approved Stock Option Sub Plan of the Registrant (incorporated by reference to Exhibit 10.7 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.3 Employee Stock Purchase Plan of the Registrant (incorporated by reference to Exhibit 4(b) to Registration Statement on Form S-8 (Registration No. 333-71866) filed on October 19, 2001)

10.4 Employment Agreement, dated April 1, 2000, by and between the Registrant and Collin J. D’Silva (incorporated by reference to Exhibit 10.8 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.5 Amendment No. 1 to the Employment Agreement, effective March 1, 2000, by and between Transgenomic, Inc. and Collin D’Silva (incorporated by reference to Exhibit 10.9 of the Registrant’s Quarterly Report on Form 10-Q filed on May 17, 2004)

10.6 Employment Agreement, effective July 31, 2004, by and between Transgenomic, Inc. and Michael A. Summers (incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-Q filed on November 15, 2004).

10.7 Employment Agreement, dated January 22, 2002, between the Registrant and Keith A. Johnson (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on May 14, 2002)

47

10.8 License Agreement, dated September 1, 1994, between Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997 (incorporated by reference to Exhibit 10.14 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.9 License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University (incorporated by reference to Exhibit 10.15 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.10 License Agreement, dated December 1, 1989, between Cruachem Holdings Ltd. (a wholly owned subsidiary of the Registrant) and Millipore Corporation (incorporated by reference to Exhibit 10.13 to Registrant’s Annual Report on Form 10-K filed on March 25, 2002)

10.11 Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Ltd. (a wholly owned subsidiary of the Registrant) and Applied Biosystems, Inc. (incorporated by reference to Exhibit 10.14 to Registrant’s Annual Report on Form 10-K filed on March 25, 2002)

10.12 Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited (incorporated by reference to Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed on August 14, 2002)

10.13 License Amendment Agreement, dated June 2, 2003, by and between Geron Corporation and the Registrant. (incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed on August 12, 2003)

10.14 Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments (incorporated by reference to Exhibit 10.16 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

10.15 Form of Securities Purchase Agreement by and between the Registrant and various counterparties, dated August 27, 2003 (incorporated by reference to Exhibit 10 to the Registrant’s Report on Form 8-K filed on August 29, 2003)

10.16 Securities Purchase Agreement by and between the Registrant and Geron Corporation, dated June 2, 2003 (incorporated by reference to Exhibit 10.0 to Amendment No. 3 to Registration Statement on Form S-3 (Registration No. 333-108319) as filed on October 14, 2003)

10.17 Security Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.18 Amendment to Security Agreement and Related Documents by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2002 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)

10.19 Secured Revolving Note by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.20 Secured Convertible Minimum Borrowing Note by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.21 Secured Convertible Minimum Borrowing Note Series B by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003, as amended on April 15, 2004 (incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.22 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.23 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

10.24 Common Stock Purchase Warrant by and between the Registrant and TN Capital Equities, Ltd., dated December 3, 2003 (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-111442) filed on December 22, 2003)

48

10.25 Securities Purchase Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.26 Amendment to Securities Purchase Agreement and Related Document by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)

10.27 Secured Convertible Term Note by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.28 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004, as amended on April 15, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.29 Registration Rights Agreement by and between the Registrant and Laurus Master Fund, Ltd., dated February 19, 2004 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.30 Common Stock Purchase Warrants by and between the Registrant and TN Capital Equities, Ltd., dated March 1, 2004 (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-3 of the Registrant (Registration No. 333-114661) filed on April 21, 2004)

10.31 Common Stock Purchase Warrant by and between the Registrant and Laurus Master Fund, Ltd., dated August 31, 2004 (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-3 (Registration No. 333-118970) as filed on September 14, 2004)

10.32 Engagement Agreement by and between the Registrant and Goldsmith, Agio, Helms Securities, Inc., dated March 19, 2004, as amended August 12, 2004 (incorporated by reference to Exhibit 10.10 to Registrant’s Quarterly Report on Form 10-Q filed on November 15, 2004)

10.33 Form of Securities Purchase Agreement by and between the Registrant and various counterparties dated September 22, 2005 (incorporated by reference to Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q filed on November 14, 2005)

10.34 Common Stock Purchase Warrant by and between the Registrant and Oppenheimer & Co., Inc. dated October 27, 2005

10.35 Letter Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated September 22, 2005

10.36 Letter Agreement by and between the Registrant and Laurus Master Fund, Ltd. dated October 31, 2005

21     Subsidiaries of the Registrant

23     Consent of Independent Registered Public Accounting Firm

24     Powers of Attorney

31     Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32     Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on this 30th day of March 2006.

TRANSGENOMIC, INC.
By:	/s/ COLLIN J. D’SILVA
	Collin J. D’Silva, Chairman and Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 30^th day of March 2006.

Signature	Title
/s/ COLLIN J. D’SILVA Collin J. D’Silva	Chairman of the Board, Director and Chief Executive Officer (Principal Executive Officer)
/s/ MICHAEL A. SUMMERS Michael A. Summers	Chief Financial Officer (Principal Financial Officer)
/s/ GREGORY J. DUMAN* Gregory J. Duman	Director
/s/ JEFFREY SKLAR* Jeffrey Sklar	Director
/s/ ROLAND J. SANTONI* Roland J. Santoni	Director
/s/ PARAG SAXENA* Parag Saxena	Director
/s/ GREGORY T. SLOMA* Gregory T. Sloma	Director
*By Collin J. D’Silva, as attorney-in-fact
/s/ COLLIN J. D’SILVA Collin J. D’Silva Attorney-in-fact for the individuals as indicated.

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EX-10.34

Exhibit 10.34

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUED UPON ITS

EXERCISE ARE SUBJECT TO THE RESTRICTIONS ON

TRANSFER SET FORTH IN SECTION 5 OF THIS WARRANT

Warrant No. 15	Number of Shares: 932,859 (subject to adjustment)
Date of Issuance: October 27, 2005 Original Issue Date: October 27, 2005

Transgenomic, Inc.

Common Stock Purchase Warrant

(Void after October 26, 2010)

Transgenomic, Inc., a Delaware corporation (the “Company”), for value received, hereby certifies that Oppenheimer & Co. Inc., or its registered assigns (the “Registered Holder”), is entitled, subject to the terms and conditions set forth below, to purchase from the Company, at any time or from time to time on or after the date hereof and on or before 5:00 p.m. (New York time) on October 26, 2010 (the “Exercise Period”), 932,859 shares of Common Stock, $0.01 par value per share, of the Company (“Common Stock”), at a purchase price of $1.20 per share. The shares purchasable upon exercise of this Warrant, and the purchase price per share, each as adjusted from time to time pursuant to the provisions of this Warrant, are hereinafter referred to as the “Warrant Shares” and the “Purchase Price,” respectively. This Warrant is one of a series of Warrants issued by the Company in connection with a private placement of Common Stock and of like tenor, except as to the number of shares of Common Stock subject thereto (collectively, the “Company Warrants”).

1. Exercise.

(a) Exercise for Cash. The Registered Holder may, at its option, elect to exercise this Warrant, in whole or in part and at any time or from time to time during the Exercise Period, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Registered Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, accompanied by payment in full, in lawful money of the United States, of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. A facsimile signature of the Registered Holder on the purchase form shall be sufficient for purposes of exercising this Warrant, provided that the Company receives the Registered Holder’s original signature with three (3) business days thereafter.

(b) Cashless Exercise.

(i) At any time during the Exercise Period that the Warrant Shares are not registered pursuant to an effective registration statement filed with the Securities and Exchange Commission, the Registered Holder may, at its option, elect to exercise this

Warrant, in whole or in part, on a cashless basis, by surrendering this Warrant, with the purchase form appended hereto as Exhibit I duly executed by or on behalf of the Registered Holder, at the principal office of the Company, or at such other office or agency as the Company may designate, by canceling a portion of this Warrant in payment of the Purchase Price payable in respect of the number of Warrant Shares purchased upon such exercise. In the event of an exercise pursuant to this subsection 1(b), the number of Warrant Shares issued to the Registered Holder shall be determined according to the following formula:

X = Y(A-B)

            A

Where: X =	the number of Warrant Shares that shall be issued to the Registered Holder;
Y =	the number of Warrant Shares for which this Warrant is being exercised (which shall include both the number of Warrant Shares issued to the Registered Holder and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price);
A =	the Fair Market Value (as defined below) of one share of Common Stock; and
B =	the Purchase Price then in effect.

(ii) For purposes of this Warrant, “Fair Market Value” per share of Common Stock shall be determined as follows:

(A) If the Common Stock is listed on a national securities exchange, the Nasdaq National Market or another nationally recognized trading system as of the Exercise Date, the Fair Market Value per share of Common Stock shall be deemed to be the closing sale price per share of Common Stock thereon on the trading day immediately preceding the Exercise Date (provided that if no such price is reported on such day, the Fair Market Value per share of Common Stock shall be determined pursuant to clause (B) below).

(B) If the Common Stock is listed on the over-the-counter bulletin board (“OTC”), the Fair Market Value per share of Common Stock shall be deemed to be the average of the closing bid and asked prices reported on the OTC on the trading day immediately preceding the Exercise Date.

(C) If neither (A) nor (B) shall apply, the Fair Market Value per share of Common Stock shall be deemed to be the amount most recently determined by the Board of Directors of the Company (the “Board”) to represent the fair market value per share of the Common Stock (including without limitation a determination for purposes of granting Common Stock options or issuing

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Common Stock under any plan, agreement or arrangement with employees of the Company); and, upon request of the Registered Holder, the Board (or a representative thereof) shall, as promptly as reasonably practicable but in any event not later than 10 days after such request, notify the Registered Holder of the Fair Market Value per share of Common Stock and furnish the Registered Holder with reasonable documentation of the Board’s determination of such Fair Market Value. Notwithstanding the foregoing, if the Board has not made such a determination within the three-month period prior to the Exercise Date, then (A) the Board shall make, and shall provide or cause to be provided to the Registered Holder notice of, a determination of the Fair Market Value per share of the Common Stock within 15 days of a request by the Registered Holder that it do so, and (B) the exercise of this Warrant pursuant to this subsection 1(b) shall be delayed until such determination is made and notice thereof is provided to the Registered Holder.

(c) Exercise Date. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant shall have been surrendered to the Company as provided in subsection 1(a) or 1(b) above (the “Exercise Date”). At such time, the person or persons in whose name or names any certificates for Warrant Shares shall be issuable upon such exercise as provided in subsection 1(d) below shall be deemed to have become the holder or holders of record of the Warrant Shares represented by such certificates.

(d) Issuance of Certificates. As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within 10 days thereafter, the Company, at its expense, will cause to be issued in the name of, and delivered to, the Registered Holder, or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct:

(i) a certificate or certificates for the number of full Warrant Shares to which the Registered Holder shall be entitled upon such exercise plus, in lieu of any fractional share to which the Registered Holder would otherwise be entitled, cash in an amount determined pursuant to Section 3 hereof; and

(ii) in case such exercise is in part only, a new warrant or warrants (dated the date hereof) of like tenor, calling in the aggregate on the face or faces thereof for the number of Warrant Shares equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of Warrant Shares for which this Warrant was so exercised (which, in the case of an exercise pursuant to subsection 1(b), shall include both the number of Warrant Shares issued to the Registered Holder pursuant to such partial exercise and the number of Warrant Shares subject to the portion of the Warrant being cancelled in payment of the Purchase Price).

2. Adjustments.

(a) Adjustment for Stock Splits and Combinations. If the Company shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding

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Common Stock, the Purchase Price then in effect immediately before that subdivision shall be proportionately decreased. If the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Purchase Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. For purposes of this Warrant, “Original Issue Date” shall mean the date on which this Warrant was first issued (or, if this Warrant was issued upon partial exercise of, or in replacement of another warrant of like tenor, then the date on which such original warrant was first issued).

(b) Adjustment for Certain Dividends and Distributions. In the event the Company at any time, or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Purchase Price then in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Purchase Price then in effect by a fraction:

(i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Purchase Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Purchase Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions.

(c) Adjustment in Number of Warrant Shares. When any adjustment is required to be made in the Purchase Price pursuant to subsections 2(a) or 2(b), the number of Warrant Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Purchase Price in effect immediately prior to such adjustment, by (ii) the Purchase Price in effect immediately after such adjustment.

(d) Adjustment for Reorganization. If there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Company in which the Common Stock is converted into or exchanged for securities, cash or other property (other than a transaction covered by subsections 2(a) or 2(b)) (collectively, a “Reorganization”), then, following such Reorganization, the Registered Holder shall receive upon exercise hereof the kind and amount of securities, cash or other property which the Registered Holder would have been entitled to receive pursuant to such Reorganization if such exercise had taken place immediately prior to such Reorganization. Notwithstanding the foregoing sentence, if (x) there shall occur

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any Reorganization in which the Common Stock is converted into or exchanged for anything other than solely equity securities, and (y) the common stock of the acquiring or surviving company is publicly traded, then, as part of such Reorganization, (i) the Registered Holder shall have the right thereafter to receive upon the exercise hereof such number of shares of common stock of the acquiring or surviving company as is determined by multiplying (A) the number of shares of Common Stock subject to this Warrant immediately prior to such Reorganization by (B) a fraction, the numerator of which is the Fair Market Value (determined in accordance with subsection 1(b)(ii) above) per share of Common Stock as of the effective date of such Reorganization, and the denominator of which is the fair market value per share of common stock of the acquiring or surviving company as of the effective date of such transaction, as determined in good faith by the Board (using the principles set forth in subsection 1(b)(ii) to the extent applicable), and (ii) the exercise price per share of common stock of the acquiring or surviving company shall be the Purchase Price divided by the fraction referred to in clause (B) above. In any such case, appropriate adjustment (as determined in good faith by the Board) shall be made in the application of the provisions set forth herein with respect to the rights and interests thereafter of the Registered Holder, to the end that the provisions set forth in this Section 2 (including provisions with respect to changes in and other adjustments of the Purchase Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities, cash or other property thereafter deliverable upon the exercise of this Warrant.

(e) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Purchase Price pursuant to this Section 2, the Company at its expense shall, as promptly as reasonably practicable but in any event not later than 10 days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Registered Holder a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property for which this Warrant shall be exercisable and the Purchase Price) and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, as promptly as reasonably practicable after the written request at any time of the Registered Holder (but in any event not later than 10 days thereafter), furnish or cause to be furnished to the Registered Holder a certificate setting forth (i) the Purchase Price then in effect and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the exercise of this Warrant.

3. Fractional Shares. The Company shall not be required upon the exercise of this Warrant to issue any fractional shares, but shall pay the value thereof to the Registered Holder in cash on the basis of the Fair Market Value per share of Common Stock, as determined pursuant to subsection 1(b)(ii) above.

4. Call Provision. The Company shall not have the right to repurchase this Warrant.

5. Transfers, etc.

(a) Notwithstanding anything to the contrary contained herein, this Warrant and the Warrant Shares shall not be sold or transferred unless either (i) they first shall have been registered under the Securities Act of 1933, as amended (the “Act”), or (ii) such sale or transfer shall be exempt from the registration requirements of the Act and the Company shall have been furnished with an opinion of legal counsel, reasonably satisfactory to the Company, to the effect that such

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sale or transfer is exempt from the registration requirements of the Act. Notwithstanding the foregoing, no registration or opinion of counsel shall be required for (i) a transfer by a Registered Holder which is an entity to a wholly owned subsidiary of such entity, a transfer by a Registered Holder which is a partnership to a partner of such partnership or a retired partner of such partnership or to the estate of any such partner or retired partner, or a transfer by a Registered Holder which is a limited liability company to a member of such limited liability company or a retired member or to the estate of any such member or retired member, provided that the transferee in each case agrees in writing to be subject to the terms of this Section 5, or (ii) a transfer made in accordance with Rule 144 under the Act.

(b) Each certificate representing Warrant Shares shall bear a legend substantially in the following form:

“The securities represented hereby have not been registered under the Securities Act of 1933, as amended, or any state securities laws and neither the securities nor any interest therein may not be offered, sold, transferred, pledged or otherwise disposed of except pursuant to an effective registration under such act or an exemption from registration, which, in the opinion of counsel reasonably satisfactory to counsel for this corporation, is available.”

The foregoing legend shall be removed from the certificates representing any Warrant Shares, at the request of the holder thereof, at such time as they become eligible for resale pursuant to Rule 144(k) under the Act or at such time as the Warrant Shares are sold or transferred in accordance with the requirements of an effective registration statement of the Company.

(c) The Company will maintain a register containing the name and address of the Registered Holder of this Warrant. The Registered Holder may change its address as shown on the warrant register by written notice to the Company requesting such change.

(d) Subject to the provisions of Section 5 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant with a properly executed assignment (in the form of Exhibit II hereto) at the principal office of the Company (or, if another office or agency has been designated by the Company for such purpose, then at such other office or agency).

6. No Impairment. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Registered Holder against impairment.

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7. Notices of Record Date, etc. In the event:

(a) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time deliverable upon the exercise of this Warrant) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right, other than the right to vote at any annual or special meeting of the holders of Common Stock); or

(b) of any capital reorganization of the Company, any reclassification of the Common Stock of the Company, any consolidation or merger of the Company with or into another corporation, or any transfer of all or substantially all of the assets of the Company; or

(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will send or cause to be sent to the Registered Holder a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other stock or securities at the time deliverable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be sent at least 10 days prior to the record date or effective date for the event specified in such notice.

8. Reservation of Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of this Warrant, such number of Warrant Shares and other securities, cash and/or property, as from time to time shall be issuable upon the exercise of this Warrant.

9. Exchange or Replacement of Warrants.

(a) Upon the surrender by the Registered Holder, properly endorsed, to the Company at the principal office of the Company, the Company will, subject to the provisions of Section 5 hereof, issue and deliver to or upon the order of the Registered Holder, at the Company’s expense, a new Warrant or Warrants of like tenor, in the name of the Registered Holder or as the Registered Holder (upon payment by the Registered Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock (or other securities, cash and/or property) then issuable upon exercise of this Warrant.

(b) Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement in an amount reasonably satisfactory to the Company, or (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will issue, in lieu thereof, a new Warrant of like tenor.

- 7 -

10. Notices. All notices and other communications from the Company to the Registered Holder in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the address last furnished to the Company in writing by the Registered Holder. All notices and other communications from the Registered Holder to the Company in connection herewith shall be mailed by certified or registered mail, postage prepaid, or sent via a reputable nationwide overnight courier service guaranteeing next business day delivery, to the Company at its principal office set forth below. If the Company should at any time change the location of its principal office to a place other than as set forth below, it shall give prompt written notice to the Registered Holder and thereafter all references in this Warrant to the location of its principal office at the particular time shall be as so specified in such notice. All such notices and communications shall be deemed delivered one business day after being sent via a reputable international overnight courier service guaranteeing next business day delivery.

11. No Rights as Stockholder. Until the exercise of this Warrant, the Registered Holder shall not have or exercise any rights by virtue hereof as a stockholder of the Company.

12. Amendment or Waiver. Any term of this Warrant may be amended or waived (either generally or in a particular instance and either retroactively or prospectively) with the written consent of the Company and the holders of Company Warrants representing more than 75% of the number of shares of Common Stock then subject to outstanding Company Warrants. Notwithstanding the foregoing, (a) this Warrant may be amended and the observance of any term hereunder may be waived without the written consent of the Registered Holder only in a manner which applies to all Company Warrants in the same fashion and (b) the number of Warrant Shares subject to this Warrant and the Purchase Price of this Warrant may not be amended, and the right to exercise this Warrant may not be waived, without the written consent of the Registered Holder (it being agreed that an amendment to or waiver under any of the provisions of Section 2 of this Warrant shall not be considered an amendment of the number of Warrant Shares or the Purchase Price). The Company shall give prompt written notice to the Registered Holder of any amendment hereof or waiver hereunder that was effected without the Registered Holder’s written consent. No waivers of any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision.

13. Section Headings. The section headings in this Warrant are for the convenience of the parties and in no way alter, modify, amend, limit or restrict the contractual obligations of the parties.

14. Governing Law. This Warrant will be governed by and construed in accordance with the internal laws of the State of New York (without reference to the conflicts of law provisions thereof).

15. Facsimile Signatures. This Warrant may be executed by facsimile signature.

* * * * * * *

- 8 -

EXECUTED as of the Date of Issuance indicated above.

TRANSGENOMIC, INC.

By:

Name:

Title:

- 9 -

EXHIBIT I

PURCHASE FORM

To: Transgenomic, Inc. Dated:                        

The undersigned, pursuant to the provisions set forth in the attached Warrant (No.             ), hereby elects to purchase (check applicable box):

[                    ] shares of the Common Stock of Transgenomic, Inc. covered by such Warrant; or

the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in subsection 1(b).

The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant. Such payment takes the form of (check applicable box or boxes):

$             in lawful money of the United States; or

the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 1(b), to exercise this Warrant with respect to the number of Warrant Shares indicated above.

Signature:

Address:

- 10 -

EXHIBIT II

ASSIGNMENT FORM

FOR VALUE RECEIVED,                                          hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (No.             ) with respect to the number of shares of Common Stock of Transgenomic, Inc. covered thereby set forth below, unto:

Name of Assignee Address No. of Shares

Dated:

Signature:

Signature Guaranteed*:

By:

^* The signature should be guaranteed by an eligible guarantor institution (banks, stockbrokers, savings and loan associations and credit unions with membership in an approved signature guarantee medallion program) pursuant to Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended.

- 11 -

EX-10.35

Exhibit 10.35

September 22, 2005

Laurus Master Fund, Ltd.

c/o Laurus Capital Management, L.L.C.

825 Third Avenue, 14th Floor

New York, NY 10022

Attention: Mr. Scott Bluestein

Dear Scott:

This Letter will serve as an agreement between Transgenomic, Inc. (“TBIO”) and Laurus Master Fund, Ltd. (“Laurus”) with respect to the following matters relating to:

(i) that certain Security Agreement, dated December 3, 2003 as amended, by and between TBIO and Laurus and the Secured Revolving Note and Secured Convertible Minimum Borrowing Notes issued by TBIO to Laurus to evidence borrowing thereunder (the “Revolving Loan”); and

(ii) that certain Secured Convertible Term Note, dated February 19, 2004, between TBIO and Laurus (the “Term Loan”).

In contemplation of the proposed issuance of additional shares of Common Stock by TBIO pursuant to that certain Securities Purchase Agreement, dated September 22, 2005, between TBIO and certain purchasers of its Common Stock (the “Purchase Agreement”) and in consideration of the mutual promises and agreements made herein, TBIO and Laurus hereby agree, subject in each case to no Event of Default having occurred or continuing at any time during the term hereof, as follows:

(a) Laurus agrees that it will not exercise any right to convert indebtedness under the Revolving Loan or the Term Loan (together the “Loans”) into Common Stock of TBIO at any time from the date hereof until the Closing (as defined in the Purchase Agreement). At the time of the Closing, Laurus will have the right to convert not more than $1,000,000 of indebtedness then outstanding under the Loans into Common Stock of TBIO at a conversion price of $1.00 per share;

(b) To the full extent such consent may be required by the terms of either of the Loans, Laurus hereby grants its consent to the sale of Common Stock and associated Warrants pursuant to the terms of the Purchase Agreement;

(c) TBIO shall provide three (3) business days prior notice to Laurus of the date upon which the Closing will occur. Contemporaneously with the Closing, TBIO will repay all outstanding principal and accrued regular interest on the Loans, less any amount Laurus elects to convert into Common Stock at the Closing pursuant to paragraph (a) above. In addition, TBIO will pay Laurus prepayment penalties in accordance with the terms of the Loans which the parties acknowledge and agree equal $323,750. Laurus agrees that no other fees, penalties, default interest, liquidated damages or payments of any other nature that may be due under the terms of the Loans will be payable by TBIO in connection with such repayment of the Loans and that TBIO is hereby released from any liability with respect thereto. Laurus agrees to comply with all provisions of the Loans relating to the release of security interests and liens held by it with respect to the assets of TBIO, including termination filings for financing statements file by it under state UCCs;

(d) In consideration for the foregoing agreements and concessions made by Laurus, TBIO shall pay Laurus an additional fee equal to $500,000 contemporaneously with the Closing;

(e) TBIO agrees to register any shares of Common Stock issued to Laurus upon conversion of indebtedness under the Loans, including shares of Common Stock and warrants issued to Laurus prior to the date of this Agreement, for resale under the Securities Act of 1933, as amended, on the same terms and conditions as it is required to register shares of Common Stock issued at the Closing pursuant to the Purchase Agreement or any agreement referred to or executed and delivered in connection with the Purchase Agreement; and

(f) Laurus hereby acknowledges that the occurrence of the Closing is subject to certain conditions precedent set forth in the Purchase Agreement, including but not limited to the receipt of shareholder approval. TBIO agrees that it will use commercially reasonable efforts to complete all conditions precedent to the Closing. In the event that the Closing has not occurred within 75 days from the date hereof, this Agreement shall be deemed null and void and of no further force or effect.

This letter may not be amended or waived except by an instrument in writing signed by TBIO and Laurus. This letter may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this letter by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof or thereof, as the case may be. This letter shall be governed by, and construed in accordance with, the laws of the State of New York. This letter sets forth the entire agreement between the parties hereto as to the matters set forth herein and supersede all prior communications, written or oral, with respect to the matters herein.

[Signatures are on following page]

If the foregoing correctly sets forth our Agreement, please have two copies of this Agreement countersigned by a duly authorized officer of Laurus as indicated below and return one original copy to me. Thank you for your cooperating in connection with this matter.

TRANSGENOMIC, INC.
By	/s/ Michael A. Summers
	Michael A. Summers
	Chief Financial Officer

ACCEPTED AND AGREED TO AS OF THE DATE FIRST SET FORTH ABOVE

LAURUS MASTER FUND, LTD.

By

Name:

Title:

EX-10.36

Exhibit 10.36

October 31, 2005

Mr. David Grin

Laurus Master Fund, Ltd.

c/o Laurus Capital Management, LLC

825 Third Avenue 14^th Fl.

New York, NY 10022

RE: Exercise Price of Laurus Warrants

Dear Mr. Grin:

On October 31, 2005, we closed the sale of the following securities to institutional investors: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share (the “Offering”). The aggregate purchase price for the securities sold in the Offering was $1.01 per share of common stock initially being sold or $15,075,000. In conjunction therewith, we have repaid all indebtedness (including interest, prepayment fees and other fees) to Laurus and agree that the Exercise Price (as defined in the warrants) of the warrants owned by Laurus Master Fund, Ltd. reset as follows:

Warrant Owner	Issue Year	Expiration Year	Underlying Shares	Exercise Price
				Old		New
Laurus Master Fund, Ltd	2003	2010	200,000	$	2.25	$	1.92
Laurus Master Fund, Ltd	2003	2010	200,000	$	2.44	$	2.07
Laurus Master Fund, Ltd	2003	2010	150,000	$	2.82	$	2.35
Laurus Master Fund, Ltd	2004	2011	125,000	$	3.11	$	2.57
Laurus Master Fund, Ltd	2004	2011	400,000	$	1.25	$	1.18
			1,075,000

Sincerely,

TRANSGENOMIC, INC.
By:	/s/ Michael A. Summers
	Michael A. Summers
	Chief Financial Officer
Agreed and accepted on the date hereof LAURUS MASTER FUND, LTD.
By:	/s/ David Grin
	David Grin
	Director

EX-21

Exhibit 21

SUBSIDIARIES OF THE REGISTRANT

LEGAL NAME	JURISDICTION OF ORGANIZATION
Transgenomic, Ltd.	United Kingdom
Transgenomic Japan, Inc.	Delaware
Annovis, Inc.	Delaware
Cruachem, Ltd.	Scotland (UK)
Todd Campus, Ltd.	Scotland (UK)

EX-23

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement No. 333-41714, No. 333-69334 and No. 333-71866 on Forms S-8 and Registration Statement No. 333-70102, No. 333-108319, No. 333-111442, No. 333-114661 and No. 333-118970 on Form S-3 of our report dated March 30, 2006 relating to the consolidated financial statements of Transgenomic, Inc. and subsidiaries, appearing in this Annual Report on Form 10-K of Transgenomic, Inc. for the year ended December 31, 2005.

/s/ Deloitte & Touche LLP

Omaha, Nebraska

March 30, 2006

EX-24

Exhibit 24

POWER OF ATTORNEY

The undersigned does hereby make, constitute and appoint Michael A. Summers as his lawful agent and attorney-in-fact solely for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 2005, and any amendments thereto, required to be filed with the Securities and Exchange Commission by Transgenomic, Inc.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 29th day of March, 2006.

/s/ COLLIN D’SILVA

Collin J. D’Silva

POWER OF ATTORNEY

The undersigned does hereby make, constitute and appoint Collin J. D’Silva and/or Michael A. Summers as his lawful agent and attorney-in-fact solely for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 2005, and any amendments thereto, required to be filed with the Securities and Exchange Commission by Transgenomic, Inc.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 2nd day of February, 2006.

/s/ GREGORY DUMAN

Gregory J. Duman

POWER OF ATTORNEY

The undersigned does hereby make, constitute and appoint Collin J. D’Silva and/or Michael A. Summers as his lawful agent and attorney-in-fact solely for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 2005, and any amendments thereto, required to be filed with the Securities and Exchange Commission by Transgenomic, Inc.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 30th day of March, 2006.

/s/ JEFFREY SKLAR

Jeffrey L. Sklar

ATTORNEY

The undersigned does hereby make, constitute and appoint Collin J. D’Silva and/or Michael A. Summers as his lawful agent and attorney-in-fact solely for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 2005, and any amendments thereto, required to be filed with the Securities and Exchange Commission by Transgenomic, Inc.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 2nd day of February, 2006.

/s/ ROLAND J. SANTONI

Roland J. Santoni

POWER OF ATTORNEY

The undersigned does hereby make, constitute and appoint Collin J. D’Silva and/or Michael A. Summers as his lawful agent and attorney-in-fact solely for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 2005, and any amendments thereto, required to be filed with the Securities and Exchange Commission by Transgenomic, Inc.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 13th day of February, 2006.

/s/ PARAG SAXENA

Parag Saxena

POWER OF ATTORNEY

The undersigned does hereby make, constitute and appoint Collin J. D’Silva and/or Michael A. Summers as his lawful agent and attorney-in-fact solely for the purpose of executing and filing all reports on Form 10-K relating to the year ending December 31, 2005, and any amendments thereto, required to be filed with the Securities and Exchange Commission by Transgenomic, Inc.

IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 6th day of February, 2006.

/s/ GREGORY T. SLOMA

Gregory T. Sloma

EX-31

Exhibit 31

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Collin J. D’Silva, certify that:

1. I have reviewed this annual report on Form 10-K of Transgenomic, Inc. (the Registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.

c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting

Date: March 30, 2006	/s/ COLLIN J. D’SILVA
	Collin J. D’Silva, Chief Executive Officer

Exhibit 31

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Michael A. Summers, certify that:

1. I have reviewed this annual report on Form 10-K of Transgenomic, Inc. (the Registrant);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.

c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting

Date: March 30, 2006	/s/ MICHAEL A. SUMMERS
	Michael A. Summers, Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Annual Report on Form 10-K of Transgenomic, Inc. for the year ended December 31, 2005, I, Collin J. D’Silva, Chairman of the Board, President and Chief Executive Officer of Transgenomic, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) such Annual Report on Form 10-K of Transgenomic, Inc. for the year ended December 31, 2005, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in such Annual Report on Form 10-K of Transgenomic, Inc. for the year ended December 31, 2005, fairly presents, in all material respects, the financial condition and results of operations of Transgenomic, Inc.

/s/ COLLIN J. D’SILVA

Collin J. D’Silva

Chairman of the Board, President and

Chief Executive Officer

Date: March 30, 2006

A signed original of the certification required by Section 906 has been provided to Transgenomic, Inc. and will be retained by Transgenomic, Inc and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Annual Report on Form 10-K of Transgenomic, Inc. for the year ended December 31, 2005, I, Michael A. Summers, Chief Financial Officer of Transgenomic, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) such Annual Report on Form 10-K of Transgenomic, Inc. for the year ended December 31, 2005, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in such Annual Report on Form 10-K of Transgenomic, Inc. for the year ended December 31, 2005, fairly presents, in all material respects, the financial condition and results of operations of Transgenomic, Inc.

/s/ MICHAEL A. SUMMERS

Michael A. Summers

Chief Financial Officer

Date: March 30, 2006

A signed original of the certification required by Section 906 has been provided to Transgenomic, Inc. and will be retained by Transgenomic, Inc and furnished to the Securities and Exchange Commission or its staff upon request.