PART I

FORWARD-LOOKING STATEMENTS

 We have made forward-looking statements in this

PART I

FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K that are subject to risks and uncertainties.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.results and are subject to risk and uncertainty. You can identify these forward-looking statements by forward-looking words such as "expects," "anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates"“expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “seeks,” “estimates” and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are importantmany factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factorsthose discussed under "Risks“Risks Related to Our Business"Business” and other factors identified by cautionary language used elsewhere in thisthe annual report on Form 10-K.

Item 1.    Business.

Overview

We provide innovative products and services for the synthesis, purification and analysis of nucleic acids. Our operations fall into two principal business units, BioSystems and Nucleic Acids. Our BioSystems products include our WAVE^® automated instrument systems, WAVE associated consumables,consumable products and other related consumable products. Our Nucleic Acids products consist principally of chemical building blocks for nucleic acid synthesis and synthesized nucleic acids. Oursynthesis. Both business units have service offerings includeas well, including genetic variation discovery services, novel chemistry developmentand analysis services and custom synthesis of specialty nucleic acids.

Our business strategytechnologies center around three core competencies: separation chemistries, enzymology, and nucleic acid chemistries. We employ novel chemistries for separating nucleic acids, proteins, peptides, amino acids and carbohydrates. Our most significant separation technology is currently embodied in the WAVE System. The WAVE System is a versatile instrument that can be used for genetic variation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. The WAVE System requires the use of various consumable products that we manufacture and sell separately.

Our second core competency is expertise in developing novel enzymes. Enzymes are proteins that act as catalysts for biochemical reactions. Several of these reactions are useful in genomics. The ability to aligndevelop enzymes useful in the experimental manipulation of genes provides powerful tools for producing genetic material in the form needed for further analysis or incorporation into diagnostics and therapeutics. These products can also expand the sale of consumable products to WAVE System users and may also be sold for other applications. Our SURVEYOR^® product line of mutation detection kits allow for the cleaving of DNA at points where DNA sequence variations exists. The resulting DNA fragments can then be analyzed by our productWAVE System, fluorescent capillary electrophoresis or standard gel electrophoresis. SURVEYOR Kits provide a simple and service offeringsrobust method of scanning relatively large DNA fragments for both known and novel sequence variations.

Our third core competency is nucleic acid chemistries. Our synthetic nucleic acid products consist of chemical building blocks of nucleic acids (known as phosphoramidites). We also manufacture related specialty chemicals such as fluorescent markers and molecular tags, dyes, quenchers, linkers, and solvents used to modify nucleic acids for subsequent detection or manipulation. These products are used by research organizations, diagnostic companies and pharmaceutical companies. These products are produced primarily in our Glasgow, Scotland facility. Prior to November 11, 2004, we had also manufactured synthesized segments of nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, we sold the assets associated with this facility to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). As a result of this sale, we no longer manufacture and sell these specialized oligonucleotides.

Our operations are managed based upon the evolutionnature of genetic advancements and to become a major supplier ofthe products and services provided. Accordingly, we operate in two reportable segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income or loss. See Note K to the accompanying consolidated financial statements for detailed segment information.

Business Strategy

Since inception, our business strategy has been to provide products and services to biomedical researchers, medical institutions, diagnostic and pharmaceutical companies. Specifically,companies that are tied to advancements in the field of genetics. The movement in the field of genomics, and related market opportunities, has shifted from gene discovery to the analysis of variations in gene sequences. Researchers are beginning to link variations in the gene sequences to disorders and diseases. Accordingly, a principal component of our strategy ishas been to

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Establish the establish our WAVE systemSystem as the industry standard in the genetic research market therebyand to develop additional

markets for the WAVE System such as diagnostics. Through an expanding the installed base of installed systems, and relatedwe expect to increase the sales of consumable sales, and



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Positionproducts used with the WAVE.

We have also historically sought to position ourselves as a unique partner to biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics, thereby allowing us to participate in future successes of products derived from the expanding knowledge of genomics.

        Our technologies center around three core competencies: separation chemistries, enzymology, and nucleic acid chemistries.

Separations Chemistries

        Our separation chemistries competency consists While we continue to believe that the long-term prospects for this business segment are favorable, we concluded that near-term revenues from this segment would generate neither positive cash flows nor profits from operations. Consequently, in the second quarter of expertise in developing novel chemical compounds tailored2004, our Board of Directors directed management to interact with samplesexplore strategic alternatives for our Nucleic Acids operating segment, including the possible sale of interest. Specifically, this interaction involves bindingone or both of the total sample tofacilities in Glasgow, Scotland and Boulder, Colorado. On November 11, 2004, we sold the compound followed by a selective release of individual components of the sample. This release is induced by the introduction of other factors, such as chemical reagents, temperature changes, and pressure changes. The separation compound is coated on the surface of microscopic polymer beads and packed in a column. The interaction and separation occurs within the tube as the sample is pumped through it. We currently have novel chemistries for separating nucleic acids, proteins, peptides, amino acids and carbohydrates.

        One of our significant separation technologies is currently embodied in the WAVE System. The WAVE System is a versatile instrument that can be used for variation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. Because of this versatility, the WAVE System can essentially replace the use of traditional gel electrophoresis in the molecular biology laboratory. Our patented technology uses a process known as high performance liquid chromatography to separate DNA material so that genetic variation may be identified and analyzed. In this process, DNA is injected into a special tube or column containing microscopic polymer beads. These

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micro-beads have special surface chemistries that cause the DNA molecules to attach to the surface of the beads. A chemical reagent is then pumped through the column under carefully controlled pressure and temperature conditions causing the DNA molecules to be selectively released from the beads so that they can be separated and measured. Our proprietary software controls the entire process and produces the results of the operation in an easy-to-read chart format. Once the DNA sample is loaded into the instrument and necessary data is entered into the software, the process requires virtually no additional input from the researcher. By using our patented DNASep®, OLIGOSep® and RNASep® columns and specifically formulated reagents that we have developed for various applications, the researcher is able to achieve a consistent high-quality result. Our WAVE system may be designed in the future to meet the needs of the emerging molecular diagnostics market.

        Additionally, the WAVE System requires the use of various consumable products that we manufacture and sell separately. As more WAVE Systems are sold, we expect that these consumable products will become an increasingly significant source of revenue for us. The principal consumable products used with the WAVE System are the DNASep, OLIGOSep and RNASep columns and the chemical reagents that are used to carry the DNA samples through the WAVE System. Other consumables include filters and other replacement parts of the WAVE System.

Enzymology

        Our second core competency is expertise in developing novel enzymes. Enzymes are proteins that act as catalysts for biochemical reactions. One such reaction useful in genomics is the cleavage of DNA into defined fragments at specific points, accomplished by the use of restriction enzymes. Another example is the formation of DNA or RNA from precursor substances in the presence of pre-existing DNA or RNA acting as a template. Enzymes that catalyze this reaction are called polymerases. The ability to develop enzymes useful in the experimental manipulation of genes provides powerful tools for producing genetic material in the form needed for further analysis or incorporation into diagnostics and therapeutics. One of our current enzymology offerings is called Optimase. Optimase polymerase is a novel enzyme unique to Transgenomic that was developed specifically to meet the needs of customers with post polymerase chain reaction (PCR) applications such as the WAVE system. Although this product may be used for any PCR application it was specifically developed to be used with a WAVE system. Optimase, used in conjunctionassets associated with our WAVE optimized consumables, provides superior testing results and extends the life of our DNASep, OligoSep or RNASep columns. This product is expected to further expand our sales of consumable products to WAVE system users and may also be sold for other PCR applications.

Nucleic Acid Chemistries

        Our third core competency, nucleic acid chemistries, stems in part from our 2001 acquisition of Annovis, Inc. Our Synthetic Nucleic Acid products consist of chemical building blocks ("phosphoramidites"), fluorescent markers and dyes, associated reagents, oligonucleotides and oligomimetics. These products are currently being sold to research organizations, diagnostic companies and pharmaceutical companies. The majority of our synthetic nucleic acid revenues are currently generated through the sale of phosphoramidite products that are produced in our Glasgow, Scotland facility. We are in the process of completing a new production facility in Boulder, Colorado that will be able to further process phosphoramidite products into synthesized oligonucleotides in large quantities. This facility will also provide process development, enhancement and unique chemistry development services. We expect demand for phosphoramidites and synthesized oligonucleotides to increase over the next several years as biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics experience product successes. Finally, our nucleic acid chemistry capabilities also include expertise in the ability to produce related specialty chemicals, such as molecular tags, dyes, quenchers, linkers, and solvents used to modify nucleic acids for subsequent detection, or manipulation.

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        The Company's internet address iswww.transgenomic.com. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with the Securities and Exchange Commission.

Industry Background

Genomics-Based Research, Diagnostics and Therapeutics

        The human body is composed of billions of cells each containing deoxyribonucleic acid, or DNA, which encodes the basic instructions for cellular function. The complete set of DNA is called the genome, or genetic code. The human genome is composed of 23 pairs of chromosomes that are further divided into approximately 30,000, or more, smaller regions called genes. Genes are used in the cell as the template for the production of proteins, and it is these proteins that direct cell function that are ultimately reflected in the individual traits of the person. Any variation in the DNA sequence of a particular gene may result in a change in the cell function controlled by that gene. These changes, known as genetic variations, are often the cause of disease or make an individual more susceptible to disease.

        Genomics is the systematic and comprehensive analysis of the sequence, structure and function of the genes that comprise the genome, the objective of which is identifying and understanding the role of genes in human physiology and disease. This information will only be developed through the intense study of genetic variation. Accordingly, genomics researchers are now attempting to understand variations in this DNA sequence information and how it correlates to disease in order to develop new therapeutics and diagnostic tools.

Synthetic Nucleic Acids

        Synthetic nucleic acid molecules—commonly referred to as oligonucleotides—are necessary consumable reagents for numerous DNA-based analytical methods, diagnostic methods, and therapeutic products.

Genomics-based Diagnostics

        Once a relationship is established between a particular genetic variation(s) and a disease it becomes possible to look for the specific genetic variation(s) or other biomarkers as a way of diagnosing a person's susceptibility to the disease or the actual presence of the disease.

Genomics-based Therapeutics

Target Identification—It has been estimated that the human genome sequence could provide 5,000-10,000 new potential target molecules on which to base drug discovery efforts, representing a 10 to 20-fold increase over the approximately 500 targets identified during the entire history of drug development to date.

Target Validation—Target validation is the process of establishing proof that a particular drug target is involved in a disease or biological process of interest and, furthermore, that experimental modulation of the target (which would ultimately be accomplished by a drug) has an impact on that process.

Clinical Trials—After a lead drug candidate has been identified, and its safety and efficacy has been demonstrated in animal models, testing must be performed on human subjects. Genetic variation among patients can impact drug efficacy as well as the likelihood of adverse drug reactions. It has been suggested that study of these effects should be incorporated into the clinical trial process. The relatively new segment of genomics called pharmacogenetics studies the impact genetic variation has on the safety and efficacy of drugs.

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Business Strategy

        Our business strategy is to align our product and service offerings with the evolution of genetic advancements and to become a major supplier of products and services to researchers, medical institutions, diagnostic and pharmaceutical companies. Genetic advancements have been and continue to develop over time. The movement along the genomics continuum and related market opportunities has shifted from gene discovery to analysis of variations in gene sequences. From these variations researchers are beginning to link the impacts to associated disorders and diseases that further lead to the creation of diagnostic tests and appropriate therapeutic treatments and drugs.

        Key elements of our strategy are as follows:

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Establish the WAVE System as the Industry Standard.    We have focused our marketing efforts on large well-known government, academic and commercial research institutions to establish the WAVE System as the industry standard for variation analysis. We believe we are the first to bring high performance DNASep micro-bead technology to the market and have sold instruments to key genomics researchers to gain validation of our technology, which has resulted in the publication of over 500 articles in numerous scientific journals discussing the WAVE technology. Our current installed base includes several hundred customers with a total of nearly 1,000 installed systems. We intend to leverage the documented success of our customers to continue to introduce our technology to new users and new markets.



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Penetrate New Markets.    Our WAVE System may be used for purposes other than genetic variation discovery research. These other potential uses represent additional market opportunities that we intend to pursue. For example, a potential new market for the WAVE System will be the genetic screening and diagnostics market. Additional market opportunities exist in the fields of pathogen identification, bioterrorism and plant genetics. We continue to develop new applications and further improvements for the WAVE and other complementary technologies.



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Position ourselves as a unique partner to biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics.    Our partnering strategy is to seek out those companies who show the potential to have consistent success in the relatively new area of developing commercially viable genomic-based diagnostic and therapeutic products. We have begun to seek out partners with whom we will develop and manufacture novel chemistries. In positioning ourselves to partner with such companies we have attracted world-class nucleic acid chemistry expertise and are in the process of completing and qualifying a cGMP (Good Manufacturing Process) oligonucleotide manufacturing facility in Boulder, Colorado. This partneringWe continue to operate our facility in Glasgow, Scotland which primarily produces chemical building blocks used in the synthesis of nucleic acids. However, we have taken steps to consolidate these operations and to reduce costs in order to better align operating expenses with anticipated revenues.

Our business strategy may resultgoing forward is to achieve revenue growth in varying demandour BioSystems operating segment and to better align our cost structure with anticipated revenues in both of our operating segments. We have already taken steps to implement this strategy as more fully discussed under “Significant 2004 Developments,” below.

Significant 2004 Developments

We determined that our Nucleic Acids operating segment was impaired and sold our specialty oligonucleotides manufacturing facility.

Based upon information obtained through the process of evaluating strategic alternatives for our Nucleic Acids segment, we determined that it was more likely than not that the productsvalue of the assets associated with this business were impaired. We engaged an external valuation firm to assist us in conducting an interim period impairment test that resulted in a non-cash charge of $11.97 million related to these assets during the three months ended June 30, 2004. The charge consisted of $9.87 million related to the impairment of goodwill and services$2.10 million related to the impairment of property and equipment.

On November 11, 2004, we seeksold the assets associated with our specialty oligonucleotides manufacturing facility in Boulder, Colorado to provide depending largelyEyetech. The sale price was $3.00 million in cash plus the assumption of the lease on the successBoulder facility and of certain equipment leases with a gross value of $2.38 million. Substantially all of the biopharmaceutical27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transaction expenses and pharmaceutical companies involved in developing such products.



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Become the Principal Supplier of Specialty Synthetic Nucleic Acids.    Our Synthetic Nucleic Acid products are used in large quantities by a variety of commercial entities.fees paid to our investment advisors) equaled approximately $2.70 million. In conjunction with aligning our new products and solutions withthis transaction, we recorded a gain on sale of $1.47 million in the genomics continuum our strategy also includes vertical expansionfourth quarter of our synthetic nucleic acid solution components whereby we intend to produce more of the components of the phosphoramidite chain starting from the raw material (nucleosides), to intermediates (trityls), to phosphoramidites, to the end oligonucleotide product.

 In support of our business strategy the following key milestones were achieved during 2002:

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BioSystems



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Launched WAVE MD platform,



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Launched Mutationdiscovery.com™,

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Competition

 Competitors

The markets in which our Biosystems operating segment operates are highly competitive, and characterized by rapidly changing technological advances. A number of Transgenomic’s 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. Transgenomic competes principally on the basis of uniquely enabling technical advantages in specific but significant market segments.

Competition for our Biosystems segmentWAVE Systems arises primarily from DNA sequencing and genotyping technologies. Competitors in these areas include several companies including Varian, Waters, Agilent, Applied Biosystems, Beckman Coulter, Amersham Biosciences(now part of GE Healthcare), Affymetrix, Agilent Technologies, Nanogen, Illumina, Sequenom, Pyrosequencing (now part of Biotage AB), Varian, and Invitrogen. Theseothers. 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 unit faces competition from a number of companies provide various productsoffering contract DNA sequencing and other genomic analysis services, that compete either directly withincluding 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.

Competition is also intense in the markets in which our systems, bioconsumablesNucleic Acids operating segment functions, and services, or indirectly through alternative technologies and/or methods. Competitors for ourincreasingly driven by price. Transgenomic competes on the basis of its ability to develop and manufacture synthetic nucleic acid segment vary depending on the product. In the standard chemical building blocks market, we compete with Applied Biosystems,used to make DNA and RNA oligonucleotides. Competitors include Proligo andDegussa, Pierce Nucleic Acid Technologies. The competitors for our pharmaceutical grade oligonucleotide synthesis productsTechnologies, and services include primarily Proligo and Avecia.Applied Byosystems. In addition, competition is expected in the future from new overseas entrants focusing on low cost production.

Employees

As of December 31, 2002,2004 and 2003, we had 326 full-time employees. The following sets forth178 and 244 employees, respectively. Certain of those employees at December 31, 2004 were terminated during January and February 2005 in connection with the number2004 restructuring plan. As of persons employedFebruary 28, 2005, we had 157 employees and expect our headcount to be relatively stable throughout the remainder of 2005. These employees are focused in the principalfollowing areas of our operation:

We supplement our workforce through the use of independent contractors and consultants. As of February 28, 2005 and December 31, 2002,2004, we have engaged independent contractors or consultants who provide services to us approximately equivalent to 5 full time employees.five and four full-time employees, respectively.

 The Company began a restructuring process during the fourth quarter of 2002 that resulted

Our employees were employed in the eliminationfollowing geographical locations.

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, Glasgow, Scotland and Cramlington, England. We maintain research and development offices in Gaithersburg, Maryland and Omaha, Nebraska.

Our Internet address iswww.transgenomic.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports available free of a significant number of job positions. A large number of employees that had been notified of termination had not yet reached their termination datecharge through our website as soon as reasonably practicable after we file these documents with the Securities and thus are included in the 12/31/02 employee counts shown above. Additionally, further job eliminations were to occur during the first quarter of 2003. The total employee count following these further reductions is expected to be approximately 270 to 280.Exchange Commission.

Risks Related to Our Business

We may not have adequate financial resources available to execute our business plan.plan and may be need to terminate some operations.

As of March 31, 2005, we had cash and cash equivalents of $1.37 million plus an additional $2.29 million available under our Credit Line. Despite our efforts to reduce costs and to obtain additional debt and equity financing, our liquidity and working capital positions continue at levels that may not be adequate to meet our needs for cash in the future. Our liquidity and working capital position is largely due to the operating losses that we have incurred, particularly in our Nucleic Acids operating segment, and to increased accounts receivable (largely from international sales), short-term investments, inventory, and to a lesser extent, purchases of property and equipment. We expect to continue to need substantial amounts of cash to fund our operations and capital expenditures and our existing cash balances, cash generated by operations, and our remaining borrowing capacity under our existing Credit Line may be insufficient to satisfy our liquidity requirements. In order to meet our cash needs for the remainder of 2005, it is essential that we achieve revenue growth in our BioSystems operating segment and manage costs according to our operating plan. There is no assurance that we will be able to achieve all of these steps or that any of these steps will allow us to meet our cash needs. Accordingly, our existing cash balances, cash generated by operations, and available borrowings under the Credit Line may be insufficient to satisfy our liquidity requirements. In addition, there is no assurance that we will be able to obtain additional debt or equity financing to meet future cash needs. If we are not able to meet our needs for working capital, we may not be able to execute parts or all of our business plan and may need to discontinue operations in one or both of our operating segments.

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

We have experienced losses from operations since inception of our operations. Our operating losses for each of the last three fiscal years were $29.06 million, $22.59 million and negative cash flows.$21.70 million, respectively. These results were mostlylosses have been due principally to the high levels of research and development expenses and sales and marketing expenses relatedthat we have incurred in order to the developmentdevelop and marketing ofmarket our products. We couldproducts, 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 forin the foreseeable future, and we may never be profitable. To date,

We may issue a substantial amount of our stock in conversion of our debt and exercise of options and warrants and this could reduce the market price for our stock.

As of April 14, 2005, we have financed our operations and capital expenditures primarily from the proceeds of a $77.3had outstanding 34,234,922 million public offeringshares of common stock. In March 2003,We also had obligations to issue approximately 6.2 million shares of common stock under outstanding stock options and warrants. Additionally, we entered into a loan commitment agreement with a financial institution for up to a $5.0may issue shares of common stock upon conversion of all or part of the Laurus Loans. Currently, Laurus may acquire 2.8 million secured lineshares of credit. We will continue to need substantial amountsour common stock upon conversion of cash for research and development and to expand our sales and manufacturing infrastructure. We may need to raise the additional capital in the future through bank financing or strategic investments. Additional financing may not be available to us when we need it, or, if available, we cannot assure that we will be able to obtain such financing on terms favorable to our stockholders or us. If we raise additional capital by issuing equity securities, thethis debt. The issuance of such securities would result in ownership dilutionadditional shares of common stock may be dilutive to our stockholders.current shareholders and could negatively impact the market price of our common stock.

WeMarkets for our products and services may not have adequate organizational resources available to execute our business plan.develop slowly.

 During

There are many factors that affect the fourth quarter of 2002market demand for our products and the first quarter of 2003, we restructured the Company, which resulted in a net reduction in staff and facilities, and the abandonment of certain intellectual property. While we feel we have retained and redeployed existing resources and secured additional resources necessary to successfully conduct our business,services that we cannot assure youcontrol. This is especially true in our Nucleic Acids operating segment where the demand for our products depends to a large degree on the success that the net reduction will not impair our abilitycustomers and potential customers have in developing useful pharmaceutical products based on genetic intervention. A central strategy for our Nucleic Acids operating segment is to achieve our planned revenue levels.

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Our business strategy includes positioning ourselves as a unique partnersell synthetic nucleic acid products to biopharmaceutical and pharmaceutical companies that are seeking to develop commercially viable genomic-based diagnostic and therapeutic products. We have invested a significant amount of capital into acquiring and developing manufacturing facilities and other assets to allow us to pursue this market. However, this is a new field of commercial development, and many of these biopharmaceutical and pharmaceutical companies are in the early stages of their efforts to develop genomic-based diagnostics and therapeutics.therapeutics and have encountered difficulties in these efforts. As a result, the demand for our synthetic nucleic acid products is difficult to forecast and may develop slowly or sporadically. In addition, we cannot

assure you that these companies will not internally develop the chemistries and manufacturing capabilities to produce the products they could buy from us. Demand for our WAVE System is similarly 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.

A single customer accounts for a significant portion of consolidated net sales and net sales in our Nucleic Acids operating segment.

During 2004, sales to Geron Corporation totaled $4.15 million and represented 12% of total consolidated net sales and 49% of total net sales within our Nucleic Acids operating segment. We do not have a long-term sales agreement with Geron Corporation and, accordingly, the amount of nucleic acid products we sell to it is subject to change. Revenues from our Nucleic Acids operating segment business would be substantially reduced if Geron Corporation’s need for our products declined or if it decided to obtain these products from other suppliers.

No other customer currently accounts for more than 10% of total consolidated or operating segment net sales.

Customer clinical trials may be delayed or discontinued.

A significant percentage of our Nucleic Acids operating segment and Discovery Services revenues are generated by sales to customers involved in drug development. Our products and services are generally used by these customers in the manufacture of drug candidates in varying stages clinical trials. If these clinical trials are delayed or cancelled or are otherwise not successful, this could have a significant impact on revenues.

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

During the last three fiscal years, our international sales have been approximately 55-65% of our 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:

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 currently 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 execute this strategy. Additionally,marketing our products and developing our customer base.

Our markets are very competitive.

As described above, we compete with many other companies in both our Biosystems and Nucleic Acids operating segments. Many of these competing companies have greater resources than we do 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.

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

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 companies we seek to partner with will not decide to develop novel chemistries and manufacturing capabilities for themselves. Lastly, we cannot assure that these companies will have consistent success in this relatively new area of developing commercially viable genomic-based diagnostic and therapeutic products. In fact, the biopharmaceutical and pharmaceutical companies involved have encountered difficulty in accomplishing this and we have seen varying demand for the products and services we seek to provide to them.

        In positioning ourselves to partner with such companies we must:

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Attract and retain world-class nucleic acid chemistry expertise,



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Develop and maintain world-class research and development facilities,



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Qualify and maintain cGMP manufacturing facilities,



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Obtain numerous permits associated with the chemicals used in various manufacturing processes, and



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Establish long-term partner relationships with various companies.

We will need to effectively manage our growth if we are to successfully implement our strategy.

        The scopeprice of our business operations has andstock will continue to change and evolve. Such changesincrease in our business and the growth that may accompany them may place a strain on our management and operations. Our ability to manage our growth will depend onfuture. Fluctuations or further declines in the abilityprice of our officers and key employees to continue to implement and improve our operational, management information and financial control systems and to expand, train and manage our work force both in the U.S. and abroad. Our inability to manage our growth effectively couldstock may affect our ability to pursue business opportunitiessell shares of our stock and expandto raise capital through future equity financing.

If we are unable to maintain our business.

Item 2.    Properties.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 March 31, 2005, 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 September 27, 2005. If we are not able to regain compliance with this listing requirement, we may be 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.

Our four principalpatents 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 they do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced.

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 patent underlying our nonexclusive license to manufacture standard nucleic acid building blocks expired as of March 15, 2005. The expiration of this patent could result in additional manufacturers entering the market for these products. Some of these manufacturers may have lower cost structures or other competitive advantages which may reduce our market share and/or our operating margins related to these products.

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 are locatedand operations, resulting in Omaha, Nebraska, San Jose, California, Boulder, Coloradodelays and increased costs.

We own one facility in Glasgow, Scotland. Additionally, corporate administration offices are locatedScotland and lease 14 facilities throughout the world under non-cancelable leases with various terms. As a result of restructuring initiatives initiated in Omaha, Nebraska. 2004 and 2002, a significant amount of leased space is currently unoccupied, and may in certain cases be sublet, to independent third parties.

The following table summarizes information related to property occupied in these locations.

Executive Vice President and Chief Financial Officer at I-Mark Systems from 1996 until itfor Nexterna, Inc., a wholly-owned technology subsidiary of the Union Pacific Corporation. From 2000 to 2001, he was purchased in 1997. I-Mark Systems designed integrated computer voting solutions and was a successor corporation of ADD Consulting Inc., which provided computer staffing professionals to numerous industries. Mr. Rasmussen served asthe Chief Financial Officer of ADD Consulting Inc. from 1994 until joining I-Mark Systems in 1996. Mr. Rasmussen owned a travel management company from 1986 to 1998, and he provided consulting services to numerous software and telecommunication companies from 1984 to 1994. Mr. Rasmussen's previous experience also includes serving as Controller and Principal Accounting Officer for Applied Communications, Inc.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 1979 to 1984. Applied Communications, Inc., now known as Transaction Systems Architects, Inc., is a software provider for transaction processing systems. Mr. Rasmussen holdsCreighton University in 1987 with a B.S. degree in Business Administration from the University of Nebraska.business administration with an accounting major. He is a Certified Public Accountant.

        John L. Allbery.    Mr. Allbery joined us in June 2001, and currently serves as an Executive Vice President. Prior to joining us, Mr. Allbery was a private business consultant based in Budapest, Hungary from 2000 to 2001. From 1999 to 2000 Mr. Allbery served as the Chief Financial Officer of The Virtus Group, a private business venture in Budapest, Hungary. Mr. Allbery also spent approximately 20 years in public accounting. Prior to leaving public accounting, Mr. Allbery was a Partner with Deloitte & Touche

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LLP. Mr. Allbery holds a B.A. degree in Accounting from Doane College and a MBA in Taxation from Golden Gate University.

Keith A. Johnson.Mr. Johnson joined us in 20012002 as Vice President, General Counsel. Mr. Johnson has a B.A. in Biochemistry from Kalamazoo College, an M.B.A. in International Business and Marketing from Michigan State, and a law degree from the University of San Diego. Before joining Transgenomic Mr. Johnson was Director of Intellectual Property, Technology Development and Licensing at Integra LifeSciences in Plainsboro, NJ, from 1999 to 2001. Mr. Johnson'sJohnson’s previous experience also includes Senior Licensing Manager, Rutgers University, from 1998 to 1999 and Technology Licensing Officer, Washington State University, from 1995 to 1998. Mr. Johnson is a member of the state bars of California, Washington, and New Jersey and Nebraska and is admitted to practice before the USPTO.United States Patent and Trade Office.

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 for 15 years.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.

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Part II

Item 5.    Market for Registrant's

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters.

Our common stock is listed for trading on the NASDAQ National MarketNasdaq 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 20012003 and 2002.2004.