UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 20072010

OR

For the transition period from                    to                    

Commission File Number 000-30975

TRANSGENOMIC, INC.

(Exact Name of Registrant as Specified in its Charter)

(402) 452-5400

(Registrant’s Telephone Number, Including Area Code)

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

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes     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 Form 10-K  Form10-K            

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer¨     Accelerated Filer¨     Non-Accelerated Filer¨     Smaller Reporting Companyx

(Do not check if a smaller reporting company)

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 OTC Bulletin Board on the last business day of the registrant’s most recently completed second quarter was approximately $27.9$10.0 million.

At March 30, 2008,14, 2011, the registrant had 49,189,67249,299,672 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant Proxy Statement relating to its 20082011 Annual Meeting of Stockholders (the “Proxy Statement”) have been incorporated into Part III of this Report on Form 10-K.

TRANSGENOMIC, INC.

Index to Form 10-K for the Fiscal Year Ended December 31, 20072010

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

PART I

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-Kreport, including Management’s Discussion & Analysis, contains or incorporates by reference certain forward-looking statements. ManyThese statements are based on management’s current views, assumptions or beliefs of these forward-looking statements refer to our plans, objectives, expectationsfuture events and intentions, as well as our future financial resultsperformance and are subject to riskuncertainty and uncertainty. You can identifychanges in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, Medicare/Medicaid/Insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, actions of governments and regulatory factors affecting our business and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements byare identifiable through the use of words such as “expects,“anticipate,” “anticipates,“believe,” “intends,“estimate,” “plans,“expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “believes,” “seeks,” “estimates”“would” and similar expressions. Because

You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements involvewe make are not guarantees of future performance and are subject to various assumptions, risks and uncertainties, there are manyother factors that could cause our actual results to differ materially from those expressed or impliedsuggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons including those discussed underdescribed in Item 1A, “Risk Factors”Factors,” and other factors identified by cautionary language used elsewhere in this report.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The following discussion should be read together with our financial statements and related notes contained in this report. Results for the Annual Report on Form 10-K.year ended December 31, 2010 are not necessarily indicative of results that may be attained in the future.

Transgenomic, Inc. (together with its Affiliates, the “Company” or “Transgenomic”) provides genetic variation analytical services to the medical research, clinical and pharmaceutical markets. Net sales are categorized as Laboratory Services and Instrument Related Business. We also provide innovative products for the synthesis, purification and analysis of nucleic acids used in the life sciences industry for research focused on molecular genetics and diagnostics. We also provide

Laboratory Services:

diseases of aging. Located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility is accredited by CAP (College of American Pathologists).

Instrument Related Business:

Historically, we operated a segment (the “Nucleic Acids operating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis. In the fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids operating segment and have recently completed the sale of the remaining assets associated with this segment. Accordingly, the assets and results of the Nucleic Acids operating segment are reflected as discontinued operations for all periods presented in this filing.

Business Strategy

Since inception, ourOur business strategy has beenis to provide products and services to biomedical researchers, medical institutions, and diagnostic and pharmaceutical companies that are tied to advancements in the field of genomics.genomics and, increasingly, personalized medicine. Advances in genomics have fueled our efforts to understand individual differences in disease susceptibility, disease progression, and response to therapy. Accordingly, a principal component of our strategy has and continues to be 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 theFor continued high quality support for our WAVE System and create opportunitiesassociated bioconsumables, we attained ISO90001:2000 certification for our Omaha manufacturing site in the fourth quarter of 2008 and have since been certified to market additional products to this customer base.the ISO9001:2008 standard in 2009.

Over the last yearfew years an increasingly important part of our strategy has shifted somewhatbeen to include another area of strategic focus that we believe can provide significant opportunity. Throughexpand our Discoverytwo Laboratory Services offerings, webusinesses. We have gained exposure to the translational and clinical research markets, laying the foundation for increasing our participation in the full valuefull-value chain associated with activities ranging from basic biomedical research to development of diagnostic and therapeutic products.products to increasing opportunities for developing and manufacturing companion diagnostics. 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.laboratories to aid in patient diagnoses or pharmaceutical drug development and drug clinical trials. In

December of 2008 our Omaha laboratory was awarded an accreditation by the Commission on Laboratory Accreditation of the College of American Pathologists (CAP) based on the results of an onsite inspection.

In December 2010 we acquired another CLIA certified laboratory in New Haven, Connecticut that specializes in genetic disorders associated with cardiomyopathies and channelopathies. We believe there is a significant opportunity for us to capitalize oncontinue growing the increasing demand for molecular-based personalized medicinetesting by leveraging on our technologies, experience and experience gained from the genomicexpertise in biomarker analysis that our Discovery Services Group has and willanalysis. In addition, we continue to provide to pharmaceuticalseek out and biopharmaceutical companies.

Significant Recent Events

We have continued to work to reduce operating costs

On February 20, 2007, we announced a cost reduction plan designed to alignevaluate new technologies and new laboratory tests that will further extend our cost structure with anticipated revenues. The closing of the Company’s Cramlington, England production facility was the principal component of this plan. All production is now being done in the United States at our Omaha, NE and San Jose, CA facilities. All administrative functions that were previously performed in France are now being performed in either the United States orofferings in our one remaining international site, Glasgow, Scotland. Restructure charges were $1.5 million for the year ended December 31, 2007, relating primarily to severance, benefitsMolecular Diagnostics Laboratory and facility closure costs.

Our stock has been delisted from the Nasdaq Capital Market and is now trading on the OTC Bulletin Board (OTCBB)

On February 1, 2007, we received a staff determination letter from Nasdaq’s Listing Qualifications Department indicating that we no longer met the minimum bid price requirement for continued listing on the Nasdaq Capital Market. As a result, our common stock on the Nasdaq Capital Market was ended on February 22, 2007. Trading information about our common stock became available on the OTC Bulletin Board beginning on February 26, 2007.Pharmacogenomics Services Lab.

Sales and Marketing

Our Laboratory Services sales team consists of regionally based sales people in the United States and Canada. We have sold our products to customers in over 50 countries. We use a direct sales and support staff for sales in the U.S., U.K. and most countries in WesternEurope. Our sales and support team consists of regionally-based sales people, service engineers and applications scientists to support our sales and marketing activities throughout the U.S. and Europe. For the rest of the world, we sell our products through dealers and distributors located in thosewithin local markets. We have over 35 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. The nature of our instruments and bioconsumables business does not generally lend itself to tracking and reporting sales backlog.

Customers

Physicians requesting testing for their patients are our primary source of laboratory services. Fees for laboratory testing services rendered for these physicians are billed either to the physician, to the patient or the patient’s third-party payer such as an insurance company, Medicare or Medicaid. Billings are typically on a fee-for-service basis. The patient or third-party payer is billed at the laboratory’s patient fee schedule, subject to third-party payer limitations. Revenues received from Medicare and Medicaid billings are based on government-set fee schedules and reimbursement rules.

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.companies both in the U.S. and abroad. No customer accountsaccounted for more than 10% of our consolidated net sales.sales for the years ended December 31, 2010 and 2009. For the years ended December 31, 2010 and 2009 one customer made up 15% and 20% of the laboratory services net sales, respectively.

Research and Development

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. Accordingly, weWe maintain an activea program of research and development with respect to bioinstruments, consumablesinstruments and discovery services. Areasservices, engaging existing and new technologies to create scientific and medical applications that will have significant commercial value. Major areas of focus include 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 SURVEYOR based oncology mutation kits for therapeutic assessment of TKI inhibitors utilizing multiple instrument platforms; a new discovery in high sensitivity DNA mutation detection for Sanger Sequencing; development of ICE COLD PCR applications for ultra-high sensitivity mutation detection in tissue and blood; a “toolbox” of mitochondrial DNA assays onto assess damage, copy number, deletion and mutation for applications ranging from toxicology to diabetes to aging; and development of a biomarker for FC Gamma receptor to aid in the WAVE System. We have also focused on further refinements and process manufacturing improvementsselection of therapeutic options for our Surveyor DNA mismatch cutting enzyme. A significant area of research in discovery services is the area ofmonoclonal antibody cancer detection screening and mitochondrial disease diagnosis.drugs.

For the years ended December 31, 2007, 20062010 and 2005,2009, our research and development expenses were $3.0 million, $2.4$2.3 million and $2.2$3.2 million, 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 and San Jose, California.

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 68 issued patents and 14 pending applications in both the U.S. and abroad. Our WAVE System and related consumables are protected by patents and in-licensed technologies that expire in various periods beginning in 2013 through 2022.2030. On December 29, 2010 we acquired the FAMILION family of genetic tests. As part of the transaction, we acquired the exclusive rights to the FAMILION family of genetic tests for inherited disease, including the patents protecting this technology. 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 substantialsubstantially greater resources than us 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.

Our Laboratory Services division faces competition from a number of companies offering contract DNA sequencing and other genomic analysis services, including Genzyme, SeqWright and others. In addition, several clinical diagnostics service providers, such as Labcorp, Quest, Athena and Baylor College of Medicine, also offer related laboratory services. Finally, additional competition arises from academic core laboratory facilities. Competition for our WAVE Systems arises primarily from DNA sequencing and genotyping technologies. Competitors in these areas include Applied Biosystems, Idaho Technologies, Roche, Sequenom, 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 face competition from a number of companies offering contract DNA sequencing and other genomic analysis services, including Genizon, Clinical Data, SeqWright and others. In addition, several clinical diagnostics service providers, such as Labcorp, Quest, Athena 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, 2007, 20062010 and 2005,2009, we had employees focused in the following areas of our operation:

Our employees were employed in the following 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). This facility houses our administrative staff and laboratories. We maintain manufacturing facilities in Omaha, Nebraska and San Jose, California. We maintain research and development offices in Gaithersburg, Maryland and Omaha, Nebraska. We maintain a CLIA laboratory in New Haven, Connecticut.

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 iswww.transgenomic.com. Information on our website, including any SEC report, is not part of this Annual Report on Form 10-K.

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

We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. Whileexpenditures. On December 29, 2010 we have been able to historically finance our operating losses through borrowings oracquired the FAMILION family of genetic tests from the issuancePGxHealth, a subsidiary of additional equity, we currently have no plans to borrow additional funds or to issue additional equity securities for this purpose.Clinical Data. At December 31, 2007,2010, we had cash and cash equivalents of $5.7$3.5 million. While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2008,2011, we will need to increase our revenues or further reduce our operating expensesnet sales and successfully integrate the FAMILION acquisition in order to be assured of meeting our liquidity needs on a long-term basis. This acquisition was funded with debt and preferred stock. However, we cannot assure you that we will be able to increase our revenues ornet sales, further reduce our expenses, or raise further capital or equity and, accordingly, we may not have sufficient sources of liquidity to continue the operations of the Company indefinitely.

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 operationsnet loss for the years ended December 31, 2007, 20062010 and 20052009 were $2.2 million, $3.0$3.1 million and $5.0$1.9 million, respectively. These historical 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, the fixed nature of our manufacturing costs, restructuring charges and impairment charges.charges and merger and acquisition costs. On December 29, 2010 we acquired the FAMILION family of genetic tests. The acquisition was completed due to the opportunity for synergies in combining the laboratories and potential for revenue growth. We will need to quickly and

successfully implement our integration plan to reduce the net loss in the future. In addition, markets for our products and services 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 forWe may not have adequate top executive talent to execute our business plan.

Prior to the acquisition of FAMILION, in order to reduce our operating costs, we have reduced the number of employees in most areas of our business. In addition, we may lose key management, scientific, technical, sales and manufacturing personnel from time to time. It may be difficult to recruit and retain executive management if they are needed in the future, and the loss of top executive talent could harm our business and operating results. We cannot assure you that our employee reductions will not impair our ability to develop new products and refine existing products in order to remain competitive or meet our customers’ needs. In addition, these reductions could prevent us from successfully marketing our products and developing our customer base.

We might enter into new acquisitions that are difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

Our success will depend in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. We expect to seek to acquire businesses, technologies or products that will complement or expand our existing business, including acquisitions that could be material in size and scope. Any acquisition we might make in the future might not provide us with the benefits we anticipated in entering into the transaction. Any future acquisitions involve various risks, including:

An acquisition could result in the incurrence of debt, restructuring charges and large one-time write-offs. Acquisitions also could result in goodwill and other intangible assets that are subject to impairment tests, which might result in future impairment charges. Furthermore, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted.

From time to time, we might enter into negotiations for acquisitions that are not ultimately consummated. Those negotiations could result in diversion of management time and potentially

significant out-of-pocket costs. If we fail to evaluate and execute acquisitions accurately, we could fail to achieve our anticipated level of growth and our business and operating results could be adversely affected.

Continued weakness in U.S. or global economic conditions could have an adverse effect on our businesses.

The economies of the United States and other regions of the world in which we do business have experienced significant weakness which, in the case of the U.S., has resulted in significant unemployment and slower growth in economic activity. A continued decline in economic conditions may adversely affect demand for our services and products, thus reducing our revenue. These conditions could also impair the ability of those with whom we do business to satisfy their obligations to us.

Sales of our Laboratory Services have been variable.

Laboratory Services include services performed by both our Molecular Clinical Reference Laboratory and our Pharmacogenomics Research Services. Testing volumes at the Molecular Clinical Reference Laboratory are dependent on patient visits to doctors’ offices and other providers of health care and tends to fluctuate on a seasonal basis. Testing volume generally declines during the year-end holiday periods, other major holidays and the summer. The Pharmacogenomics Research Services depends on project-based work that changes from quarter to quarter. Therefore, comparison of the results of successive quarters may not accurately reflect trends or results for the full year.

Changes in payer mix could have a material adverse impact on our net sales and profitability.

Testing services are billed to private patients, Medicare, Medicaid and insurance companies. Tests may be billed to different payers depending on a particular patient’s medical insurance benefits. Increases in the percentage of services billed to government payors could have an adverse impact on our net sales.

Governmental payers and healthcare plans have taken steps to control costs.

Medicare, Medicaid and private insurers have increased their efforts to control the costs of health care services, including clinical testing services. They may reduce fee schedules or limit/exclude coverage for tests that we perform. Medicaid reimbursement varies by state and is subject to administrative and billing requirements and budget pressures. We expect efforts to reduce reimbursements, to impose more stringent cost controls and to reduce utilization of testing services will continue. These efforts, including changes in law or regulations, may have a material adverse impact on our business.

Our Laboratory requires ongoing CLIA certification.

The Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) extended federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally approved accreditation agency. CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories also must undergo proficiency testing and are subject to inspections.

The sanctions for failure to comply with CLIA requirements include suspension, revocation or limitation of a laboratory’s CLIA certificate, which is necessary to conduct business, cancellation or suspension of the laboratory’s approval to receive Medicare and/or Medicaid reimbursement, as well as significant fines and/or criminal penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could have a material adverse effect on us.

We believe that we are in compliance with all applicable laboratory requirements, but no assurances can be given that our laboratories will pass all future certification inspections.

Failure to comply with HIPAA could be costly.

The Health Insurance Portability and Accountability Act (HIPAA) and associated regulations protect the privacy and security of certain protected health information and establish standards for electronic healthcare transactions in the United States. These privacy regulations establish federal standards regarding the uses and disclosures of protected health information. Our Molecular Clinical Reference Laboratory is subject to HIPAA and its associated regulations. If we fail to comply with these laws and regulations we could suffer civil and criminal penalties, fines, exclusion from participation in governmental healthcare programs and the loss of various licenses, certificates and authorizations necessary to operate our Laboratory Services business. We could also incur liabilities from third party claims.

Our business could be adversely impacted by healthcare reform.

Government attention to the healthcare industry in the United States is significant and may increase. The Patient Protection and Affordable Care Act passed by Congress and signed into law by the President in March 2010 could adversely impact our business. While the ultimate impact of the legislation on the healthcare industry is unknown, it is likely to be extensive and could result in significant change.

We may be subject to client lawsuits.

Providers of clinical testing services may continuebe subject to develop slowly.lawsuits alleging negligence or other similar legal claims. Potential suits could involve claims for substantial damages. Litigation could also have an adverse impact on our client base and reputation. We maintain liability insurance coverage for certain claims that could result from providing or failing to provide clinical testing services, including inaccurate testing results and other exposures. Our insurance coverage limits our maximum recovery on individual claims and, therefore, there is no assurance that such coverage will be adequate.

Market demand is outside of our control.

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. Similarly, the sales cycle for the OEM equipment that we sell can be lengthy. If revenues from thenet 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. Similarly, the sales cycle for the OEM equipment that we sell can also be a lengthy

Sales of our Discovery Services have been variable.

Discovery services includes services performed by both our Molecular Clinical Reference Laboratory and our Pharmacogenomics Research Services. Testing volumes at the Molecular Clinical Reference Laboratory is dependent on patient visits to doctor’s offices and other providers of health

care and tends to fluctuate on a seasonal basis. Volume of testing generally declines during the year end holiday periods, other major holidays and the summer. The Pharmocogenomics Laboratory depends on project based work which will change from quarter to quarter. Therefore, comparison of the results of successive quarters may not accurately reflect trends or results for the full year.

Compliance with HIPPA is time consuming and costly.

The Health Insurance Portability and Accountability Act (HIPAA) and associated regulations protect the privacy and security of certain healthcare information and establish standards for electronic healthcare transactions in the United States. The privacy regulations establish federal standards regarding the uses and disclosures of protected health information. Our Molecular Clinical Reference Laboratory is subject to HIPAA and its associated regulations and if we fail to comply with these laws and regulations we could suffer civil and criminal penalties, fines, exclusion from participation in governmental healthcare programs and the loss of various licenses, certificates and authorizations necessary to operate this business. We could also incur liabilities from third party claims.

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 more than half of our total net sales. As a result, a major portion of our revenuesnet sales 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 rely on a single supplier, Hitachi High Technologies America, to provide the basic instrument modules used in our WAVE Systems. While other suppliers of instrumentation are available, we believe that our arrangement with Hitachi offers strategic advantages. We have successfully converted the latest model of WAVE systemsSystems to utilize Hitachi’s newest instrument line. If we were required to seek alternative sources of supply, it could be more 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.net sales.

WeThe current economy may cause suppliers of products to not have adequate personnelbe able to execute our business plan.perform.

We rely on various suppliers for products and materials needed to produce our products. In orderthe event that they would be unable to reduce our operating costs, we have reduced the number of employees in all areas of the business. In addition,deliver those items due to product shortage or business closure, we may lose other key management, scientific, technical, sales and

manufacturing personnel from timebe unable to time. Itdeliver our products or may be very difficultneed to replace personnel if they are needed in the future, and the lossincrease our prices. The current economy poses additional risk of key personnel could harm our business and operating results. We cannot assure you that our employee reductions will not impair oursuppliers’ 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.their businesses as usual.

Our markets are very competitive.

Many of our competitors have greater resources than we do and/orand 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 substantialadequate 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,secrets, 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.

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. The delisting of our stock from the NASDAQ may negatively affect the volume of shares traded and the price for our stock. 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.

Our common stock is deemed to be “penny stock”, which may make it more difficult for investors to sell their shares due to suitability requirements.

Our common stock is classified as a “penny stock” under the rules of the SEC. The Securities and Exchange Commission has adopted Rule 3a51-1 whichthat establishes the definition of a “penny stock”, for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:requires that:

·

that the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which is in highlight form:

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

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, 2007,2010, we had obligations to issue 12,583,87918,607,229 shares of common stock includingupon exercise of outstanding stock options representing 4,535,0642,565,001 shares, convertible preferred stock representing 10,344,820 shares and warrants representing 8,048,8155,697,408 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 December 31, 2007,2010, we had 49,189,67249,289,672 shares of common stock outstanding. Fewer than ten unrelated, institutional holders own more than 50% of these sharesshares. The sale of a significant number of 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.

None.

We currently lease and occupy a total of six facilities throughout the world under non-cancelable leases with various terms. The following table summarizes certain information regarding the leased facilities. Annual rent amounts presented in the table are reflected in thousands.

The leases on

We believe that these facilities are adequate to meet our current and planned needs. We expect that the Cramlington, England facility will expireOmaha lease which expires in March 2008, and we2011 will be vacating the property atreplaced with a lease of equivalent nature. We believe that time. We have vacated the Paris, France facility and areif additional space is needed in the process of finding a tenant to sublease this facility.future, we could find alternate space at competitive market rates without substantial increase in cost.

On January 23, 2009, Transgenomic and Power 3 Medical Products, Inc. (“Power3”) entered into a Collaboration and Exclusive License Agreement (the “Agreement”). On January 29, 2010, Transgenomic received a letter from Power3 terminating the Agreement. Power3’s alleged basis for terminating the Agreement was, among other claims, that Transgenomic committed a material breach of the Agreement by its alleged unauthorized disclosure of confidential information concerning the licensed technology. Transgenomic denies it has breached the Agreement. Transgenomic has sued Power 3 in the United States District Court for the District of Nebraska, Case No. 8:10CV-00079 (the “Action”) claiming that Power3 wrongfully terminated the Agreement. Power3 has not yet filed a counterclaim against Transgenomic in the action and no discovery has taken place in the Action. At this time, Transgenomic and Power3 have stayed the Action and have agreed to commence mediation proceedings to attempt to resolve the matters involved in the Action. Since Power3 has not filed a counterclaim against Transgenomic in the Action, we are not in a position to assess the merits of Power3’s threatened claims against Transgenomic. However, based upon the facts known to Transgenomic at this time, we do not believe the Action will have a material adverse effect on our financial position, results of operations or cash flows.

The Company is not a party to any other pending legal proceedings which,that, if decided adversely to the Company, will have a material adverse effect on our financial position, results of operations or cash flows.

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.

PART II

Market Information.    Share price information for our common stock is available on the OTC Bulletin Board under the symbol TBIO.OB. Prior to February 22, 2007, our common stock was listed for trading on the Nasdaq Capital Market 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 20062010 and 2007.2009.

Holders.    At December 31, 2007,2010, there are 49,189,67249,289,672 shares of our common stock outstanding and approximately 3,3102,800 holders of record.

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. The Series A Preferred Stock holders are entitled to receive quarterly dividends.

Sale of Unregistered SecuritiesSecurities.    .    The Company made no sales of its common stock during the years ended December 31, 20072010 and 20062009 that were not registered under the Securities Act of 1933 (the “Securities Act”). Information regarding salesOn December 29, 2010 we issued 2,586,205 shares of equity securities by the Company during the years ended December 31, 2005Series A Convertible Preferred Stock that were not registered under the Securities Act“Securities Act”. The issuance of 1933 have been previously reportedsuch Convertible Preferred Stock was related to the financing for the Company’s acquisition of assets from PGxHealth. Please refer to the Series A Convertible Preferred Stock Purchase Agreement with affiliates of Third Security dated December 29, 2010 (incorporated by reference to the CompanyRegistrant’s Report on Form 8-Ks8-K (Registration No. 000-30975) filed on March 18, 2005, March 30, 2005 and October 31, 2005.January 4, 2011).

Issuer Purchase of Equity Securities.    The Company made no purchases of its common stock during the quarter ended December 31, 2007.2010. Therefore, tabular disclosure is not presented.

Item 6.

Selected Consolidated Financial DataData.

The selected consolidated balance sheet data as of December 31, 2010 and 2009 and the selected consolidated statements of operations data for each year ended December 31, 2010 and 2009 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 as of December 31, 2008, 2007 and 2006 and the selected consolidated statements of operations data for each year ended December 31, 2008, 2007 2006 and 2005 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 as of December 31, 2005, 2004 and 2003 and the selected consolidated statements of operations data for each year ended December 31, 2004 and 20032006 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.

(3)

Other income (expense) for all years presented primarily includes interest expense and interest income. Other income in 2010 includes $0.6 million awarded in a federal grant under the Qualifying Therapeutic Discovery Project Program related to 2009 projects. Other income in 2007 includes $.9 million from the sale of an investment security and $.2 million in insurance proceeds related to equipment destroyed in fire at our Cramlington, England facility. The loss on debt extinguishment of $0.5 million in 2005 related to the repayment of long-term debt and $2.9 million resulting from certain modifications to long-term borrowing agreements that were treated as extinguishments for financial reporting purposes.

The following discussionThis report, including Management’s Discussion & Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should be readunderstand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in conjunctionthe forward-looking statements. These factors include, among other things: our expected revenue, income (loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, Medicare/Medicaid/Insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, actions of governments and regulatory factors affecting our business and other risks as described in our reports filed with the Consolidated Financial StatementsSecurities and applicable NotesExchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions.

You are cautioned not to Consolidated Financial Statementsplace undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other information in this report,factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons including Risk Factors set forththose described in Item 1A, “Risk Factors,” and Critical Accounting Policies at the endother factors identified by cautionary language used elsewhere in this report.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of this Item 7.new information, future events or otherwise, except as required by law.

Our continuing operations consist of Laboratory Services and Instrument Related Business, including the manufacture and sale of our WAVE System and related consumable products and discovery services which make use of(see the Company’s WAVE System to perform genomic research on a contract basis and disease testing services. These functions are categorized as one reportable operating segment. Although revenue is analyzed by type, the Company’s net financial results are analyzed as a single segment due to the integrated nature of the products and services that we sell. The Consolidated Financial Statements also reflect the assets and resultsdescription of our former Nucleic Acids operating segment, whichbusiness in Item 1). We have broken out our business into two reportable segments: Laboratory Services and Instrument Related business. There are shown as discontinued operationsestimates involved in all periods as a resultbreaking out the expenses and other disclosures.

The following discussion should be read together with our financial statements and related notes contained in this report. Results for the year ended December 31, 2010 are not necessarily indicative of the implementation of a plan to exit this operating segmentresults that may be attained in the fourth quarter of 2005.future.

Executive Summary

20072010 Results

Full year revenuenet sales for 20072010 of $23.2$20.0 million was consistentdecreased by 9% compared with total revenuenet sales for 20062009 of $23.4$22.0 million. Our Laboratory Services business grew 9% over the prior year, while the Instrument Related Business decreased 14% from 2009 to 2010. Overall gross margins decreased from 53% to 49%. Operating expenses were $13.4 million for the year ended December 31, 2010 compared

to $13.5 million for the same period of 2009, but note that 2010 included $0.8 million in deal costs related to our acquisition of the FAMILION family of genetic tests of PGxHealth and $0.1 million in restructuring costs related to the consolidation of our Gaithersburg, Maryland facility into Omaha that was offset by a decrease in research and development costs of $0.9 million.

On December 29, 2010 we acquired the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data. This strategic acquisition provided us with proprietary genetic commercial tests that have an established revenue base, proprietary biomarker assays, an additional fully integrated CLIA certified laboratory operation, and established test reimbursement and coverage policies that offer access to testing.

2011 Outlook

We continue to leverage our core instrument business declinedfor on-going instrument sales worldwide as well as employing our instruments and related expertise in 2007 dueour two laboratory services businesses. We anticipate strengthening growth in both of our laboratory services businesses and we continue to fewerseek out new assay technologies and tests to license or develop internally to expand our menu offerings for both of these service businesses. In particular, we have substantially increased our footprint in the molecular diagnostics laboratory market through our recent acquisition of the Clinical Data FAMILION product line, which includes a CLIA laboratory business. This acquisition brings us approximately $13.0 million in new annual revenues and a much larger presence both with insurers and patients. This acquisition also provides us access to higher throughput technologies and an expert staff to aid us in growing our reference laboratory business.

In our Pharmacogenomics Lab, we have completed cancer pathway gene mutation projects for a number of high visibility pharmaceutical companies. Employing our recently licensed ultra sensitive DNA mutation detection technology, termed Cold-PCR, we have added the significant addition of utilizing blood as a mutation detection sample source rather than just testing patients’ tumors. This is a significant achievement and should, we believe, lead to much faster expansion of our service testing for pharmaceutical partners as they adopt this novel approach. In addition to Cold-PCR, which offers sensitivity improvements as much as 10,000 times higher than routine testing technology, we have recently discovered a technique to further improve mutation detection sensitivity of standard sequencing technology. We are combining this new discovery with our Cold-PCR program to bring what we believe to be the most accurate and sensitive mutation detection technology available in the market today. We believe that this combination of technologies will offer us the ability to develop tests for earlier cancer detection using blood or even saliva and to measure recurrence for a very early warning to better manage patients suffering from cancer as well as support earlier drug selection or drug resistance determinations for these patients.

Although the WAVE system sales. The bioconsumable business hadSystem is a slight increase of 2% from 2006 to 2007. Thefully matured technology, and both it and its corresponding consumable sales growth in our discovery services was 149% overtraditional markets are shrinking, we are expanding our opportunities by selling systems into new geographic areas, including the prior year. These revenues, coupled with our recently completed cost reduction efforts enabled us to achieve a profit in the fourth quarter of 2007 of $.2 million. The pharmacogenomics business increased from the third quarter of 2007 to the fourth quarter of 2007 by $.4 million. We believe this is due to our increased focus on pharmaceutical companies that we initiated at the beginning of 2007.

Although we have taken significant steps to reduce our operating expenses, we continued to operate at a lossMiddle East and to generate a negative cash flow during the year. However, our loss and use of cash were reduced over each of the last three years. Our losses from continuing operations have gone from $5.0 million and $3.0 million in 2005 and 2006, respectively, to $2.2 million in 2007. We were able to maintain our cash level of $5.7 million, avoid new debt and improve our gross margins.

2008 Outlook

We are forecasting revenue growth of 10-15% over 2007 and to be profitable in 2008. To accomplish these goals we must generate sequential growth in net sales and continue to better control operating expenses. We are investing in all parts of our business to drive improved sales in 2008 and have added experienced sales staff. We have worked hard to develop a significant number of exciting collaboration opportunities. In addition, we have strengthened our Board of Directors, added key senior management and formed a Scientific Advisory Board to advise us on the latest developments and scientific opportunities in cancer detection screening and mitochondrial disease diagnosis.

Develop sequential growth in net sales.

We will workAsia, to continue to leverage on and strengthenthe revenue from our core instrument business. Challenges exist for WAVE System and consumable growth in traditional markets.related business segment. We continue to look for emerging markets and novel applications to provide us with new opportunities for our WAVE System.System such as our newly launched K-RAS mutation detection kit. We have launched our CE IVD labeled K-RAS mutation detection kit into Europe and the U.S. and will soon follow that with additional assay kits for BRAF, PIK3CA and P-53 mutation assay kits. These are all key cancer pathway mutation assessment tools and through our proprietary technologies bring noteworthy improvements in sensitivity and cost

efficiency to the market compared to competing technologies. We intend to continue to look for opportunities to diversify into new markets, including the personalized medicine market, (particularlyparticularly in oncology),oncology, where the sensitivities of our technologies are essential. InA recently licensed technology that could provide the short-term, we believe thathighest sensitivity available in the introduction of the newest generation ofmarketplace is being refined for use on our flagship product, the WAVE System 4500 will provide upgrade opportunities to our current installed base.Wave Systems. In addition, we are also selling refurbished WAVESystems in order to allow an opportunity for customers thatwho may not be able to afford the full cost of a new system. In the intermediatesystem to longer-term, we believe that newly developed “targeted” consumable products will increase usability ofpurchase and utilize our installed base and enhance net sales of consumables.WAVE technology. Additionally, we have developed credibility and momentum with third-party platforms that will allow us to leverage on our direct sales force and distribution network.

On the discovery services front, we have hired two new business development directors to develop pharmaceutical and clinical research organization customers. We have entered into agreements with two major pharmaceutical companies for three Phase II trials representing more than $.5 millionhistorically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenditures. On December 29, 2010 we acquired the FAMILION family of revenues in the first halfgenetic tests from PGxHealth, a subsidiary of 2008Clinical Data. At December 31, 2010, we had cash and cash equivalents of $3.5 million. While we believe that existing sources of liquidity are focused on maintaining this momentum in our pharmacogenomics business. To compliment our mutation detection expertise,sufficient to meet expected cash needs through 2011, we also have strong capabilities in biomarker development and mutation detection in cancer pathway genes which will aid in the development of true personalized medicine for our pharmaceutical partners. We have also focused increased efforts to expand our Molecular Clinical Reference Laboratory sales by hiring three experienced sales representatives.

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 researchincrease our net sales and development activitiessuccessfully integrate the FAMILION acquisition in order to remain competitivebe assured of meeting our liquidity needs on a long-term basis. This acquisition was funded with debt and preferred stock. However, we cannot assure that we will be able to take advantageincrease our net sales, further reduce our expenses, or raise further capital or equity and, accordingly, we may not have sufficient sources of new business opportunities as they arise. During 2008, we expect operating expenses, including research and development expense,liquidity to be approximately equal to 2007 levels.continue operations indefinitely.

Results of Continuing Operations

Years Ended December 31, 20072010 and 20062009

Net Sales.    Net sales for the years ended December 31, 20072010 and 20062009 consisted of the following (dollars in thousands):

Laboratory Services net sales increased during the year ended December 31, 2010 compared to 2009 by $0.4 million or 9%. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of $3.6 million increased 2% over the year ended December 31, 2009. The Molecular Clinical Reference Laboratory average revenue per test has decreased by 4% due to the mix of tests performed and the increased Medicare and Medicaid test volumes which generates lower reimbursement for these tests. The decrease in average revenue per test is offset by a 6% increase in volume. The Pharmacogenomics Research Services net sales of $1.4 million during 2010 increased

34% over the year ended December 31, 2009. The increase in Pharmacogenomics Research Services is largely due to an increase in the number of clients and average revenue billed per client for the year ended December 31, 2010 compared to the same period of 2009. The Pharmacogenomics Research Services net sales have peaks due to the nature of this project-related business. Each period for Pharmacogenomics Research Services should be considered on a stand-alone basis and is not indicative of future net sales.

Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, revenuesnet sales from service contracts that we enter into with purchasers of our instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems in order to access customers that may not be able to afford new systems. Bioinstrument net sales are down $1.9 million, or 18% during the year ended December 31, 2010 as compared to the same period in 2009. We sold 5625 WAVE Systems during the year ended December 31, 20072010 compared to 6832 systems during 2009. We sold 10 OEM instruments during the year ended December 31, 2010 compared to 11 in the same period of 2006. This2009. The decrease resulted fromin bioinstrument net sales was due to the lower demandvolume of instruments sold and lower average sales price on both our WAVE and OEM instruments. Service contract sales were down $0.2 million for the year ended December 31, 2010 compared to the same period of 2009 due to lower volumes in all major geographic marketsboth the European and among both researchU.S. markets. Parts, freight and diagnostic users particularly in our largest markets throughout Western Europe.miscellaneous income was lower by $0.5 million for the year ended December 31, 2010 as compared to the same period of 2009. Demand for WAVE systems has beenSystems continues to be affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. In addition, there were decreasedInstrument related revenue is subject to many factors such as type of instrument sold and the country of sale. Due to these factors each period should be considered on a stand alone basis and is not indicative of future net sales from product upgrades.streams.

Bioconsumable net sales increaseddecreased during the year ended December 31, 20072010 compared to 2006.2009 by $0.5 million or 7%. The installed base of WAVE instruments increased from 1,358 units at December 31, 2006 to 1,414 units at December 31, 2007, which is an increase of 4%. However, consumable usage increased by just 2%. We believe that this is reflective of the fact that not all of the installed instruments are being fully utilized. In addition, consumable products are available from other manufacturers which can be usedprimary decrease in place of many of our consumable products. Some of these competitive products sell at prices below the prices we charge for our products, which have caused us to have some price compression, principally in Europe

Discovery Services net sales increased during the year ended December 31, 2007 compared to 2006 by approximately $1.6 million. Discovery Services sales includes both the Molecular Clinical Reference Laboratory and the Pharmocogenomics Research Services. The Molecular Clinical Reference Laboratory net sales of $1.7 million increased 300% over the year ended December 31, 2006. The increased revenue is attributable to new customers with one of the new customers representing approximately 50% of the 2007 revenue. The Pharmacogenomics Research Services net sales of $1.1 million increased 47% over the year ended December 31, 2006. Revenue in the fourth quarter of 2007 was $.6 million for the Pharacogenomics Research Services which represents approximately 50% of the annual revenue. Thisconsumables is due to the completion of 13 projects for 5 pharmaceutical partners during the fourth quarter of 2007.lower volume in our European market offset by higher volume in our U.S. market.

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) as well as the wholesale price we pay manufacturers of OEM equipment that we distribute. It also includes direct costs (primarily personnel costs, test outsourcing fees, rent, supplies and depreciation) associated with our discovery servicesLaboratory Services operations. Cost of goods sold for the years ended December 31, 20072010 and 20062009 consisted of the following (dollars in thousands):

Gross profit equaled $12.7$9.8 million or 55%49% of total net sales during the year ended December 31, 20072010 compared to $11.4$11.6 million and 49%or 53% during the same period of 2006.2009. The increasedecrease in gross profit as a percent of revenuenet sales is largely attributable to changes in the composition of products sold. Margins on bioinstruments improved from 58% to 63% from 2006 to 2007 due to the change in the mix of instruments sold. We were also able to improveThe Laboratory Services business segment margins on bioconsumables from 48% in 2006 to 54% in 2007 due our focus on cost containment. The discovery services group improved marginsdecreased for the year ended December 31, 20072010 to 22%29% as compared to a negative 62%38% for the year ended December 31, 20062009. The erosion in the Laboratory Services gross margin is driven by the lower average net sales reimbursement per test due primarily to being ableincreased Medicare and Medicaid test volume. In addition, Laboratory Services had higher operating supplies cost in 2010 than the same period in 2009 related to leveragethe higher volume of tests and work required on the Pharmacogenomic projects. Margins on bioinstruments declined from 63% to 57% from 2009 to 2010 due to fewer instruments sold, a decline in service contract revenue and lower parts, freight and miscellaneous income. The instruments business has a fixed cost structure withcomponent in cost of goods sold, therefore lower revenue will cause the margin to deteriorate. Margins on bioconsumables increased sales revenue.from 48% in 2009 to 53% in 2010 primarily related to a 2009 one time obsolescence reserve of $0.4 million for control plasmids used in our SURVEYOR kits and the transition from a steel syringe delivery method to a disposable delivery method.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, facility costs and facility costs. These costs decreased in 2007 compared to 2006,foreign currency revaluation. Selling, general and decreasedadministrative expenses increased as a percentage of net sales from 52%47% in 2009 to 49%. These reductions were primarily due55% in 2010. For the year ended December 31, 2010 we incurred $0.8 million in expenses that related to lower personnel costsour acquisition of the FAMILION family of genetic tests. Selling, general and facilities costs resulting from our restructuring plan. In addition, foreign currency transaction adjustments decreased operatingadministrative expenses by approximately $.1would have been $10.3 million for the year ended December 31, 2007 compared2010 excluding the deal costs to 2006.acquire the FAMILION family of genetic tests which would be comparable to SG&A expenses for the year ended December 31, 2009 of $10.3 million. Foreign currency translation expense was $0.3 million in each of the periods ended December 31, 2010 and 2009. We recorded restructuring charges of $0.1 million in 2010 related to the consolidation of research and development into Omaha, which included closing the Gaithersburg, Maryland facility and the elimination of positions in our manufacturing group. There were no restructuring charges in 2009.

Research and Development Expenses.    Research and development expenses primarily include personnel costs, collaboration costs, legal fees, supplies, and facility costs. These costs totaled $3.0$2.3 million during the year ended December 31, 20072010 compared to $2.4$3.2 million during the same period of 2006, an increase2009, a decrease of $0.7$0.9 million or 28%. The decrease is primarily due to expenses in 2009 related to collaboration expenses for NuroPro assay development related to the diagnosis of Alzheimer’s and Parkinson’s diseases, the development of high sensitivity mutation detection technology called Cold-PCR and purchases of samples related to research work in progress. As a percentage of net sales, research and development expenses totaled 13%11% and 10%14% of net sales during the year ended December 31, 20072010 and 20062009 respectively. We expect to continue to invest approximately 10% of our net sales in research and development activities. Research and development costsexpenses are expensed in the year in which they are incurred.

Restructuring Charges.    We recorded restructuring charges totaling $1.5 million during 2007. The restructuring charges were comprised of severance payments totaling $.9 million, facility closure costs totaling $.5 million and other costs totaling $.1 million. Restructuring charges related to three events: A restructuring plan completed in the second quarter of 2007, which resulted in the termination of four employees in Omaha, Nebraska; the closure of the Cramlington, England bioconsumable production facility and consolidation of this production in the Omaha, Nebraska facility; and the closure of an administrative office outside Paris, France and combining those operations with those functions performed elsewhere in the organization. We substantially completed these restructuring activities as of December 31, 2007. These restructuring charges do not relate to any activities taken by

us during 2007 or prior periods in connection with the termination of our Nucleic Acids business segment. All costs associated with these activities are included in income (loss) from discontinued operations.

Other Income (Expense).    Other income during the year ended December 31, 2007 of $1.4 million represented an increase of $1.2 million from 2006. The increase was attributable to the sale of an investment in equity securities. On May 10, 2007, we sold 250,000 shares of stock in Pinnacle Pharmaceuticals, Inc. which we acquired in connection with a prior business acquisition. Gross proceeds realized from the sale were $.9 million and because our carrying cost in this stock was $0, the sale resulted in a gain of $.9 million. Other income also includes $.2 million in insurance proceeds related to equipment destroyed in the fire at our Cramlington facility. In addition we received $.3 millionconsists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income in the year ended December 31, 2010 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project. Other income related to this federal grant was offset by a nominal amount$0.6 million net of interest expense in both 2007 and 2006.consulting fees. Other income for the year ended December 31, 2009 was less than $0.1 million.

Income Tax Expense.    Income tax expense recorded during the years ended December 31, 20072010 and 20062009 related to income taxes in states, foreign countries and other local jurisdictions. Due tojurisdictions and

totaled less than $0.2 million and $0.1 million, respectively. The effective tax rate for the our cumulative losses and inability to utilize any additional losses as carrybacks, we did not provide for an income tax benefit during the yearsyear ended December 31, 2007 or 2006 based on2010 is 5.0%, which is primarily the result of valuation allowances against net operating losses for the United States, partially adjusted by permanent differences related to intercompany foreign currency exchange of our determination that itsubsidiary outside the United States. The effective tax rate for the year ended December 31, 2009 was more likely2.2%.

A net deferred tax liability was recorded during 2010 relating to the UK income taxes of less than not that such benefits would not be realized.$0.1 million compared to a net deferred tax liability of $0.1 million at year end 2009. 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 $109.2$104.3 million will expire at various dates from 20082012 through 2027,2029, if not utilized. We also had state income tax loss carryforwards from continuing and discontinued operations of $40.7$36.0 million at December 31, 2007.2010. These carryforwards will also expire at various dates if not utilized.

Years Ended December 31, 2006 and 2005

Net Sales.    Net sales for the years ended December 31, 2006 and 2005 consisted of the following (dollars in thousands):

WAVE Systems sold totaled 68 during the year ended December 31, 2006 compared to 97 during the same period of 2005. The increase in the installed base of instruments continued to drive increases in sales of bioconsumables used with these instruments. The decrease in discovery services net sales was primarily attributable to the expiration of certain research contracts with a large pharmaceutical company in 2005.

Costs of Goods Sold.    Cost of goods sold for the years ended December 31, 2006 and 2005 consisted of the following (dollars in thousands):

Gross profit equaled $11.3 million or 49% of total net sales during the year ended December 31, 2006 compared to $12.3 million and 48% during the same period of 2005. The increase in gross profit as a percent of revenue is largely attributable to changes in the composition of products sold. Sales of OEM instruments provided for higher gross profit in 2006, while gross profit on WAVE sales was down, due to the lower number of instruments sold and the fixed base of cost associated with this area. Gross profit from discovery services was significantly less in 2006 due to the decrease in net sales to a large pharmaceutical customer which produced net sales of $2.1 million in 2005.

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 remained essentially flat in 2006 compared to 2005, but increased as a percentage of net sales from 47% to 52% as a result of reduced sales. Foreign currency transaction adjustments increased operating expenses by approximately $.08 million compared to the year ended December 31, 2005

Research and Development Expenses.    Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled $2.4 million during the year ended December 31, 2006 compared to $2.2 million during the same period of 2005, an increase of $0.2 million or 7%. As a percentage of net sales, research and development expenses totaled 10% and 9% of net sales during the years ended December 31, 2006 and 2005 respectively. We expect to continue to invest up to 10% of our net sales in research and development activities. Research and development costs are expensed in the year in which they are incurred.

Impairment Charges.    We did not record any charges in 2006 for impairment of goodwill or long lived assets subject to annual evaluations of impairment. However, impairment charges totaled $0.4 million during the year ended December 31, 2005 and consisted of $0.2 million associated with certain international patent pursuits that were no longer consistent with our strategic plan and $0.2 million related to certain inventory associated with third party platforms.

Other Income (Expense).    Other income during the year ended December 31, 2006 of $0.2 million consisted of interest income. Other expense during the year ended December 31, 2005 consisted of interest expense of $2.0 million and a loss on debt extinguishment of $0.5 million which was partially offset by interest income of $0.1 and other income of $0.1 million. Interest expense consisted of the following for the years ended December 31, 2006 and 2005 (dollars in thousands):

We had previously entered into a $7.5 million line of credit (the “Credit Line”) and a $2.8 million convertible note (the “Term Note,” and collectively with the Credit Line the “Laurus Loans”) from Laurus Master Fund, Ltd. (“Laurus”). On March 18, 2005, Laurus converted $1.9 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of our common stock at $0.52 per share. In addition, on March 24, 2005, Laurus converted $.7 million of the outstanding principal balance of the Term Note into 1,250,000 shares of our common stock at $0.52 per share. In conjunction with these conversions, we accelerated amortization of $.4 million of related debt premiums and discounts and recorded a charge to interest expense of $1.4 million related to the fair value of incremental shares received by Laurus. Contemporaneously with the closing of a private offering of common stock in November 2005 (the “2005 Private Placement”), we repaid all outstanding principal and accrued interest on the Laurus Loans. In conjunction with this prepayment, we recorded a loss on debt extinguishment of $.5 million. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $.8 million offset by the elimination of associated net debt premiums of $.3 million.

Income Tax Expense.    Income tax expense recorded during the years ended December 31, 2006 and 2005 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, 2006 or 2005 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

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. In conjunction with the decision to exit this operating segment,

the Company recorded impairment charges of $.4 million and $8.0 million in 2006 and 2005, respectively, consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value. Accordingly, the results of this business segment are shown 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 to this segment in determining the results from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows (dollars in thousands):

Assets associated with the Nucleic Acids segment consisted principally of our facility in Glasgow, Scotland. During 2007 we completed the sale of the Glasgow facility and the associated equipment for $2.9 million, net of selling expenses, which resulted in a gain of $.1 million.

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 of $.1 million was reflected as other income. Proceeds from the sales of these available for sale securities were reflected within net cash flows from investing activities in 2005. During 2005 product sales to Geron totaled $1.9 million representing 50% of net sales within this business segment.

Liquidity and Capital Resources

Our working capital positions at December 31, 20072010 and 20062009 were as follows (in thousands):

		December 31,
		2010				2009				Change
Current assets(including cash and cash equivalents of $3,454 and $5,642, respectively)		$	15,034			$	14,454			$	580
Current liabilities			8,253				4,103				(4,150	)
Working capital		$	6,781			$	10,351			$	(3,570	)

We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. In 2010 we had a net loss of $3.1 million and needed to use $1.7 million in operating activities. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we currently have no plans to increase borrowings and have no plansor to issue additional equity securities for this purpose. At December 31, 20072010 and December 31, 2006,2009, we had cash and cash equivalents of $5.7$3.5 and $5.9$5.6 million, respectively. While we believe that existing sources of liquidity are sufficient to meet expected cash needs during 2008,2011, we will need to increase our revenues or furthernet sales and focus on the integration of the FAMILION acquisition to reduce our operating expenses in order to be assured of meetingmeet our liquidity needs on a long-term basis. However, we cannot assure you that we will be able to increase our revenuesnet sales or further reduce our expenses, or raise further capital or equity and, accordingly, we may not have sufficient sources of liquidity to continue the operations indefinitely. We continue to explore additional sources of the Company indefinitely.liquidity.

Analysis of Cash Flows

Years Ended December 31, 20072010 and 20062009

Net Change in Cash and Cash Equivalents.    Cash and cash equivalents decreased $0.1$2.2 million during the year ended December 31, 20072010 primarily as a result of $1.7 million being used in operating

activities, net cash used in investing activities of $6.2 million and $5.8 million provided by financing activities. Cash and cash equivalents increased $0.9 million during the year ended December 31, 2009 as a result of net cash of $2.9$1.3 million being usedprovided by operating activities and changes in foreign currency exchanges of $.3 million which was offset by net cash provided byused in investing activities of $3.1$0.4 million.

Cash Flows Used In Operating Activities.    Cash flows used in operating activities totaled $2.9$1.7 million for the year ended December 31, 2010 compared to cash flows provided in operating activities of $1.3 million during the year ended December 31, 2007 compared2009. The cash flows used in operating activities in 2010 relate to $1.2 million during the same period of 2006. The use in 2007 resulted from our net loss of $2.1$3.1 million which is offset by an increase in accounts payable of $0.4 million and higher inventory levelsnoncash items of $1.4 million related$0.7 million. The cash flows provided by operating activities in 2009 primarily relate to the acquisition of an inventory of OEM instruments. This was offset byincreased accounts receivable collections of $1.5$1.1 million, gain on salethe decrease in inventory of an investment in equity securties of $.9$1.3 million and non-cash chargesnoncash items of $1.1 million. The use in 2006 resulted primarily from our net loss of $3.43 million, offset by non-cash chargesthe loss of $2.55$1.9 million and lower accrued expenses of $0.4 million. Non-cash charges consisted primarily of depreciation and amortization, impairment charges and non-cash stock based compensation. Working capital and other adjustments decreased cash flows from operating activities by $0.34 million during 2006.

Cash Flows Used In Investing Activities.    Cash flows provided byused in investing activities totaled $3.1$6.2 million during the year ended December 31, 2007 compared to $.22010. This included the acquisition costs for FAMILION of $6.0 million and purchases of cash flowproperty and equipment of $0.2 million. Cash flows used in investing activities totaled $0.4 million during the same period of 2006.year ended December 31, 2009. Cash flows provided byused in investing activities in 20072009 consisted primarily of sales proceeds from our Glasgow facility and equipment of $2.9 and proceeds from the sale of an investment in equity securities of $.9 million. This was offset by purchases of $0.7 million of property and equipment. The cash used in 2006 was for purchases, offset by sales, of property and equipment.

Cash Flows fromProvided by Financing Activities.    Cash flows fromprovided by financing activities were minimal during$5.8 million for the yearsyear ended December 31, 2007 and 2006.2010. This resulted in the issuance of preferred stock to fund the acquisition of FAMILION. Also, we issued common stock due to the exercise of stock options for 100,000 shares during the second quarter of 2010. There were no cash flows provided by or used in financing activities for the year ended December 31, 2009.

Off Balance Sheet Arrangements

At December 31, 20072010 and 2006,2009, 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 AccountAccounts and Contractual Allowances.    Accounts receivable are shown net of an allowance for doubtful accounts. In determining an allowance for doubtful accounts, we consider the following:

Management also evaluates contract terms and history of collections with third party payors. 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.market net of allowance for obsolete inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process.process, which approximates the first-in, first-out (FIFO) method. 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 property and equipment, patents and intellectual property and capitalized software development costs.property. 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. 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 31 to 1510 years. We capitalize 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.

Preferred Stock.    We entered into a Series A Convertible Preferred Stock Purchase Agreement on December 29, 2010, as discussed in Note L, selling shares of preferred stock and issuing warrants to purchase a certain number of shares of Series A Preferred Stock. The Series A Preferred Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported outside of equity. Preferred stock is accreted to its redemption value. The warrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A Preferred Stock that meets the definition of a derivative. The preferred stock, warrant liability and preferred stock conversion feature are all recorded separately and were initially recorded at fair value using the Black Scholes model. We are required to record these instruments at fair value at each reporting date and changes will be recorded as an adjustment to earnings. The warrant liability and preferred stock conversion feature are considered level three financial instruments.

Impairment of Long-Lived Assets.    We evaluate long lived assets including such things as 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.

RevenueNet Sales Recognition.    Revenue onis realized and earned when all of the following criteria are met:

Net sales of our instrument and bioconsumable products isare 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 normal sales terms do not provide for the right of return unless the product is damaged or defective. RevenuesNet Sales 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. RevenueWe also enter into various service contracts that cover installed instruments. These contracts cover specific time period and net sales associated with these contracts are deferred and ratably recognized over the service period.

Net sales recognition for our Molecular Clinical Reference Laboratory is on an individual test basis and takes place when the test report is compete, all sign offs have been completed, reviewed and the report is sent to the client. client and is recorded net of the allowance for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Molecular Clinical Reference Laboratory. Adjustments to the allowances, based on actual receipts from the third party payers, are recorded upon settlement.

In our Pharmacogenomics research group we recognize revenue basedperform services on a percentproject by project basis. When payment is received in advance, revenue is recognized upon delivery of completion method for each project. the service. These projects typically do not extend beyond one year.

Taxes collected from customers and remitted to government agencies for specific revenuenet sales producing transactions are recorded net with no effect on the income statementstatement.

Recently Issued Accounting Pronouncements

Effective January 1,2007, we began to measure and record tax contingency accruals in accordance with Financial Accounting Standards Board (“FASB”) InterpretationIn October 2009, the FASB issued ASU No. 48,2009-13,Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. For additional information on the adoption of FIN 48, see Note H of this report.

In September 2006, the SEC issued Staff Accounting Bulletin. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and then evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial are now considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior year’s financial statements are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings (deficit) asRevenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force); effective for years beginning of the fiscal year of adoption. SAB 108after June 15, 2010. This standard update became effective for us on January 1, 2011. Vendors often provide multiple products and/or services to their customers as part of a single arrangement. These deliverables may be provided at different points in time or over different time periods. The existing guidance regarding how and whether to separate these deliverables and how to allocate the endoverall arrangement consideration to each was originally captured in EITF Issue 00-21,RevenueArrangements with Multiple Deliverables, which is now codified at ASC 605-25,Revenue Recognition—Multiple-Element Arrangements. The issuance of 2006. ThereASU 2009-13 amends ASC (FASB Accounting Standards Codification) 605-25 and represents a significant shift from the existing guidance that was no material impact to our Consolidated Financial Statements as a result of adoptionconsidered abuse-preventative and heavily geared toward ensuring that revenue recognition was not accelerated. The application of this pronouncement.new guidance is expected to result in accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting. We are in the final stages of analyzing the impact of ASU 2009-13.

In September 2006,October 2009, the FASB issued SFASASU No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides a new single authoritative definition2009-14,Software (ASC 985): Certain Revenue Arrangements That Include Software Elements (a consensus of fair value and provides enhanced

guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective as of January 1, 2008 for financial assets and financial liabilities within its scope and it is not expected to have a material impact on our consolidated financial statements. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which defers theEmerging Issues Task Force); effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), for fiscal years beginning after NovemberJune 15, 20082010. This standard update became effective for us on January 1, 2011. ASU 2009-14 modifies the existing scope guidance in ASC 985-605,Software Revenue Recognition, for revenue arrangements with tangible products that include software elements.

This modification was made primarily due to the changes in ASC 605-25 noted previously, which further differentiated the separation and interim periods within those fiscal yearsallocation guidance applicable to non-software arrangements as compared to software arrangements. Prior to the modification of ASC 605-25, the separation and allocation guidance for items withinsoftware and non-software arrangements was more similar. Under ASC 985-605, which was originally issued as AICPA Statement of position 97-2,Software Revenue Recognition, an arrangement to sell a tangible product along with software was considered to be in its scope if the scope of FSP FAS 157-2.software was more than incidental to the product as a whole. We are currently assessingin the final stages of analyzing the impact if any, of SFAS 157 and FSP FAS 157-2 on our consolidated financial statements.ASU 2009-14.

In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to irrevocably elect to measure certain financial assets and financial liabilities at fair value on an instrument-by-instrument basis with the resulting changes in fair value recorded in earnings. The objective of SFAS 159 is to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by using different measurement attributes for financial assets and financial liabilities. SFAS 159 is effective as of January 1, 2008. We currently have no financial assets or financial liabilities for which SFAS 159 would be applicable.

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) changes several underlying principles in applying the purchase method of accounting. Among the significant changes, SFAS 141(R) requires a redefining of the measurement date of a business combination, expensing direct transaction costs as incurred, capitalizing in-process research and development costs as an intangible asset and recording a liability for contingent consideration at the measurement date with subsequent re-measurements recorded in the results of operations. SFAS 141(R) also requires that costs for business restructuring and exit activities related to the acquired company will be included in the post-combination financial results of operations and also provides new guidance for the recognition and measurement of contingent assets and liabilities in a business combination. In addition, SFAS 141(R) requires several new disclosures, including the reasons for the business combination, the factors that contribute to the recognition of goodwill, the amount of acquisition related third-party expenses incurred, the nature and amount of contingent consideration, and a discussion of pre-existing relationships between the parties. SFAS 141(R) is effective as of January 1, 2009. We currently do not have any plans for a business combination, therefore SFAS No.141 (R) is not expected to have an impact on our financial statements.

In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires noncontrolling interests in subsidiaries initially to be measured at fair value and classified as a separate component of equity. SFAS 160 also requires a new presentation on the face of the consolidated financial statements to separately report the amounts attributable to controlling and non-controlling interests. SFAS 160 is effective as of January 1, 2009. We do not expect SFAS No. 160 to have an impact on our consolidated financial statements.

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 net sales and expenses during the reported period. In addition, estimates and assumptions associated with the determination of the 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.

This report, including Management’s Discussion & Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income(loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, Medicare/Medicaid/Insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, actions of governments and regulatory factors affecting our business and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate”, believe”, “estimate”, “expect”, “intend”, “plan”, “project”, “target”, “can”, “could”, “may”, “should”, “will”, “would” and similar expressions.

You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements for a number of reasons including those described in Part I, Item 1A, “Risk Factors”, of this report.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Impact of Inflation

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

Foreign Currency Translation Risk.During the last threetwo fiscal years, our international sales have represented more than 50% 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 twothe British Pound Sterling is the functional currency of our wholly owned subsidiaries,subsidiary, Transgenomic Limited, and Cruachem Limited, whose operating currency is British Pounds SterlingLimited. Results of operation and the Euro.Balance Sheet are translated from the functional currency of the subsidiary to our reporting currency of the US Dollar. 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 at the balance sheet date. In addition, we have revaluation risk which occurs when the transaction is consummated in a currency other than the British Pound Sterling. This transaction must be revalued within the Transgenomic Limited ledger, whose functional currency is the British Pound Sterling. The majority of the transactions on this ledger are in Euro. 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 we do not have a material exposure to foreign currency rate fluctuations at this time.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMReport of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

Transgenomic, Inc.

We have audited the accompanying consolidated balance sheetsheets of Transgenomic, Inc. and subsidiariesSubsidiary as of December 31, 20072010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2007. 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 audit.

We conducted our audit 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. We were not engaged to examine management’s assertion about the effectiveness of Transgenomic, Inc’s internal control over financial reporting as of December 31, 2007 included in the accompanying Management’s Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Transgenomic, Inc. and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for year ended December 31, 2007 in conformity with U.S. generally accepted accounting principles.

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, 2006 and 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006.then ended. 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 auditsaudit 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, suchthe consolidated financial statements referred to above present fairly, in all material respects, the financial position of Transgenomic, Inc. and subsidiaries atSubsidiary as of December 31, 20062010 and 2005,2009, and the results of their operations and their cash flows for each of the three years in the periodthen ended December 31, 2006, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles.

As discussed in Note B to the consolidated financial statements, in 2006 the Company adopted Statement of Financial Accounting Standards No. 123(R),Share-Based Payment.Omaha, Nebraska

March 14, 2011

TRANSGENOMIC, INC. AND SUBSIDIARIESSUBSIDIARY

CONSOLIDATED BALANCE SHEETS

As of December 31, 20072010 and 20062009

(Dollars in thousands except per share data)

See notes to consolidated financial statements.

TRANSGENOMIC, INC. AND SUBSIDIARIESSUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2007, 20062010 and 20052009

(Dollars in thousands except per share data)