UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________________________

FORM 10-Q

_______________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the ~~Quarterly Period Ended~~quarterly period ended September 30, ~~2011~~2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from _____ to _____

Commission ~~file number:~~File Number: 000-30975

_______________________________

TRANSGENOMIC, INC.

(Exact name of registrant as specified in its charter)

_______________________________



Delaware		911789357
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12325 Emmet Street, Omaha, Nebraska		68164
(Address of principal executive offices)		(Zip Code)

(402) 452-5400

(Registrant’s telephone number, including area code)

_______________________________

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 o

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 x No o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~



Large accelerated filer	o	Accelerated filer	ox
Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller ~~Reporting Company~~reporting company	xo

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

As of November ~~9, 2011,~~7, 2012, the number of shares of common stock outstanding was ~~49,379,822.~~71,645,725.

Table of Contents

TRANSGENOMIC, INC.

INDEX




		Page No.

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, ~~2011~~2012 (Unaudited) and December 31, ~~2010~~2011 (Audited)	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, ~~2011~~2012 and ~~2010~~2011	4

	Unaudited Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2012 and 2011	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, ~~2011~~2012	56

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2011~~2012 and ~~2010~~2011	67

	Notes to Condensed Consolidated Unaudited Financial Statements	78

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	2829

PART II.	OTHER INFORMATION	2930

Item 1.	Legal Proceedings	2930

Item 1A.	Risk Factors	2930

Item 6.	Exhibits	3031

Signatures		3133

Table of Contents

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

TRANSGENOMIC, INC. AND ~~SUBSIDIARY~~SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)


	September 30,						September 30,
	2011			December 31,			2012			December 31,
	(unaudited)			2010			(unaudited)			2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,423		$	3,454		$	4,747		$	4,946
Short term investments							3,998			—
Accounts receivable, net	7,591			7,601			8,157			7,573
Inventories, net	3,306			3,344			4,406			3,859
Other current assets	1,336			635			1,186			820
Total current assets	13,656			15,034			22,494			17,198
PROPERTY AND EQUIPMENT:
Equipment	10,105			9,820			10,819			10,143
Furniture, fixtures & leasehold improvements	3,723			3,479			3,762			3,682
	13,828			13,299			14,581			13,825
Less: accumulated depreciation	(12,231		)	(11,697		)	(12,490		)	(11,969		)
	1,597			1,602			2,091			1,856
OTHER ASSETS:
Goodwill	6,275			6,275			6,674			6,440
Intangibles (net of accumulated amortization of $1,142 and $519, respectively)	8,325			8,962
Intangibles, net							11,485			7,966
Other assets	121			154			143			102
	$	29,974		$	32,027		$	42,887		$	33,562
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,721		$	1,360		$	1,517		$	2,609
Accrued compensation	1,058			875			1,058			1,133
Short term debt	247			989			—			3,082
Current maturities of long term debt	1,234			—			6,957			3,703
Accrued liabilities	3,834			3,231
Contractual obligation	1,363			1,628
Current portion of lease obligations	197			170
Accrued expenses							3,627			2,782
Deferred revenue							1,279			1,377
Other liabilities							1,067			1,042
Accrued preferred stock dividend	450			—			1,095			600
Total current liabilities	10,104			8,253			16,600			16,328
LONG TERM LIABILITIES:
Long term debt less current maturities	7,405			8,640			448			4,937
Preferred stock conversion feature	8,000			1,983
Preferred stock warrant liability	3,200			2,351
Common stock warrant liability							2,100			—
Other long-term liabilities	974			843			1,163			1,249
Total liabilities	29,683			22,070			20,311			22,514
Redeemable Series A convertible preferred stock, $.01 par value, 3,879,307 shares authorized, 2,586,205 shares issued and outstanding	1,796			1,457
STOCKHOLDERS’ EQUITY(DEFICIT):
Preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding	—			—
Common stock, $.01 par value, 100,000,000 shares authorized, 49,379,822 and 49,289,672 shares issued and outstanding, respectively	499			498
STOCKHOLDERS’ EQUITY:
Series A preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding							26			26
Common stock, $.01 par value, 150,000,000 shares authorized, 71,645,725 and 49,625,725 shares issued and outstanding, respectively							721			501
Additional paid-in capital	140,486			139,730			170,706			152,987
Accumulated other comprehensive income	1,675			1,589			434			336
Accumulated deficit	(144,165		)	(133,317		)	(149,311		)	(142,802		)
Total stockholders’ equity (deficit)	(1,505		)	8,500
Total stockholders’ equity							22,576			11,048
	$	29,974		$	32,027		$	42,887		$	33,562

See notes to unaudited condensed consolidated financial statements.

Table of Contents

TRANSGENOMIC, INC. AND ~~SUBSIDIARY~~SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2011			2010			2011			2010			2012			2011			2012			2011
NET SALES	$	8,253		$	4,419		$	23,400		$	14,956		$	7,889		$	8,253		$	24,188		$	23,400
COST OF GOODS SOLD	3,808			2,402			10,248			7,568			4,089			3,808			12,722			10,248
Gross profit	4,445			2,017			13,152			7,388			3,800			4,445			11,466			13,152
OPERATING EXPENSES:
Selling, general and administrative	4,364			2,159			14,272			7,623			5,559			4,364			15,832			14,272
Research and development	515			613			1,650			1,952			668			515			1,870			1,650
Restructuring charges	5			72			40			72			—			5			—			40
	4,884			2,844			15,962			9,647			6,227			4,884			17,702			15,962
LOSS FROM OPERATIONS	(439		)	(827		)	(2,810		)	(2,259		)	(2,427		)	(439		)	(6,236		)	(2,810		)
OTHER INCOME (EXPENSE):
Interest income (expense), net	(238		)	—			(720		)	1
Interest expense, net													(207		)	(238		)	(713		)	(720		)
Expense on preferred stock	(600		)	—			(6,866		)	—			—			(600		)	—			(6,866		)
Effect on warrants													—			—			1,000			—
Other, net	(2		)	—			231			—			(6		)	(2		)	23			231
	(840		)	—			(7,355		)	1			(213		)	(840		)	310			(7,355		)
LOSS BEFORE INCOME TAXES	(1,279		)	(827		)	(10,165		)	(2,258		)	(2,640		)	(1,279		)	(5,926		)	(10,165		)
INCOME TAX EXPENSE (BENEFIT)	(9		)	71			(120		)	109			114			(9		)	88			(120		)
NET LOSS	$	(1,270	)	$	(898	)	$	(10,045	)	$	(2,367	)	$	(2,754	)	$	(1,270	)	$	(6,014	)	$	(10,045	)
PREFERRED STOCK DIVIDENDS AND ACCRETION	(275		)	—			(803		)	—			(165		)	(275		)	(495		)	(803		)
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS	$	(1,545	)	$	(898	)	$	(10,848	)	$	(2,367	)	$	(2,919	)	$	(1,545	)	$	(6,509	)	$	(10,848	)
BASIC AND DILUTED LOSS PER COMMON SHARE	$	(0.03	)	$	(0.02	)	$	(0.22	)	$	(0.05	)	$	(0.04	)	$	(0.03	)	$	(0.09	)	$	(0.22	)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING	49,327,527			49,289,672			49,306,861			49,228,561			71,645,725			49,327,527			68,669,229			49,306,861

See notes to unaudited condensed consolidated financial statements.

Table of Contents

TRANSGENOMIC, INC. AND ~~SUBSIDIARY~~SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~STOCKHOLDERS’ EQUITY (DEFICIT)~~

~~Nine Months EndedSeptember 30, 2011~~COMPREHENSIVE LOSS

(Dollars in ~~thousands except per share data)~~thousands)

Common Stock

Outstanding
Shares

Par
Value

Additional
Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, January 1, 2011 49,289,672
$ 498
$ 139,730
$ (133,317 ) $ 1,589
$ 8,500
Net loss —
—
—
(10,045 ) (10,045 ) (10,045 )
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax —
—
—
—
86
86
Comprehensive loss (9,959 )
Non-cash stock-based compensation —
—
734
—
—
734
Issuance of shares of stock 90,150
1
22
—
—
23
Preferred stock accretion —
—
—
(353 ) (353 )
Dividends on preferred stock —
—
—
(450 ) —
(450 )
Balance, September 30, 2011 49,379,822
499
140,486
(144,165 ) $ 1,675
$ (1,505 )



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
��	2012			2011			2012			2011
Net Loss	$	(2,754	)	$	(1,270	)	$	(6,014	)	$	(10,045	)
Foreign currency translation adjustment, net of tax	88			(56		)	98			86
Other Comprehensive Income (Loss), net of tax	88			(56		)	98			86
Comprehensive Loss	$	(2,666	)	$	(1,326	)	$	(5,916	)	$	(9,959	)

See notes to unaudited condensed consolidated financial statements.

Table of Contents

TRANSGENOMIC, INC. AND ~~SUBSIDIARY~~SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY

Nine Months EndedSeptember 30, 2012

(Dollars in ~~thousands)~~thousands except per share data)

Nine Months Ended
September 30,
2011 2010
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (10,045 ) $ (2,367 )
Adjustments to reconcile net loss to net cash flows used in operating activities:
Depreciation and amortization 1,506
523
Non-cash, stock based compensation 734
(29 )
Provision for losses on doubtful accounts 1,432
29
Provision for losses on inventory obsolescence 47
78
Preferred stock revaluation 6,866
—
Changes in operating assets and liabilities:
Accounts receivable (1,418 ) 940
Inventories (44 ) (245 )
Prepaid expenses and other current assets (269 ) 90
Accounts payable 137
(121 )
Accrued liabilities (131 ) 242
Other long term liabilities 268
(44 )
Long term deferred income taxes 18
20
Net cash flows used in operating activities (899 ) (884 )
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment (147 ) (141 )
Change in other assets (256 ) (25 )
Net cash flows used in investing activities (403 ) (166 )
CASH FLOWS USED IN FINANCING ACTIVITIES:
Principal payments on capital lease obligations (165 ) (57 )
Issuance of common stock 23
42
Principal payment on note payable (659 ) —
Net cash flows used in financing activities (801 ) (15 )
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH 72
12
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,031 ) (1,053 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,454
5,642
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,423
$ 4,589
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 495
$ —
Income taxes, net 106
4
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Acquisition of equipment through capital leases $ 388
$ 286
Dividends accrued on preferred stock 450
—



	Preferred Stock			Common Stock
	Outstanding Shares	Par Value		Outstanding Shares	Par Value		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total
Balance, January 1, 2012	2,586,205	$26		49,625,725	$	501	$	152,987	$	(142,802	)	$	336	$	11,048
Net loss				—	—		—		(6,014		)	—		(6,014		)
Foreign currency translation adjustment, net of tax				—	—		—		—			98		98
Non-cash stock-based compensation				—	—		556		—			—		556
Private Placement, net				22,000,000	220		17,153							17,373
Issuance of shares of stock for employee stock options				20,000	—		10		—			—		10
Dividends on preferred stock				—	—		—		(495		)	—		(495		)
Balance, September 30, 2012	2,586,205	$	26	71,645,725	$	721	$	170,706	$	(149,311	)	$	434	$	22,576

See notes to unaudited condensed consolidated financial statements.

Table of Contents

TRANSGENOMIC, INC. AND ~~SUBSIDIARY~~SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



	Nine Months Ended
	September 30,
	2012			2011
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss	$	(6,014	)	$	(10,045	)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:
Depreciation and amortization	1,570			1,506
Non-cash, stock based compensation	556			734
Provision for losses on doubtful accounts	1,649			1,432
Provision for losses on inventory obsolescence	88			47
Preferred stock revaluation	—			6,866
Warrant revaluation	(1,000		)	—
Changes in operating assets and liabilities:
Accounts receivable	(2,153		)	(1,418		)
Inventories	(616		)	(44		)
Prepaid expenses and other current assets	(377		)	(269		)
Accounts payable	(1,113		)	137
Accrued expenses	(403		)	(131		)
Other long term liabilities	3			268
Long term deferred income taxes	33			18
Net cash flows used in operating activities	(7,777		)	(899		)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment	(641		)	(147		)
Purchase of short term investments	(8,994		)	—
Proceeds from the sale of short term investments	4,996			—
Acquisition of intangible assets	(3,394		)	—
Change in other assets	(345		)	(256		)
Net cash flows used in investing activities	(8,378		)	(403		)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal payments on capital lease obligations	(244		)	(165		)
Issuance of common stock and warrants, net	17,483			23
Principal payment on note payable	(1,317		)	(659		)
Net cash flows provided by (used in) financing activities	15,922			(801		)
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH	34			72
NET CHANGE IN CASH AND CASH EQUIVALENTS	(199		)	(2,031		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	4,946			3,454
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,747		$	1,423
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	753		$	495
Income taxes, net	2			106
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Acquisition of equipment through capital leases	$	175		$	388
Dividends accrued on preferred stock	495			450
Note Payable converted to Equity	3,000			—
Acquisition of intangible assets	1,007			—

See notes to unaudited condensed consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

Three and Nine Months EndedSeptember 30, ~~2011~~2012 and ~~2010~~2011


A.	BUSINESS DESCRIPTION

Business Description.

Transgenomic, Inc. is a global biotechnology company advancing personalized medicine in the detection and treatment of cancer and inherited diseases through its proprietary molecular technologies and ~~world-class~~ clinical and research services. We have three complementary business ~~segments.~~segments:

Clinical Laboratories. Our clinical laboratories specialize in genetic testing for cardiology, neurology, mitochondrial disorders, and oncology. 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 also accredited by ~~CAP (College~~the College of American ~~Pathologists)~~Pathologists (CAP).

Pharmacogenomics Services. ~~Pharmacogenomics research services are provided by our~~Our Contract Research Organization located in Omaha, ~~Nebraska.~~Nebraska provides pharmacogenomics research services supporting Phase II and Phase III clinical trials conducted by our pharmaceutical customers. This lab specializes in pharmacogenomic, biomarker and mutation discovery research ~~serving~~testing that serves the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support. The lab employs a variety of genomic testing service technologies including ICE COLD-PCR technology. ICE COLD-PCR is a proprietary platform technology that can be run in any laboratory with standard PCR technology and which enables detection of mutations from virtually any sample type including tissue biopsies, blood, and circulating tumor cells (CTCs) at levels greater than 1,000-fold higher than standard DNA sequencing techniques.

•

Diagnostic Tools. Our proprietary product is the WAVE^® System, which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of ~~over 1,500~~more than 1,550 WAVE Systems as of September 30, ~~2011~~2012. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR^® Nuclease and a range of chromatography columns.


B.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.

The condensed consolidated balance sheet as of December 31, 2011 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three and nine months ended September 30, 2012 and 2011 are unaudited and reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2011 contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2012. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Principles of Consolidation.

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

Risks and Uncertainties.

Certain risks and uncertainties are inherent in our day-to-day operations and to the process of preparing our financial statements. The more significant of those risks are presented below and throughout the notes to the consolidated financial statements.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three and Nine Months Ended September 30, 2012 and 2011

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 reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these consolidated financial statements.

Reclassifications.

Certain prior year amounts have been reclassified in order to conform to the current year presentation regarding segment reporting.

Fair Value.

Unless otherwise specified, book value approximates fair market value. ~~The preferred~~Short term investments and the common stock ~~conversion feature and~~ warrant liability are recorded at fair value. See Footnote I.

~~Basis of Presentation.~~

The condensed consolidated balance sheet as of December 31, 2010 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three and ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~and 2010 are unaudited and reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the~~

~~Table of Contents~~

~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2011 and 2010~~

financial position and operating results for the interim periods. These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2010 contained in our Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.H - Fair Value.

Cash and Cash Equivalents.

Cash and cash equivalents include cash and investments with original maturities at the date of acquisition of three months or less. ~~Such~~

Concentrations of Cash.

From time to time, we may maintain a cash position with financial institutions in amounts that exceed federally insured limits. We have not experienced any losses on such accounts as of September 30, 2012.

Short term Investments.

Short term investments ~~presently~~ consist of ~~temporary overnight investments.~~U.S. Treasury securities with original maturities at the date of acquisition of one year or less.

Accounts Receivable.

The following is a summary of activity for the allowance for doubtful accounts during the three and nine months ended September 30, ~~2011~~2012 and ~~2010:~~2011:


	Dollars in Thousands									Dollars in Thousands
	Beginning Balance		Provision		Write Offs			Ending Balance		Beginning Balance		Provision		Write Offs			Ending Balance
Three Months Ended September 30, 2012										$	1,236	$	679	$	(339	)	$	1,576
Three Months Ended September 30, 2011	$	1,387	$	205	$	(113	)	$	1,479	$	1,387	$	205	$	(113	)	$	1,479
Three Months Ended September 30, 2010	$	295	$	40	$	—		$	335
Nine Months Ended September 30, 2012										$	1,088	$	1,649	$	(1,161	)	$	1,576
Nine Months Ended September 30, 2011	$	334	$	1,433	$	(288	)	$	1,479	$	334	$	1,432	$	(287	)	$	1,479
Nine Months Ended September 30, 2010	$	310	$	29	$	(4	)	$	335

While payment terms are generally 30 days, we have also provided extended payment terms of up to 90 days in certain cases. We operate globally and some of the international payment terms may be greater than 90 days. Accounts receivable are carried at original invoice amount and shown net of allowance for doubtful accounts and contractual allowances. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. We determine the allowance for doubtful accounts and contractual allowances by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Accounts receivable are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are recorded when received.

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Three and Nine Months Ended September 30, 2012 and 2011

Inventories.

Inventories are stated at the lower of cost or 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, which approximates the first-in, first-out (FIFO) method.

The following is a summary of activity for the allowance for obsolete inventory during the three and nine months ended September 30, ~~2011~~2012 and ~~2010:~~2011:


	Dollars in Thousands										Dollars in Thousands
	Beginning Balance		Provision			Write Offs			Ending Balance		Beginning Balance		Provision			Write Offs			Ending Balance
Three Months Ended September 30, 2012											$	559	$	35		$	(13	)	$	581
Three Months Ended September 30, 2011	$	520	$	(2	)	$	(4	)	$	514	$	520	$	(2	)	$	(4	)	$	514
Three Months Ended September 30, 2010	$	536	$	12		$	(28	)	$	520
Nine Months Ended September 30, 2012											$	511	$	88		$	(18	)	$	581
Nine Months Ended September 30, 2011	$	518	$	47		$	(51	)	$	514	$	518	$	47		$	(51	)	$	514
Nine Months Ended September 30, 2010	$	507	$	78		$	(65	)	$	520

We determine the allowance for obsolescence by evaluating inventory quarterly for items deemed to be slow moving or obsolete.

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2011 and 2010~~

Property and Equipment.

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



Leasehold improvements	1 to 10 years
Furniture and fixtures	3 to 7 years
Production equipment	3 to 7 years
Computer equipment	3 to 7 years
Research and development equipment	2 to 7 years

Depreciation expense related to property and equipment was $0.2 million and $0.2 millionduring the three months ended September 30, ~~2011~~2012 and ~~2010 was $0.2 million and $0.1 million,~~2011, respectively. Included in depreciation for the three months ended September 30, 2012 and 2011 was $0.1 million and less than ~~$0.1~~$0.1 million, respectively, related to equipment acquired under capital leases. Depreciation expense related to property and equipment was $0.5 million and $0.5 millionduring the nine months ended September 30, ~~2011~~2012 and ~~2010 was $0.5 million and $0.3 million,~~2011, respectively. Included in depreciation for the nine months ended September 30, 2012 and 2011 was ~~$0.1~~$0.2 million and $0.1 million, respectively, related to equipment acquired under capital leases.

Goodwill.

Goodwill is the excess of the purchase price over fair value of assets acquired and is not amortized. Goodwill is tested for impairment annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs that may impact goodwill. Impairment occurs when the carrying value is determined to be not recoverable thereby causing the carrying value of the goodwill to exceed its fair value. If impaired, the asset’s carrying value is reduced to its fair value. ~~We recorded no impairment charges related to goodwill as of December 31, 2010.~~ No events have transpired in the nine months ended September 30, ~~2011~~2012 that would require an impairment analysis prior to our scheduled review.

Stock Based Compensation.

All stock options awarded to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of September 30, ~~2011~~2012 had vesting periods of one or three years from the date of grant. None of the stock options outstanding at September 30, ~~2011~~2012 are subject to performance or market-based vesting conditions.

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We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period).

During the ~~three~~nine months ended September 30, ~~2011~~2012, we recorded ~~the recapture of~~ compensation expense of ~~less than $0.1~~$0.6 million within selling, general and administrative expense. During the nine months ended September 30, 2011, we recorded compensation expense of ~~$0.7~~$0.7 million within selling, general and administrative ~~expense as a result of the vesting of options exercisable for the purchase of 3.6 million shares. During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2010~~, we recorded compensation expense recovery of less than $0.1 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.3 million shares.expense. As of September 30, ~~2011~~2012, there was ~~$1.2~~$0.7 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of nearly three years.

NoWe granted 477,500 stock options ~~were granted~~ during the ~~quarters~~quarter ended September 30, ~~2011 and 2010.~~2012. The fair value of the options granted ~~during the nine months ended~~ ~~September 30, 2011and 2010~~ was estimated on the ~~respective~~ grant ~~dates~~date using the Black-Scholes option pricing model. ~~We granted 2.2 million stock options during the second quarter of 2011. These stock options were granted to our entire employee base with the bulk being granted to our senior management team.~~ The Black-Scholes model ~~was used~~ with the following ~~assumptions:~~assumptions was used to estimate the fair value of the options: risk-free interest rates of ~~1.87%~~0.7% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of ~~four~~5.00 years, based on expected exercise activity behavior; and volatility of ~~105%~~114% based on the historical volatility of our stock over a time that is consistent with the expected life of the option. ~~A small group of senior executives hold the majority of the stock options and are expected to hold the options for five years.~~ Forfeitures of ~~1.10%~~3.88% have been assumed.

~~There were 75,000~~We did not grant any stock options ~~granted~~ during the quarter ended ~~June 30, 2010. The Black-Scholes model was used with~~

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~~Three and Nine Months Ended~~ September 30, ~~2011 and 2010~~

the following assumptions: risk-free interest rates of 1.98% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected life of five years, based on historical exercise activity behavior; and volatility of 102.69% based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives held the majority of the stock options and are expected to hold the options until they are vested. Forfeitures of 2.2% were assumed in the calculation.2011.

Net Sales Recognition.

Revenue is realized and earned when all of the following criteria are met:

Persuasive evidence of an arrangement exists,

Delivery has occurred or services have been rendered,

The seller’s price to the buyer is fixed or determinable, and

Collectability is reasonably assured.

Net sales from our Clinical Laboratories segment are recognized on an individual test basis and ~~takes place~~occur when the test report is completed, reviewed and sent to the ~~client~~client. Sales are recorded at our list price less ~~the reserve~~a provision for insurance, Medicare and Medicaid contractual adjustments. There are no deferred net sales associated with our Clinical ~~Laboratories.~~Laboratories segment. Adjustments to the allowances, based on actual receipts from third party payers, are recorded upon settlement.

In our Pharmacogenomics Services segment, we perform services on a project by project ~~basis. When we receive payment in advance, we~~basis and recognize revenue when ~~we deliver the service.~~services are delivered. These projects typically do not extend beyond one year. At September 30, ~~2011~~2012 and ~~2010,~~December 31, 2011, deferred net sales associated with pharmacogenomics research projects for which we have received payment in advance of performing services was $0.2 million and $0.1 million, respectively, and are included in the balance sheet in ~~other~~ accrued ~~liabilities, was $0.1 million and less than $0.1 million, respectively.~~expenses.

Net sales of products in our Diagnostic Tools ~~products~~segment are 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 under a purchase order. Our sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the 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. We also enter into various service contracts that cover installed instruments. These contracts, for which payment is received at the time of execution, cover specific time periods and net sales associated with these contracts are deferred and recognized ratably over the service period. At September 30, ~~2011~~2012 and ~~2010,~~December 31, 2011, deferred net sales ~~mainly~~ associated with our service contracts was $1.1 million and $1.3 million, respectively, and is included in the balance sheet in accrued ~~liabilities, was approximately $1.4 million for each period.~~expenses.

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

~~Preferred Stock.~~Common Stock Warrants.

~~We entered into a Series A Convertible Preferred Stock Purchase Agreement on December 29, 2010, as discussed in Note I, selling shares~~ Our issued and ~~issuing~~outstanding warrants to purchase ~~a certain number of shares of Series A Preferred Stock. The Series A Preferred Stock meets the definition of mandatorily redeemable~~common 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~~liability ("Common Stock ~~that meets the definition of a derivative.~~Warrant Liability"). The ~~preferred stock, warrant~~Common Stock Warrant liability ~~and preferred stock conversion feature are all recorded separately and were~~was initially recorded at fair value using ~~the Black Scholes~~a Monte Carlo simulation model. We are required to ~~record~~present these instruments at fair value at each reporting date

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Three and Nine Months Ended September 30, 2012 and 2011

and any changes ~~will be~~in fair values are recorded as an adjustment to earnings. The ~~warrant~~Common Stock Warrant liability ~~and preferred stock conversion feature are~~is considered a level three financial ~~instruments.~~instrument. See Footnote I.H - Fair Value.

Translation of Foreign Currency.

Our foreign subsidiary uses the local currency of the country in which it is located as its functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. A cumulative translation gain of ~~approximately~~ $0.1 million is reported as ~~accumulated~~ other comprehensive income on the accompanying consolidated ~~balance sheet as~~statement of comprehensive loss for the nine months September 30, ~~2011~~2012. A cumulative translation ~~loss~~gain of ~~less than $0.1~~$0.1 million was reported as accumulated other comprehensive income for the nine months ended September 30, ~~2010~~2011. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized $0.1 million as foreign currency transaction loss in the determination of net loss for the nine months ending September 30, 2012 and less than ~~$0.1~~$0.1 million as

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~~Three and Nine Months Ended September 30, 2011 and 2010~~

foreign currency transaction gain in the determination of net loss for the nine months ending September 30, 2011 ~~and $0.3 million as foreign currency transaction loss in the determination of net loss for the~~ ~~nine~~ ~~months ending~~ ~~September 30, 2010~~.

~~Other Income.~~

~~Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income in the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ includes an award of a federal grant under the Qualifying Therapeutic Discovery Project related to COLD-PCR, Surveyor Scan kit development for detecting key cancer pathway gene mutations and mtDNA damage assays. Income related to this federal grant was $0.2 million, net of consulting fees. Other income for the three months ended ~~September 30, 2011~~ ~~was less than $0.1 million. Other income for the~~ ~~three and nine~~ ~~months ending~~ ~~September 30, 2010~~ ~~was less than $0.1 million.~~

~~Earnings~~Loss Per Share.

Basic ~~earnings~~loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted ~~earnings~~loss per share include shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. Options, warrants and conversion rights pertaining to ~~17,751,940~~29,269,699 and ~~10,598,156~~17,751,940 shares of our common stock have been excluded from the computation of diluted ~~earnings~~loss per share at September 30, ~~2011~~2012 and ~~2010,~~2011, respectively. The options, warrants and conversion rights that were exercisable in ~~2011~~2012 and ~~2010~~2011 were not included because the effect would be anti-dilutive due to the net loss.

Recently adopted accounting pronouncements.

~~In October 2009, the FASB issued ASU No. 2009-13,~~ ~~Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Emerging Issues Task Force)~~; effective for years beginning after June 15, 2010. 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 overall arrangement consideration to each was originally captured in EITF Issue No. 00-21, ~~Revenue Arrangements with Multiple Deliverables, which is now codified at ASC 605-25,~~ ~~Revenue Recognition – Multiple-Element Arrangements~~. The issuance of ASU 2009-13 amends ASC 605-25 and represents a significant shift from the existing guidance that was considered abuse-preventative and heavily geared toward ensuring that revenue recognition was not accelerated. The application of this 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. Our adoption of ASU No. 2009-13 did not have a material impact on our consolidated financial statements.

~~In October 2009, the FASB issued ASU No. 2009-14,~~ ~~Software (ASC 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. 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 allocation 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 software 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 software was more than incidental to the product as a whole. Our adoption of ASU No. 2009-14 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements, effective for years beginning after December 15, 2010. The guidance requires the disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level Three fair value measurements). We adopted the new disclosure provisions with the filing of our Form 10-Q for the three months ended March 31, 2011.

~~Recently issued accounting pronouncements not yet adopted.~~

In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new guidance eliminates the

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~~Three and Nine Months Ended September 30, 2011 and 2010~~

current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, ~~2011~~2011. We elected to report other comprehensive income and ~~will have presentation changes only.~~its components in a separate statement of comprehensive income for the three and nine months ended September 30, 2012 and 2011.

In July 2011, the FASB issued guidance on the presentation of net patient service revenue. The new guidance requires a change in presentation of the statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, enhanced disclosure about policies for recognizing revenue and assessing bad debts are required. Disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts will be required. The new guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. Our adoption of this guidance did not have a material impact on our consolidated financial statements.

In September 2011, the FASB issued guidance on Intangibles including goodwill and other intangibles. The new guidance will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The new guidance is effective for fiscal years beginning after December 15, 2011. ~~Early adoption is permitted.~~We will follow this guidance in our fourth quarter 2012 testing of goodwill and other intangibles.

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurement” (“ASU 2011-04”). ASU 2011-04 amends ASC 820 to achieve common fair value measurement and disclosure requirements in U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The amended guidance requires information disclosure regarding transfers between Level 1 and Level 2 of the fair value hierarchy, information disclosure regarding sensitivity of a fair value measurement categorized within Level 3 of the fair value hierarchy to changes in unobservable inputs and any interrelationships between those unobservable inputs, and the categorization by level of the fair value hierarchy for items that are not measured at fair value. The amended guidance was effective for financial periods beginning after December 15, 2011. ASU 2011-04 did not have a material effect on our consolidated financial position or results of operations.

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Three and Nine Months Ended September 30, 2012 and 2011


C.	INVENTORIES

Inventories (net of allowance for obsolescence) consisted of the following:


	Dollars in Thousands						Dollars in Thousands
	September 30, 2011			December 31, 2010			September 30, 2012			December 31, 2011
Finished goods	$	2,063		$	2,119		$	3,333		$	2,608
Raw materials and work in process	1,469			1,531			1,563			1,485
Demonstration inventory	288			212			91			277
	$	3,820		$	3,862		$	4,987		$	4,370
Less allowance for obsolescence	(514		)	(518		)	(581		)	(511		)
Total	$	3,306		$	3,344		$	4,406		$	3,859


D.	INTANGIBLES AND OTHER ASSETS

Long-lived intangible assets and other assets consisted of the following:


	Dollars in Thousands												Dollars in Thousands
	September 30, 2011						December 31, 2010						September 30, 2012						December 31, 2011
	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Intangibles—acquired technology	$	6,535	$	683	$	5,852	$	6,535	$	—	$	6,535	$	9,100	$	1,594	$	7,506	$	6,535	$	911	$	5,624
Intangibles—assay royalties	1,434		154		1,280		1,434		—		1,434		1,434		359		1,075		1,434		205		1,229
Intangibles—third party payor relationships	367		—		367		367		—		367		367		—		367		367		—		367
Intangibles—tradenames and trademarks	344		37		307		344		—		344		842		86		756		344		49		295
Intangibles—customer relationships													695		—		695		—		—		—
Intangibles—covenants not to compete													277		—		277		—		—		—
Patents	767		263		504		511		245		266		915		266		649		703		267		436
Intellectual property	20		5		15		290		274		16		170		10		160		20		5		15
	$	9,467	$	1,142	$	8,325	$	9,481	$	519	$	8,962	$	13,800	$	2,315	$	11,485	$	9,403	$	1,437	$	7,966

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~~Three and Nine Months Ended September 30, 2011 and 2010~~




	Estimated Useful Life
Intellectual property	10 years
Patents	~~7 years~~life of patent
Intangibles—acquired technology	7 – 815 years
Intangibles—third party payor relationships	Indefinite
Intangibles—~~assay royalties~~customer relationships	75 years
Intangibles—covenants not to compete	3 years
Intangibles—tradenames and trademarks	7 years

Other assets include U.S. security deposits and deferred tax assets, net of applicable valuation allowances.

Amortization expense for intangible assets was $0.3 million during each of the three months ended September 30, 2012 and 2011. Amortization expense for intangible assets was $0.9 million during the nine months ended September 30, 2012 and $1.0 million during the nine months ended September 30, 2011. Amortization expense for intangible assets is expected to be $1.7 million in each of the years 2013 through 2017.

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Three and Nine Months Ended September 30, 2012 and 2011

On September 21, 2012, we acquired certain intangible assets from Axial Biotech, Inc. ("Axial") related to the ScoliScore^TM assay. In consideration for the purchase of the intangible assets, we made a cash payment of approximately $3.4 million to Axial and certain of its creditors. In addition, following the transfer of all of the assets related to the ScoliScore^TM assay and confirmation that the ScoliScore^TM assay operates, within our laboratories pursuant to protocol agreed upon by us and Axial, we will pay an additional $1.0 million to Axial and certain of its creditors, $0.1 million which will be placed into escrow for a period of one year from the closing of the transaction to secure Axial's indemnification obligations for, among other things, any breach of, or default under, any of Axial's representations, warranties, covenants or agreements contained in the asset purchase agreement. This acquisition provides us with the ScoliScore^TM assay technology and intellectual property, and an established revenue and customer base.

The following intangible assets were each valued separately using valuation approaches most appropriate for each specific asset.




Intangibles—acquired technology	Relief from Royalty Method
Intangibles—tradenames	~~Income Approach - Multi-period~~Relief from Royalty Method
Intangibles—customer relationships	Multi-Period Excess Earnings Method
Intangibles—~~third party payor relationships~~covenants not to compete		~~Cost Approach - Replacement Cost~~With and Without Method
~~Intangibles—assay royalties~~Patents		~~Income Approach - Multi-period Excess Earnings Method~~
~~Intangibles—tradenames and trademarks~~		~~Income Approach -~~ Relief from Royalty Method

The Income Approach

uses valuation techniques to convert future amounts, cash flows or earnings, to a single, discounted amount. The ~~income approach~~fair value measure is based ~~upon the economic principle of anticipation. In this approach,~~on the value ~~of the subject intangible asset~~that is indicated by market expectations about the present value of those future amounts.

The Relief from Royalty Method assumes that if the expected economic income to be earned from that intangible asset. This expectation is then converted into a present value through the selection of an investor's required rate of return given the risk and/or uncertainty associated with the subject intangible asset. In valuing an intangible asset using the income approach, the following elements should be considered: (i) remaining useful life, (ii) legal rights, (iii) positionCompany did not have proprietary ownership of the ~~intangible asset in~~genetic testing processes on which its ~~respective life cycle, (iv) appropriate capital charges, (v) allocations~~revenues depend, it might elect to lease the rights or licenses from another company. The fair value is measured as the estimated discounted cash flows of ~~income, and (vi) whether any tax amortization benefit should be included in~~ the ~~analysis.~~royalty payments avoided by ownership.

~~Cost Approach~~

The cost approach to intangible asset analysis is based upon the economic principles of substitution and price equilibrium. These basic economic principles assert that an investor pay no more for an investment than the cost to obtain an investment of equal utility. Within the cost approach there are several related analytical methods. Two of the most common and widely accepted include the reproduction cost and replacement cost methods. All cost based approaches typically involve a comprehensive analysis of the relevant cost components, which typically include: (i) materials, (ii) labor, (iii) overhead, (iv) intangible asset developer's profit, and (v) an adequate return on the asset developer's capital.

Reproduction cost contemplates the construction of an exact replica of the subject intangible asset. Before appropriate adjustments are made for the purposes of deriving an indication of value, reproduction cost does not consider either the market demand for or the market acceptance of the subject intangible. Therefore, before the requisite adjustments, the reproduction cost estimate does not answer the question of whether anyone would be interested in an exact replica of the subject interest.

Unlike the reproduction cost method, the replacement cost method does consider market demand and market acceptance for the subject intangible. In other words, if there are elements or components of the subject intangible that generate little or no demand, they are not included in the subject intangible.

~~Excess Earnings Method~~

~~The~~Multi Period Excess Earnings Method ~~a form~~measures the fair value as the estimated discounted cash flows of the ~~Income Approach, reflects~~existing customer relationships over a period during which revenues form existing customer relationships are assumed to have been substantially replaced by revenues from future customers.

The With and Without Method measures the ~~present~~fair value of the ~~projected~~non-competition agreements as the probability adjusted difference between the estimated discounted cash flows with and without the effect of competition. The model that includes competition includes lost revenues as well as increased expenses required to rebuild the lost revenues.

The assets acquired were $4.2 million in identifiable intangible assets and $0.2 million in goodwill. No liabilities were assumed. The acquired assets are ~~expected to be generated by the intangible asset, less charges representing the contribution of other assets to those cash flows. As part~~reported as a component of our ~~analysis, we determined individual rates of return applicable to each acquired asset and estimate the effective “capital charge” to be applied to the earnings of the identified intangibles.~~laboratory services segment.

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2011 and 2010~~

~~Relief-from-Royalty Method~~

The ~~Relief-from-Royalty method, a form of~~goodwill arising from the Income Approach, estimates the cost of licensing the acquired intangible asset from an independent third party using a royalty rate. Since the company owns the intangible asset, it is relieved from making royalty payments. The resulting cash flow savings attributedacquisition has been assigned to ~~the owned intangible asset are estimated over the intangible asset's remaining useful life~~our Laboratory Services segment and ~~discounted to present value.~~

~~Amortization expense for intangible assets was $0.3 million and less than $0.1 million during the three months ended~~ ~~September 30, 2011~~ ~~and 2010, respectively. Amortization expense for intangible assets was $1.0 million and less than $0.1 million during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~and 2010, respectively. Amortization expense for intangible assets~~ is expected to be ~~$1.2 million in each~~deductible for tax purposes.

The amounts we have recorded for the allocation of our indefinite intangible assets and goodwill are preliminary and amounts may change when the ~~years 2011 through 2017.~~acquisition accounting is completed.


E.	~~CAPITAL LEASES~~

~~The following is an analysis of the property acquired under capital leases.~~

Dollars in Thousands
Asset Balances at
Classes of Property
September 30,
2011

December 31,
2010

Equipment $ 782
$ 394
Less: Accumulated amortization (119 ) (13 )
Total $ 663
$ 381

~~The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of~~ ~~September 30, 2011~~.

~~Year ending December 31:~~

Dollars in Thousands
2011 $ 75
2012 224
2013 209
2014 35
Total minimum lease payments $ 543
Less: Amount representing interest (79 )
Present value of net minimum lease payments $ 464


F.	COMMITMENTS AND CONTINGENCIES

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

We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through ~~2016.~~2022. The future minimum lease payments required under these leases are approximately ~~$0.3~~$0.3 million ~~in 2011, $1.1 million in 2012, $0.6 million in 2013, $0.4 million in 2014 , $0.4 million in 2015 and $0.3 million in 2016. Rent expense~~ for the ~~three months ended~~remainder of ~~September 30, 2011~~2012, $1.1 million in 2013, $1.1 million in 2014, $1.0 million in 2015, $0.9 million in 2016 and ~~2010 was $0.2~~$0.8 million ~~and $0.2 million, respectively.~~ in 2017. Rent expense for each of the nine months ended September 30, ~~2011~~2012 and ~~2010~~2011 was ~~$0.7~~$0.7 million and ~~$0.6~~$0.7 million, respectively. At September 30, 2012, firm commitments to vendors totaled $3.0 million.

We have entered into an employment agreement with Craig J. Tuttle, our President and Chief Executive Officer. The current term of Mr. Tuttle’s employment agreement ends on July 12, 2012. The employment agreement provides that Mr. Tuttle will be entitled to receive a severance payment from the Company if his employment is terminated involuntarily except if such termination is based on “just cause”, as that term is defined in his employment agreement. The severance payment payable in the event of involuntary termination without just cause is equal to his annual base salary at the time of termination and will be paid over a twelve-month period. The employment agreement provides that the severance payment provision will be honored if the Company is acquired by, or merged into, another company and his position is eliminated as a result of such acquisition or merger. In addition

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three and Nine Months Ended September 30, ~~2011~~2012 and ~~2010~~2011

~~we have one employee who is entitled to a severance payment of less than $0.1 million if the employee’s position is eliminated prior to July 2012.~~

At ~~September 30, 2011, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $0.5 million.~~


G.F.	INCOME TAXES

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. We have statutes of limitation open for federal income tax returns related to tax years ~~2007~~2009 through ~~2010.~~2011. We have state income tax returns subject to examination primarily for tax years ~~2007~~2009 through ~~2010.~~2011. Open tax years related to foreign jurisdictions, primarily the United Kingdom, remain subject to examination for the tax years ~~2007~~2009 through ~~2010.~~2011.

Income tax expense for the nine months ended September 30, 2012 was $0.1 million. Income tax benefit for the nine months ended September 30, 2011 was $0.1 million. This is the result of the change in deferred tax assets and liabilities reported in financial statements of our subsidiary outside the U.S. We believe the tax benefit recorded will be offset in future periods by a tax expense related to income reported in financial statements of our subsidiary outside the U.S. Income tax expense for the ~~nine~~ ~~months ended~~ ~~September 30, 2010~~ ~~was less than $0.1 million. The~~Our effective tax rate for the nine months ended September 30, ~~2011~~2012 ~~is 1.14%~~was 1.48%, which is primarily the result of valuation allowances against the net operating losses for the U.S., which results in us not recording net deferred tax assets in the U.S.

During the three and nine months ended September 30, ~~2011~~2012 and ~~2010,~~2011, there were no material changes to the liability for uncertain tax positions.


H.G.	STOCKHOLDERS’ EQUITY

~~Preferred~~Common Stock.

~~The Company’s~~At our Annual Meeting of Stockholders, held on May 23, 2012, our stockholders approved an amendment to our certificate of incorporation to increase the authorized number of shares of our common stock from 100,000,000 to 150,000,000. Our Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Company has no current plans to issue any additional preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any additional preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.

On December 29, 2010, we entered into a transaction with affiliates of Third Security, LLC (the “Investors”), pursuant to the terms of Series A Convertible Preferred Stock Purchase Agreement (“Series A Purchase Agreement”), in which we: (i) sold an aggregate of 2,586,205 shares of Series A Convertible Preferred Stock (the “Series A Preferred”) at a price of $2.32 per share; and (ii) issued a warrant to purchase up to an aggregate of 1,293,102 shares of Series A Preferred (the “Warrant”) having an exercise price of $2.32 per share (the sale of Series A Preferred and issuance of the Warrant hereafter referred to as the “Financing”). The Warrant may be exercised at any time from December 29, 2010 until December 28, 2015 and contains a “cashless exercise” feature. The gross proceeds from the Financing were $6.0 million. The $0.2 million of costs incurred to complete the Financing were recorded as a reduction in the value of the Series A Preferred. We used the net proceeds from the financing to acquire the FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data, Inc.The Series A Preferred meets the definition of mandatorily redeemable stock as it is preferred capital stock that is redeemable at the option of the holder through December 2015 and should be reported outside of equity. The Series A Preferred is accreted to its redemption value of $6.0 million. The Warrant does not qualify to be treated as equity and, accordingly, is recorded as a liability. A preferred stock anti-dilution feature is embedded within the Series A Preferred that meets the definition of a derivative.

In connection with the Financing, we filed a Certificate of Designation of Series A Convertible Preferred Stock (the “Certificate of Designation”) with the Secretary of State of the State of Delaware, designating 3,879,307 shares of our preferred stock as Series A Convertible Preferred Stock. The Series A Preferred, including the Series A Preferred issuable upon exercise of the Warrant, is

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~~Three and Nine Months Ended September 30, 2011 and 2010~~

convertible into shares of our common stock at a rate of 4-for-1, which conversion rate is subject to further adjustment as set forth in the Certificate of Designation. Certain rights of the holders of the Series A Preferred are senior to the rights of the holders of common stock. The Series A Preferred has a liquidation preference equal to its original price per share, plus any accrued and unpaid dividends thereon. The holders of the Series A Preferred are entitled to receive quarterly dividends, which accrue at the rate of 10.0% of the original price per share per annum, whether or not declared, shall compound annually and shall be cumulative. In any calendar quarter, we are required to pay from funds legally available a cash dividend in the amount of 50% of the distributable cash flow as defined in the Series A Purchase Agreement or the aggregate amount of dividends accrued on the Series A Preferred. During the nine months ended September 30, 2011, we recorded $0.5 million in accrued dividends.

Generally, the holders of the Series A Preferred are entitled to vote together with the holders of common stock, as a single group, on an as-converted basis. However, the Certificate of Designation provides that we shall not perform some activities, subject to certain exceptions, without the affirmative vote of a majority of the holders of the outstanding shares of Series A Preferred. The holders of the Series A Preferred also are entitled to elect or appoint, as a single group, two (2) of the five (5) directors of the Company.

In connection with the Financing, we also entered into a registration rights agreement with the Investors (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has granted the Investors certain demand, “piggyback” and S-3 registration rights covering the resale of the shares of common stock underlying the Series A Preferred issued pursuant to the Series A Purchase Agreement and issuable upon exercise of the Warrants and all shares of common stock issuable upon any dividend or other distribution with respect thereto.

~~Common Stock.~~

~~The Company’s Board of Directors is authorized to issue up to 100,000,000~~150,000,000 shares of common stock, from time to time, as provided in a resolution or resolutions adopted by the Board of Directors.

On February 7, 2012 we entered into definitive agreements with institutional and other accredited investors and raised approximately $22.0 million in a private placement financing ("Private Placement"), which includes an aggregate of $3.0 million in convertible notes issued in December 2011 to entities associated with Third Security, LLC, a related party, that automatically convert into shares of our common stock and warrants to purchase such common stock on the same terms as all investors in the Private Placement. Pursuant to the purchase agreement, we issued an aggregate of 19,000,000 shares of our common stock at a price per share of $1.00, as well as five-year warrants to purchase up to an aggregate of 9,500,000 shares of common stock with an exercise price of $1.25 per share. In connection with the conversion of the convertible notes issued by us to the entities associated with Third Security, LLC, the entities received an aggregate of 3,000,000 shares of common stock and 1,500,000 warrants on the same terms as all investors in the Private Placement. The costs incurred to complete the Private Placement were recorded as a reduction in equity in the amount of $1.5 million. Net proceeds from this offering will be used for general corporate and working capital purposes, primarily to accelerate development of several of our key initiatives.

In connection with the Private Placement the investors have a Registration Rights Agreement which requires the Company to maintain an effective registration statement with the SEC. In the event that the registration statement is not effective the Company shall pay to each holder an amount in cash, as liquidated damages, equal to 1.5% of the aggregate purchase price paid by such holder and again on each 30 day anniversary that the deadline is not met. In no event shall the aggregate amount of the liquidated damages payable to a holder exceed 10% of the purchase price.

Pursuant to our equity financing completed in February 2012, we are obligated to pay PGxHealth, LLC (“PGx”) an aggregate of $5.5 million as a prepayment under the senior secured promissory note (the “Note”). We have accounted for the full prepayment amount as a current liability as of September 30, 2012. We have contacted PGx on numerous occasions to make arrangements for the prepayment to PGx in accordance with the terms of the Note, as well as to coordinate the timing of the prepayment. However, PGx has not responded to any of our outreach efforts. We made our initial payment of $1.2 million under the Note in June 2012, and intend to continue to comply with the original terms of the Note.

Common Stock Warrants.

~~No common~~Common stock warrants ~~were~~ issued during the three and nine ~~months~~ ended September 30, ~~2011~~2012~~. Laurus Master Fund, Ltd. exercised its~~ were 0 and 11,000,000, respectively, and none of the issued warrants ~~during the third quarter of 2011 in a cashless exercise for 60,150 shares of stock.~~were exercised. No common stock warrants were issued or exercised during the three and nine months ended September 30, ~~2010~~2011. ~~A warrant~~Warrants to purchase an aggregate of ~~5,172,408~~16,172,408 shares of common stock ~~was~~were outstanding at September 30, ~~2011~~2012.

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Three and Nine Months Ended September 30, 2012 and 2011


Warrant Holder	Issue Year	Expiration	Underlying Shares	Exercise Price	Issue Year	Expiration	Underlying Shares	Exercise Price
Affiliates of Third Security, LLC (1)	2010	December 2015	5,172,408	$0.58	2010	December 2015	5,172,408	$0.58
Various Institutional Holders⁽²⁾					2012	February 2017	9,500,000	$1.25
Affiliates of Third Security, LLC⁽²⁾					2012	February 2017	1,500,000	$1.25
							16,172,408

(1)

This Warrant was issued in connection with the ~~Financing.~~issuance of warrants to purchase shares of our Series A Preferred Stock to affiliates of Third Security, LLC in December 2010. The number of underlying shares shown reflects the ~~post-conversion shares.~~number of shares of common stock issuable upon conversion of the shares of Series A Preferred Stock for which this Warrant is currently exercisable.


(2)	These Warrants were issued in connection with the Private Placement completed in February 2012.


I.H.	FAIR VALUE

~~Financial Accounting Standards Board (“FASB”)~~FASB guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for our financial assets and liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.

FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities,

Level 2—Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets, and

Level 3—Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in pricing the asset or liability.

~~The preferred~~

U.S. Treasury securities are classified as Level 1 within the fair value hierarchy, as fair value is based on quoted prices in active markets.



	Dollars in Thousands
	September 30, 2012		December 31, 2011
U.S. Treasury securities	$	3,998	$	—

Common Stock Warrant Liability

Our issued and outstanding warrants to purchase common stock ~~warrant liability~~do not qualify to be treated as equity, and ~~preferred stock conversion feature~~accordingly are recorded ~~separately at~~as a liability. The Common Stock Warrant Liability represents the fair ~~value.~~value of the 11.0 million warrants issued in February 2012. We are

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2011 and 2010~~

required to record these instruments at fair value at each reporting date and changes are recorded as ana non-cash adjustment to earnings. The gains or losses included in earnings are reported in other income (expense) in our Statement of Operations. Management does not believe that this liability will be settled by a use of cash.

The Common Stock Warrant Liability is considered a Level 3 financial instrument and is valued using a Monte Carlo simulation. This method is well suited to value options with non-standard features, such as anti-dilution protection. A Monte Carlo simulation model uses repeated random sampling to simulate significant uncertainty in inputs. Assumptions and inputs used in the valuation of the commons stock warrants are broken down into four sections: Static Business Inputs; Static Technical Inputs; Simulated Business Inputs: and Simulated Technical Inputs.

Static Business Inputs include: Our equity value, which was estimated using our stock price of $0.95 as of September 30, 2012; the amount of the down-round financing, the timing of the down-round financing, the expected exercise period of 4.35 years from the valuation date and the fact that no other potential fundamental transactions are expected during the term of the common stock warrants.

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Three and Nine Months Ended September 30, 2012 and 2011

Static Technical Inputs include: volatility of 55% and the risk-free interest rate of 0.54% based on the 4.5-year U.S. Treasury yield interpolated from the 3 year and 5 year U.S. Treasury bonds.

Simulated Business Inputs include: the probability of down-round financing which was estimated to be 25% for simulated equity values below the down-round financing cut-off point.

Simulated Technical Inputs include: our equity value in periods 1-10 follows a geometric Brownian motion and is simulated over 10 independent six-month periods; a down-round financing event was randomly simulated in an iteration based on the 25% discrete probability of a down-round financing for those iterations where our simulated equity value at the expected timing of down-round financing was below the down-round financing cut-off point.

During the three months ended September 30, 2012, the changes in the fair value of the liability measured using significant unobservable inputs (Level 3) was comprised of the following:



	Dollars in Thousands
	For the Three Months Ended
	September 30, 2012
Beginning balance at June 30, 2012	$	2,100
Total gains or losses:
Recognized in earnings	—
Balance at September 30, 2012	$	2,100

During the nine months ended September 30, 2012, the changes in the fair value of the liability measured using significant unobservable inputs (Level 3) was comprised of the following:



	Dollars in Thousands
	For the Nine Months Ended
	September 30, 2012
Beginning balance	$	3,100
Total gains or losses:
Recognized in earnings	(1,000		)
Balance at September 30, 2012	$	2,100

Preferred Stock Warrant Liability and Conversion Feature

Prior to November 2011, we were required to record our 5.2 million of preferred stock warrants and the preferred stock's conversion feature at their respective fair values at each reporting date and changes were recorded as an adjustment to earnings. The gains or losses included in earnings were reported in other income (expense) in our Statement of Operations.

Due to a change in terms we are no longer required to recognize the preferred stock warrant and preferred stock conversion feature as liabilities. They were reclassified into stockholders' equity as of the date of the amended agreement.

The preferred stock warrant liability and preferred stock conversion feature ~~are~~were considered Level 3 financial instruments and ~~are~~were valued using the Black Scholes call option pricing formula, which approximates a binomial model for the preferred stock conversion feature. This method is among the most common and widely used valuation approaches for call options. The model relates an option's value to five variables: the current price of the underlying asset, the strike price of the option, the time to expiration or exercise of the option, a risk free interest rate, and the volatility of the underlying asset.

The following assumptions were used in the September 30, ~~2011valuation~~2011 valuation of the preferred stock conversion feature: the closing share price of our common stock for the quarter ended September 30, 2011 discounted 15% due to the lack of marketability and liquidity, an exercise price of ~~$0.39,~~$0.39, expected term of 4.25 years, risk-free interest rate of 0.96% based on a 5five year U.S. Treasury bond and volatility of 103%.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Three and Nine Months Ended September 30, 2012 and 2011

The following assumptions were used in the September 30, 2011valuation of the preferred stock warrants: an exercise price of ~~$2.32,~~$2.32, expected term of 1.5 years, risk-free interest rate of 0.25% based on a 2two year U.S. Treasury and volatility of 50%.

During the three months ended September 30, 2011, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:


	Dollars in Thousands						Dollars in Thousands
	For the three months ended						For the three months ended
	September 30, 2011						September 30, 2011
	Preferred Stock Conversion Feature		Preferred Stock Warrant Liability		Total		Preferred Stock Conversion Feature		Preferred Stock Warrant Liability		Total
Beginning balance at June 1, 2011	$	7,600	$	3,000	$	10,600
Beginning balance at June 30, 2011							$	7,600	$	3,000	$	10,600
Total gains or losses:
Recognized in earnings	400		200		600		400		200		600
Balance at September 30, 2011	$	8,000	$	3,200	$	11,200	$	8,000	$	3,200	$	11,200

During the nine months ended September 30, 2011, the changes in the fair value of the liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:



	Dollars in Thousands
	For the nine months ended
	September 30, 2011
	Preferred Stock Conversion Feature		Warrants		Total
Beginning balance at January 1, 2011	$	1,983	$	2,351	$	4,334
Total gains or losses:
Recognized in earnings	6,017		849		6,866
Balance at September 30, 2011	$	8,000	$	3,200	$	11,200

~~We had no Level 3 liabilities at~~ ~~September 30, 2010. There were no purchases, sales, issuances or settlements of Level 3 liabilities~~

The change in ~~the three or~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~and 2010. The~~ unrealized gains or losses of Level 3 liabilities ~~are~~is included in earnings ~~are~~and is reported in other income (expense) in our Statement of Operations.

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~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2011 and 2010~~


J.I.	STOCK OPTIONS

The following table summarizes stock option activity during the nine months ended September 30, ~~2011~~2012:

Number of
Options

Weighted Average
Exercise Price
Balance at January 1, 2011 2,565,001
$ 2.11
Granted 2,335,500
1.17
Exercised (30,000 ) (0.76 )
Forfeited (334,501 ) (1.66 )
Cancelled (363,000 ) (6.79 )
Balance at September 30, 2011 4,173,000
$ 1.20
Exercisable at September 30, 2011 2,234,712
$ 1.26



	Number of Options		Weighted Average Exercise Price
Balance at January 1, 2012	4,172,000		$	1.10
Granted	626,500		1.03
Exercised	(20,000	)	(0.50		)
Forfeited	(439,000	)	(1.20		)
Canceled	(25,500	)	(5.42		)
Balance at September 30, 2012	4,314,000		$	1.06
Exercisable at September 30, 2012	2,752,471		$	1.02

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Three and Nine Months Ended September 30, 2012 and 2011

During the nine months ended September 30, ~~2011~~2012, we granted options exercisable to purchase ~~2,335,500~~626,500 shares of common stock at a weighted average exercise price of $~~1.17~~1.03 per share under our 2006 Equity Incentive Plan. ~~No options~~Options to purchase an aggregate of 2,335,500 shares of common stock were granted induring the ~~third quarter of 2011.~~nine months ended September 30, 2011.


K.J.	OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Our ~~company’s~~ chief operating decision-maker is ~~the~~our Chief Executive Officer, who regularly evaluates our performance based on net sales and ~~gross profit.~~net loss before taxes. The preparation of this segment analysis requires management to make estimates and assumptions around expenses below the gross profit level. While we believe the segment information to be directionally correct, actual results could differ from the estimates and assumptions used in preparing this information.

The accounting policies of the segments are the same as the policies discussed in Footnote B – Summary of Significant Accounting Policies.

We have three reportable operating segments, Clinical Laboratories, Pharmacogenomic Services and Diagnostic Tools. During the third quarter of 2011, we changed the manner in which we report segment results internally. Accordingly, segment results of the prior period have been reclassified to reflect these changes. Beginning with the third quarter of 2011 our company's chief operating decision-maker is now reviewing our business as having three segments. The change in segments was driven by our corporate strategy to advance personalized medicine through proprietary molecular technologies and world-class clinical and research services. These lines of business are complementary with the Pharmacogenomics Services driving innovation and leading to kit production in our Diagnostic Tools segment and new tests in our Clinical Laboratories.

Segment information for the three months ended September 30, ~~2011~~2012 and ~~2010~~2011 is as follows:

Dollars in Thousands
2011
Clinical Laboratories Pharmacogenomic Services Diagnostic
Tools Total
Net Sales $ 4,085
$ 552
$ 3,616
$ 8,253
Gross Profit 2,456
241
1,748
4,445
Net Income (Loss) before Taxes (1,472 ) 122
71
(1,279 )
Income Tax Expense (Benefit) (20 ) —
11
(9 )
Net Income (Loss) $ (1,452 ) $ 122
$ 60
$ (1,270 )
Depreciation/Amortization 350
75
56
481
Restructure 2
—
3
5
Interest Income (Expense) (238 ) —
—
(238 )



	Dollars in Thousands
	2012
	Clinical Laboratories			Pharmacogenomic Services			Diagnostic Tools			Total
Net Sales	$	4,498		$	220		$	3,171		$	7,889
Gross Profit	2,385			(38		)	1,453			3,800
Net Loss before Taxes	(1,694		)	(213		)	(733		)	(2,640		)
Income Tax Expense	—			—			114			114
Net Loss	$	(1,694	)	$	(213	)	$	(847	)	$	(2,754	)
Depreciation/Amortization	$	418		$	24		$	53		$	495
Interest Expense, net	$	(201	)	$	—		$	(6	)	$	(207	)

	September 30, 2012
Total Assets	$	28,822		$	1,731		$	12,334		$	42,887




	Dollars in Thousands
	2011
	Clinical Laboratories			Pharmacogenomic Services		Diagnostic Tools		Total
Net Sales	$	4,085		$	552	$	3,616	$	8,253
Gross Profit	2,456			241		1,748		4,445
Net Income (Loss) before Taxes	(1,472		)	122		71		(1,279		)
Income Tax Expense (Benefit)	(20		)	—		11		(9		)
Net Income (Loss)	$	(1,452	)	$	122	$	60	$	(1,270	)
Depreciation/Amortization	$	350		$	75	$	56	$	481
Restructure	$	2		$	—	$	3	$	5
Interest Expense, net	$	(238	)	$	—	$	—	$	(238	)

	September 30, 2011
Total Assets	$	20,822		$	953	$	8,199	$	29,974

1819

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Three and Nine Months Ended September 30, ~~2011~~2012 and ~~2010~~2011

Dollars in Thousands
2010
Clinical Laboratories Pharmacogenomic Services Diagnostic
Tools Total
Net Sales $ 918
$ 346
$ 3,155
$ 4,419
Gross Profit 248
(80 ) 1,849
2,017
Net Loss before Taxes (662 ) (135 ) (30 ) (827 )
Income Tax Expense (Benefit) —
—
71
71
Net Loss $ (662 ) $ (135 ) $ (101 ) $ (898 )
Depreciation/Amortization 32
45
47
124
Restructure 34
—
38
72
Interest Income (Expense) —
—
—
—

Segment information for the nine months ended September 30, ~~2011~~2012 and ~~2010~~2011 is as follows:



	Dollars in Thousands
	2012
	Clinical Laboratories			Pharmacogenomic Services			Diagnostic Tools			Total
Net Sales	$	13,329		$	1,198		$	9,661		$	24,188
Gross Profit	6,693			418			4,355			11,466
Net Loss before Taxes	(4,309		)	(310		)	(1,307		)	(5,926		)
Income Tax Expense	—			—			88			88
Net Loss	$	(4,309	)	$	(310	)	$	(1,395	)	$	(6,014	)
Depreciation/Amortization	$	1,265		$	92		$	213		$	1,570
Restructure	$	—		$	—		$	—		$	—
Interest Expense, net	$	(665	)	$	(11	)	$	(37	)	$	(713	)

Dollars in Thousands
2011

Clinical
Laboratories

Pharmacogenomic
Services
Diagnostic
Tools Total
Net Sales $ 11,435
$ 1,824
$ 10,141
$ 23,400
Gross Profit 6,787
764
5,601
13,152
Net Income (Loss) before Taxes (11,331 ) 615
551
(10,165 )
Income Tax Expense (Benefit) —
—
(120 ) (120 )
Net Income (Loss) $ (11,331 ) $ 615
$ 671
$ (10,045 )
Depreciation/Amortization 1,113
184
151
1,448
Restructure 28
—
12
40
Interest Income (Expense) (720 ) —
—
(720 )
9/30/2011
Total Assets $ 20,822
$ 953
$ 8,199
$ 29,974

Dollars in Thousands
2010
Clinical
Laboratories Pharmacogenomic
Services Diagnostic
Tools Total
Net Sales $ 2,790
$ 986
$ 11,180
$ 14,956
Gross Profit 1,159
(91 ) 6,320
7,388
Net Loss before Taxes (1,471 ) (444 ) (343 ) (2,258 )
Income Tax Expense (Benefit) —
—
109
109
Net Loss $ (1,471 ) $ (444 ) $ (452 ) $ (2,367 )
Depreciation/Amortization 98
131
151
380
Restructure 34
—
38
72
Interest Income (Expense) —
—
1
1
9/30/2010
Total Assets $ 5,777
$ 1,088
$ 7,072
$ 13,937




	Dollars in Thousands
	2011
	Clinical Laboratories			Pharmacogenomic Services		Diagnostic Tools			Total
Net Sales	$	11,435		$	1,824	$	10,141		$	23,400
Gross Profit	6,787			764		5,601			13,152
Net Income (Loss) before Taxes	(11,331		)	615		551			(10,165		)
Income Tax Benefit	—			—		(120		)	(120		)
Net Income (Loss)	$	(11,331	)	$	615	$	671		$	(10,045	)
Depreciation/Amortization	$	1,113		$	184	$	209		$	1,506
Restructure	$	28		$	—	$	12		$	40
Interest Expense, net	$	(720	)	$	—	$	—		$	(720	)

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~~TRANSGENOMIC, INC. AND SUBSIDIARY~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~Three and Nine Months Ended September 30, 2011 and 2010~~

Net sales for the three and nine months ended September 30, ~~2011~~2012 and ~~2010~~2011 by country were as follows:


	Dollars in Thousands				Dollars in Thousands				Dollars in Thousands				Dollars in Thousands
	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2011		2010		2011		2010		2012		2011		2012		2011
United States	$	6,034	$	2,082	$	16,738	$	6,483	$	5,442	$	6,034	$	17,013	$	16,738
Italy	762		813		2,373		2,300		571		762		2,277		2,373
United Kingdom	193		224		451		991		546		193		1,113		451
France	166		209		579		812		264		166		575		579
Germany	187		194		581		1,099		517		187		769		581
United Arab Emirates	—		4		—		778
All Other Countries	911		893		2,678		2,493		549		911		2,441		2,678
Total	$	8,253	$	4,419	$	23,400	$	14,956	$	7,889	$	8,253	$	24,188	$	23,400

NoOther than the countries specifically identified above, no other country individually accounted for more than 5% of total net sales.

More than 95% of our long-lived assets are located within the United States. ~~Substantially all of the remaining long-lived assets are located within Europe.~~

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L.K.	SUBSEQUENT EVENTS

Events or transactions that occur after the balance sheet date, but before the financial statements are complete, are reviewed to determine if they should be recognized.

~~In November 2011, we entered into a transaction with the Investors, pursuant~~ We have no material subsequent events to an Agreement Regarding Preferred Stock (the “Amendment Agreement”), in which the Investors agreed to (i) waive their rights to enforce the anti-dilution and redemption features of the Series A Preferred and (ii) at the next annual shareholder meeting, vote to amend the Certificate of Designation to remove the anti-dilution and redemption features of the Series A Preferred. In exchange, the Company issued shares of common stock to the Investors having an aggregate market value of $0.3 million.

As a result of the Amendment Agreement, the value of the Series A Preferred and Warrant, including the preferred stock conversion feature and preferred stock warrant liability, will be reclassified into shareholders equity as of the date of the Amendment Agreement. The following table sets forth a summary of the balance sheet as reported and pro-forma as if the Amendment Agreement had occurred on September 30, 2011.disclose.

As reported Pro-Forma
Dollars in Thousands
September 30, 2011 September 30, 2011
Total Assets $29,974 $29,974

Total Liabilities 29,683
18,483
Redeemable Series A convertible preferred stock 1,796
—
Total Stockholders' Equity (Deficit) (1,505 ) 11,491
$ 29,974
29,974

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

Forward-Looking Information

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 we make 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 that we make for a number of reasons including those described in Part II, Item 1A, “Risk Factors,” of this ~~report.~~report and in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which we filed with the Securities and Exchange Commission on March 14, 2012.

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 and with the financial statements, related notes, and Management’s Discussion & Analysis included in our ~~annual report~~Annual Report on Form 10-K for the fiscal year ended December 31, ~~2010.~~2011, which we filed with the Securities and Exchange Commission on March 14, 2012. Results for the ~~quarter~~three and nine months ended September 30, ~~2011~~2012 are not necessarily indicative of results that may be attained in the future.

Overview

~~Transgenomic, Inc. is~~We are a global biotechnology company advancing personalized medicine in the detection and treatment of cancer and inherited diseases through ~~its~~our proprietary molecular technologies and ~~world-class~~ clinical and research services. We have three complementary business ~~segments.~~segments:

Clinical Laboratories. Our clinical laboratories specialize in genetic testing for cardiology, neurology, mitochondrial disorders, and oncology. 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 also accredited by ~~CAP (College~~the College of American ~~Pathologists)~~Pathologists (CAP).

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clinical trial support. The lab employs a variety of genomic testing service technologies including ICE COLD-PCR technology. ICE COLD-PCR is a proprietary platform technology that can be run in any laboratory with standard PCR technology and which enables detection of mutations from virtually any sample type including tissue biopsies, blood, and circulating tumor cells (CTCs) at levels greater than 1,000-fold higher than standard DNA sequencing techniques.

•

Diagnostic Tools. Our proprietary product is the WAVE^® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of ~~over 1,500~~more than 1,550 WAVE Systems as of September 30, ~~2011~~2012. We also distribute bioinstruments produced by other manufacturers (“OEM Equipment”) through our sales and distribution network. Service contracts to maintain installed systems are sold and supported by our technical support personnel. The installed WAVE base and some OEM Equipment platforms generate a demand for consumables that are required for the continued operation of the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR^® Nuclease and a range of chromatography columns.

~~Executive Summary~~

~~Net sales for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~increased by $8.4 million~~ or ~~56%~~ ~~compared to the same period in~~

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~~2010. These results include the FAMILION acquisition in~~In our Clinical Laboratories ~~segment. During~~segment, one of our key products is our new proprietary C-GAAP (Clopidogrel Genetic Absorption Activation Panel) test. In July of 2012, we successfully secured Medicare coverage for C-GAAP, which is a simple but comprehensive saliva test that accurately predicts whether or not a patient has the ~~nine~~ ~~months ended~~ ~~September 30, 2011, net sales~~appropriate genetic make up to receive a therapeutic benefit from ~~Clinical Laboratories~~Plavix® (clopidogrel). This innovative test analyzes markers in two important genes to identify patients who are at a genetically increased by ~~$8.6 million~~ ~~compared~~risk of major adverse cardiovascular events due to ~~the same~~ ~~nine~~ ~~month period in 2010. The Clinical Laboratories increase is~~diminished effectiveness of Plavix® (clopidogrel). As a result of this coverage, the 48 million Americans currently covered by Medicare will have access to this important genetic test.

Plavix® is the most widely prescribed antiplatelet drug used to reduce the risks of death, stroke and heart attack in heart disease patients. Patients with dysfunctional CYP2C19 and ABCB1 genes treated with clopidogrel exhibit a 50% increase in major adverse cardiovascular event rates than do patients with normal CYP2C19 and ABCB1 genetic function. Transgenomic's C-GAAP is the only one on the market that includes both genes in the test.

In September, we announced the completion of the acquisition of global rights to the ScoliScore™ Adolescent Idiopathic Scoliosis (AIS) Prognostic Test from Axial Biotech. This acquisition provides Transgenomic with the ScoliScore™ assay technology and intellectual property, an established revenue and customer base, and access to a testing market estimated at more than 400,000 patients in the United States alone. ScoliScore™ is the first clinically validated and commercially available saliva-based multi-gene test that provides a highly accurate assessment of ~~$8.4 million~~the likelihood of spinal curve progression for individuals diagnosed with AIS, or an abnormal lateral curve of the spine. ScoliScore™ has the ability to identify patients that will not progress to a severe curvature of the spine and reduces those patients' need for repeated doctor visits, and more importantly, years of exposure to radiation from frequent X-Rays which significantly increases these patients' risk for cancer. The health economic benefits of the ScoliScore™ Test are considerable for patients, physicians, and payors, when taking into account the time and expense associated with repeated radiography and the costs related to treating AIS. ScoliScore™ is emblematic of the ~~FAMILION acquisition. Net sales from Pharmacogenomics Services increased by $0.8 million~~kind of value-added, proprietary genetic test that Transgenomic seeks to provide to patients.

In August, we announced a new commercial collaboration with the Medical College of Wisconsin Laboratories (MCW), a world-renowned institution with a robust presence in genomics and genetic testing. In addition to traditional sequencing services, MCW is the first lab to offer Transgenomic's proprietary NuclearMitome Test which employs next-generation sequencing technology to identify mutations in 448 genes and, to date, represents the most comprehensive genetic test available for mitochondrial disorders. Mitochondrial disorders are notoriously difficult to diagnose because they affect multiple organ systems, including the ~~nine months ended September 30, 2011 compared to~~liver, the ~~same period in 2010. Net sales in Diagnostic Tools were down~~ 9% or ~~$1.0 million~~ ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~compared to the same period in 2010. Our gross profit margin increased from~~ ~~49%~~ ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2010~~ to ~~56%~~ ~~for the same period in 2011. Clinical Laboratories gross margin increased from~~ ~~42%~~brain and nervous system, kidneys, and cardiovascular system. We expect that MCW will commence processing commercial tests in the ~~nine~~ ~~months ended~~ ~~September 30, 2010~~ to ~~59%~~ ~~for the same period in 2011. Loss from operations was $2.8 million~~ ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~compared to $2.3 million~~ ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2010~~.

As4th quarter of ~~September 30, 2011, we had cash and cash equivalents of~~ ~~$1.4 million~~.

~~Outlook~~

We anticipate continued growth in both our diagnostics and our laboratory services businesses as we commercialize new assay technologies and tests we have developed internally or in-licensed, and as we expand into other markets and regions worldwide.

Our FAMILION franchise, which we acquired in December 2010, includes eleven tests for inherited cardiac disorders. Product sales for this unit grew 12% over second quarter 2011 levels, to $2.9 million. We continue to believe that there is significant opportunity to expand this business based on increased use of existing tests and the launch of new products into the marketplace. In May, the Heart Rhythm Society issued new diagnostic guidelines supporting the use of some of our key cardiac tests, and we expect to introduce a new, competitively-positioned Plavix® response test in the near term.

In June, we launched our Nuclear Mitome Test, a 400-gene screen of the nuclear genes linked to mitochondrial function that provides useful clinical information in understanding the underlying genetic causes of this spectrum of diseases. This test has been well-received by mitochondrial experts and physicians already and is assisting them to better diagnose this serious and difficult to discern set of disorders.2012.

In our Pharmacogenomics Services Unit, we continue to perform cancer pathway gene mutation analysis and other associated genomics service testing for a number of pharmaceutical companies: both for pre-clinical drug discovery projects and phase II and III clinical trials. Although we may experience variability in quarter-to-quarter revenues based on the timing of projects or when specimens may arrive, we continue to experience growth in this area of the business. We can now analyze a patient's blood serum rather than a tumor to detect DNA mutations, using our recently licensed ultra-sensitive DNA mutation detection technology, termed “COLD-PCR”, and a significant improvement to COLD-PCR termed “ICE COLD-PCR”. This is a significant achievement, and we believe it should lead to faster growth of our pharmacogenomics research services as pharmaceutical companies adopt this novel approach for both drug and disease research.

~~In addition to~~ ICE COLD-PCR ~~which offers sensitivity improvements as much as 1,000 times higher than routine DNA testing technology, we have recently discovered a technique to further improve mutation~~enables detection ~~sensitivity~~ of ~~standard Sanger sequencing. We have termed this new discovery “BLOCker-Sequencing”~~mutations from virtually any sample type including tissue biopsies, blood, and ~~we are combining this new discovery with our ICE COLD-PCR program to bring what we believe to be the most accurate and sensitive mutation detection technology available in the market today.~~

~~Although the WAVE~~^® System is a fully matured technology, and both it and its corresponding consumable sales growth in our traditional markets are shrinking, we are expanding our distribution network in Europe and introducing the systems into geographic areas, including the Middle East and Asia, to continue the revenue from our Diagnostic Tools segment. In addition, we recently announced an agreement with A. Menarini Diagnostics, one of the leading diagnostics companies in Europe, for the distribution of our new WAVE^®~~M.C.E System and SURVEYOR~~^® ~~mutation detection assay kits in the European Union, which will greatly increase our footprint in key European markets and, we believe, lead to significant sales from this product line.~~

We also announced recently a distribution agreement with ScreenCell, a Paris-based Company, for the sale and marketing of its ScreenCell® filtration device portfolio worldwide. ScreenCell® filtration devices are devoted to isolation of circulating rare cells, such as circulating tumor cells, which may simplify and improve non-invasive access to tumor cells. We will initially market the filtration systems to pharmaceutical and research organizations, with the goal of developing applications for screening circulating tumor cells (CTCs) ~~combined with our sensitive mutation detection technologies including ICE COLD-PCR, BLOCker Sequencing and WAVE M.C.E and our Surveyor SCAN kits. We are targeting the~~. The broad use of this innovative technology has the ~~ScreenCell technology~~potential to benefit cancer screening, diagnosis, monitoring, and therapy selection since it has the ability to perform safer, less invasive, and more frequent assessments of a cancer and its mutations, all through a simple blood draw. In addition to our on-going study in ~~combination~~several cancer types with ~~our technology to further develop our ultra-high sensitivity blood-based mutation detection capabilities.~~

~~We continue to advance our pipeline of cancer pathway gene mutation kits as well. We~~MD Anderson, we have ~~completed development~~initiated two new collaborations for clinical validation of our ~~first ICE COLD-PCR assay kit and will commence market validation trials in the fourth quarter. Our first ICE COLD-PCR kit,~~advanced platform technology.


◦	Collaboration with NYU Langone Medical Center to better understand molecular events that drive non-small cell lung cancer and validate the use of ICE COLD-PCR mutation detection in blood (which we refer to as a “blood biopsy”) for determining the appropriate response to existing and novel therapies in NSCLC.

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~~has been designed~~


◦	Collaboration with the University of Nebraska Medical Center for employing ICE COLD-PCR for the early detection of Pancreatic Cancer. Transgenomic was awarded an NIH STTR Grant to support this work.

The breakthrough ICE COLD-PCR technology, exclusively licensed by Transgenomic for DNA sequencing analysis, was developed in collaboration with the Dana-Farber Cancer Institute and is supported by multiple validation studies confirming reproducible mutation detection up to ~~enrich~~1,000 to 10,000 times more sensitive than traditional sequencing techniques and significantly improves the detection of mutations in ~~the K-RAS gene, which are known to confer resistance to the newest treatment options in colon and lung cancer, and~~biological samples. The technology is ~~the first~~also being evaluated in an ~~expected portfolio~~ongoing study with The University of ~~assay kits that can be used~~Texas MD Anderson Cancer Center to test for resistance conferring mutations. Longer term, we anticipate that these ultra-sensitive mutation detection kits can become effective and efficient products for use both in earlier cancer screeningcharacterize tumor-derived DNA in blood and DNA isolated from circulating tumor cells (CTCs) from patients with a variety of cancers to ~~monitor treatment and disease recurrence.~~choose therapies shown to target specific mutations.

Finally, in September, we ~~continue to look~~announced the appointment of Mark P. Colonnese as Executive Vice President and Chief Financial Officer of Transgenomic. Mr. Colonnese has nearly 30 years of experience in leading business growth and financial strategies for ~~opportunities to diversify into~~life sciences companies. In this new markets, particularly in oncology, where the sensitivities of our technologies provide significant clinical benefit. We have also embarked on several academic collaborations to further validate our newest technologies and better determine how they can androle, Mr. Colonnese will be ~~used~~a key player in ~~clinical settings for patients undergoing treatment for cancer.~~

Transgenomic's expansion through strategic corporate development, new collaborations, and future acquisitions. He will also lead our financial and capital markets strategy and advise on business development and transactional activities.

Uncertainties

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. ~~While we~~We have been able to historically finance our operating losses through borrowings or from the issuance of additional ~~equity, we may not be able to obtain such funding due to the tightened credit markets.~~equity. At September 30, ~~2011~~2012 we had cash, ~~and~~ cash equivalents and short term investments of $~~1.4~~8.7 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs ~~into 2012.~~for at least the next 12 months.

The uncertainty of the current general economic conditions could negatively impact our business in the future. There are many factors that affect the market demand for our products and services that we cannot control. Demand for our Diagnostic Tools business is affected by the needs and budgetary resources of research institutions, universities and hospitals. The instrument purchase represents a significant expenditure by these types of customers and often requires a long sales cycle. These customers may not have the funding available to purchase our instruments. Competition and new instruments in the marketplace also may impact our sales.

We have translation risk that occurs when transactions are consummated in a currency other than British Pound Sterling, which is the functional currency of our foreign ~~subsidiary~~subsidiary. These transactions, which are most often consummated in Euros, must be translated into British Pound Sterling. In addition, results of operations and the balance sheet of our foreign subsidiary are translated from British Pound Sterling to our reporting currency, which is the U.S. Dollar. As a result we are subject to exchange rate risk. Fluctuations in foreign exchange rates could impact our ~~business.~~business and financial results.

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Results of Operations

Net sales for the nine months ended September 30, 2012 increased by $0.8 million, or 3% compared to the same period in 2011. During the nine months ended September 30, 2012, net sales from our Clinical Laboratories segment increased by $1.9 million compared to the same nine month period in 2011. Net sales from our Pharmacogenomics Services segment decreased by $0.6 million for the nine months ended September 30, 2012 compared to the same period in 2011. Net sales in our Diagnostic Tools segment decreased $0.5 million for the nine months ended September 30, 2012 compared to the same period in 2011. Our gross profit margin decreased to 47% for the nine months ended September 30, 2012 from 56% for the nine months ended September 30, 2011. Loss from operations was $6.2 million for the nine months ended September 30, 2012 compared to $10.0 million for the nine months ended September 30, 2011.

Three Months Ended September 30, ~~2011~~2012 and ~~2010~~2011

Net Sales. Net sales ~~consisted~~for the three months ended September 30, 2012decreased by $0.4 million, or 4% compared to the same period of 2011. Net sales performance in each of the ~~following:~~segments was as follows:


	Dollars in Thousands								Dollars in Thousands
	Three Months Ended								Three Months Ended
	September 30,				Change				September 30,				Change
	2011		2010		$		%		2012		2011		$			%
Clinical Laboratories	$	4,085	$	918	$	3,167	345	%	$	4,498	$	4,085	$	413		10	%
Pharmacogenomics Services	552		346		206		60	%	220		552		(332		)	(60	)%
Diagnostic Tools	3,616		3,155		461		15	%	3,171		3,616		(445		)	(12	)%
Total Net sales	$	8,253	$	4,419	$	3,834	87	%
Total Net Sales									$	7,889	$	8,253	$	(364	)	(4	)%

Clinical Laboratories net sales of $4.5 millionincreased $~~3.2~~0.4 million, or 10% during the three months ended September 30, 2012 compared to the same period in 2011. Revenue increased compared to last year due to higher test volumes, largely reflecting the introduction of our C-GAAP diagnostic test, and a modest shift towards higher priced tests.

Pharmacogenomics Services net sales of $0.2 million during the three months ended September 30, ~~2011~~2012 compared to the same period in 2010. Of this increase, $3.0 million is due to revenue from the FAMILION family of genetic tests, which we acquired on December 29, 2010. In addition, our revenue increased by $0.2 million in our neurology family of tests due to the mix of tests performed and the average revenue per test.

~~Pharmacogenomics Services net sales of~~ ~~$0.6 million~~ ~~during the three months ended~~ ~~September 30, 2011~~ ~~increased~~decreased by $~~0.2~~0.3 million compared to the same period of ~~2010~~2011 due to a decrease in the volume of genetic testing performed in connection with various clinical trials ~~at various stages~~ by our pharmaceutical company clients. Pharmacogenomics Services net sales ~~have peaks~~trends are more volatile than our other segments due to the nature of patient enrollment patterns and the timing of clinical trials. While the revenue generated from genetic testing related to clinical trials iscan be significant, it is usually earned over the duration of the trial. Therefore, each period for Pharmacogenomics Services should be considered on a standalone basis and is not indicative of future net sales.

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Diagnostic Tools net sales of $~~3.6~~3.2 million ~~increased~~decreased $~~0.5~~0.4 million, or ~~15%~~12%, during the three months ended September 30, ~~2011~~2012 as compared to the same period in ~~2010 due to selling~~2011. We sold more instruments in the third quarter of ~~2011. We sold five OEM Equipment instruments~~2012 than in the third quarter of 2011, ~~compared~~but there was a shift this quarter to ~~zero in~~lower priced instruments.

Cost of Goods Sold. Cost of goods sold includes material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Clinical Laboratories and Pharmacogenomics Services operations.

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Gross Profit. Gross profit and gross margins for each of our business segments were as follows:



	Dollars in Thousands
	Three Months Ended
	September 30,					Margin %
	2012			2011		2012		2011
Clinical Laboratories	$	2,385		$	2,456	53	%	60	%
Pharmacogenomics Services	(38		)	241		(17	)%	44	%
Diagnostic Tools	1,453			1,748		46	%	48	%
Gross Profit	$	3,800		$	4,445	48	%	54	%

Gross profit was $3.8 million, or 48% of total net sales during the third quarter of ~~2010~~2012, compared to $4.4 million, or 54% of total net sales during the same period of 2011. During the three months ended September 30, 2012, the gross margin for Clinical Laboratories was 53% as compared to 60% in the same period of 2011. The change in Clinical Laboratories gross margin is attributable to a change in the mix of tests performed and higher operating supplies, wages and software costs, which we ~~sold four WAVE instruments~~are investing in ~~both~~a project to improve the efficiency of our lab operations. Pharmacogenomics Services gross margin decreased from ~~third~~44% ~~quarter of 2011 and 2010. Demand~~ for ~~WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. Net sales of bioconsumables were down $0.5 million during~~ the three months ended September 30, 2011 to (17)% for the three months ended September 30, 2012. Pharmacogenomics Services has a relatively fixed-cost base and any increase or decrease in revenue directly impacts gross margins. Diagnostic Tools gross margin decreased to 46% for the three months ended September 30, 2012 from 48% in the same period of 2011 due to the mix of instruments sold.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel costs, professional fees, and facility costs. In addition, the effects of foreign currency revaluation are included in selling, general and administrative expenses. Our selling, general and administrative costs increased $1.2 million to $5.6 million from $4.4 million during the three month period ended September 30, 2012compared to the same period in ~~2010. Bioconsumable~~2011. We had higher bad debt expenses and stock compensation costs during the three months ended September 30, 2012. We also had higher recruiting fees, which were incurred to increase the size of our sales ~~volumes~~force to support C-GAAP and the launch of ScoliScore^TM, and higher marketing materials expenses. Included in ~~both~~our selling, general and administrative expenses for the ~~United States~~three month period ended September 30, 2012 were $0.1 million in costs related to our acquisition of the ScoliScore^TM test from Axial.

Research and ~~Europe were lower~~Development Expenses. Research and development expenses primarily include personnel costs, intellectual property fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. For the three months ended ~~third~~September 30, 2012 ~~quarter~~and 2011, these costs totaled $0.7 million and $0.5 million, respectively. Research and development expenses totaled 8% and 6% of net sales during the three months ended September 30, 2012 and 2011, respectively.

Other Income (Expense). Other expense for the three months ended September 30, 2012 and 2011 includes interest expense of $0.2 million.

Income Tax Expense (Benefit). Income tax expense for the three months ended September 30, 2012 was $0.1 million, primarily related to income reported in the financial statements of our foreign subsidiary. Income tax benefit for the three months ended September 30, 2011 was nominal.

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Nine Months Ended September 30, 2012 and 2011

Net Sales. Net sales for the nine months ended September 30, 2012 increased by $0.8 million, or 3%., compared to the same period of 2011. Net sales performance in each of the segments was as follows:



	Dollars in Thousands
	Nine Months Ended
	September 30,				Change
	2012		2011		$			%
Clinical Laboratories	$	13,329	$	11,435	$	1,894		17	%
Pharmacogenomics Services	1,198		1,824		(626		)	(34	)%
Diagnostic Tools	9,661		10,141		(480		)	(5	)%
Total Net sales	$	24,188	$	23,400	$	788		3	%

Clinical Laboratories net sales of ~~third~~$13.3 million ~~quarter~~increased $1.9 million, or 17% during the nine months ended September 30, 2012 compared to the same period in 2011 due to a higher volume of ~~2010.~~tests, including new tests such as our NuclearMitome test and our C-GAAP test as well as the mix of tests performed.

Pharmacogenomics Services net sales of $1.2 million during the nine months ended September 30, 2012 decreased by $0.6 million compared to the same period of 2011 due to the lower volume of genetic testing performed in connection with various clinical trials by our pharmaceutical company clients. Pharmacogenomics Services net sales trends are more volatile than our other segments due to the nature of patient enrollment patterns and the timing of clinical trials. While the revenue generated from genetic testing related to clinical trials can be significant, it is usually earned over the duration of the trial. Therefore, each period for Pharmacogenomics Services should be considered on a standalone basis and is not indicative of future net sales.

Diagnostic Tools net sales of $9.7 million decreased $0.5 million during the nine months ended September 30, 2012 as compared to the same period in 2011. We sold more instruments at a lower average sales price per instrument during the nine months ended September 30, 2012 compared to 2011.

Cost of Goods Sold. ~~Costs~~Cost of goods sold ~~include~~includes material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Clinical Laboratories and Pharmacogenomics Services operations.

Gross Profit. Gross profit and gross margins for each of our business segments were as follows:


	Dollars in Thousands									Dollars in Thousands
	Three Months Ended									Nine Months Ended
	September 30,					Margin %				September 30,				Margin %
	2011		2010			2011		2010		2012		2011		2012		2011
Clinical Laboratories	$	2,456	$	248		60	%	27	%	$	6,693	$	6,787	50	%	59	%
Pharmacogenomics Services	241		(80		)	44	%	(23	)%	418		764		35	%	42	%
Diagnostic Tools	1,748		1,849			48	%	59	%	4,355		5,601		45	%	55	%
Gross Profit	$	4,445	$	2,017		54	%	46	%	$	11,466	$	13,152	47	%	56	%

Gross profit was $~~4.4~~11.5 million or ~~54%~~47% of total net sales during the ~~third~~nine ~~quarter of 2011,~~months ended September 30, 2012, compared to $~~2.0~~13.2 million, or ~~46%~~56% of total net sales during the same period of ~~2010.~~ 2011.

During the ~~three~~nine months ended September 30, ~~2011~~2012, the gross margin for Clinical Laboratories was ~~60%~~50% as compared to ~~27%~~59% in the same period of ~~2010. The three~~2011 due to the mix of tests performed and higher operating supplies, wages and software costs incurred both in connection with repairing and improving the Laboratory Information Management System (LIMS) at our New Haven facility following its software failure in the first quarter of 2012, including processing our sample backlog, and in connection with an important project to improve the efficiency of our lab operations.

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Pharmacogenomics Services gross margin decreased from 42% for the nine months ended September 30, 2011 ~~include the gross profits from sales of the FAMILION family of genetic tests, which we acquired on December 29, 2010. Pharmacogenomics Services gross margin increased from negative~~to ~~23%~~35% for the ~~three~~nine months ended September 30, ~~2010~~ to ~~44%~~ ~~for the three months ended~~ ~~September 30, 2011~~2012. Pharmacogenomics Services has a relatively fixed-cost base soand any increase or decrease in revenue directly impacts gross margins.

Diagnostic Tools gross margin decreased ~~from~~to ~~59%~~45% in the ~~three~~nine months ended September 30, 2012 from 55% in the nine months ended September 30, ~~2010~~2011 to ~~48%~~ ~~in the same period of 2011~~ due to ~~lower bioconsumables sales which also have a relatively fixed-cost base.~~the mix of instruments sold.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel ~~and entertainment~~ costs, professional fees, and facility costs. In addition, the effects of foreign currency revaluation isare included ~~here.~~in selling, general and administrative expenses. Our selling, general and administrative costs increased $~~2.2~~1.6 million from $~~2.2~~$14.3 million to $~~4.4~~$15.8 million during the ~~three~~nine month period ended September 30, ~~2011~~2012 compared to the same period in ~~2010. The primary increase in our selling, general and administrative costs is due to the acquisition of the FAMILION family of genetic tests of $1.3 million. In addition, we~~2011. We had higher bad debt ~~charges of $0.2 million~~expense, marketing materials and ~~amortization of acquired intangible assets of $0.3 million. Foreign currency revaluation loss~~employment fees , partially offset by lower stock compensation costs for the ~~three~~nine months ended September 30, ~~2011~~2012 ~~was $0.1 million~~as compared to ~~$0.2 million~~the same period of 2011. Included in ~~revaluation gain~~our higher outside services for the ~~three months~~nine month period ended September 30, ~~2010~~2012 were the costs related to our acquisition of the ScoliScore.^TM test of $0.1 million.

Research and Development Expenses. Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. For the ~~three~~nine months ended September 30, ~~2011~~2012 and ~~2010,~~2011, these costs totaled $~~0.5~~1.9 million and $~~0.6~~1.7 million, respectively. Research and development expenses totaled 6% ~~and~~ ~~14%~~ ~~of net sales during the three months ended~~ ~~September 30, 2011~~ ~~and 2010, respectively. The decrease as a percentage of net sales is due primarily to the consolidation of our research and development activities in Omaha, Nebraska.~~

~~Other Income (Expense).~~ ~~Other expense for the three months ended~~ ~~September 30, 2011~~ includes interest expense and the expense associated with the preferred stock and warrant, which is due to the change in fair value of the preferred stock conversion feature. The expense associated with the change in value of the preferred stock conversion feature is a non-cash item.

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~~Income Tax Expense (Benefit).~~ ~~Income tax benefit for the three months ended~~ ~~September 30, 2011~~ was a benefit of less than$0.1 million. This is the result of the change in deferred tax assets and liabilities reported in the financial statements of our foreign subsidiary. This tax benefit is partially offset by tax expense related to state and franchise taxes as well as reserves for uncertain income taxes. We believe the recorded tax benefit will be offset in future periods by a tax expense, related to income reported in the financial statements of our foreign subsidiary. Income tax expense for the three months ended ~~September 30, 2010~~ ~~was $0.1 million.~~

~~Results of Operations~~

~~Nine~~ ~~Months Ended~~ ~~September 30, 2011~~ ~~and 2010~~

~~Net Sales.~~ ~~Net sales consisted of the following:~~

Dollars in Thousands
Nine Months Ended
September 30, Change
2011 2010 $ %
Clinical Laboratories $ 11,435
$ 2,790
$ 8,645
310 %
Pharmacogenomic Services 1,824
986
838
85 %
Diagnostic Tools 10,141
11,180
(1,039 ) (9 )%
Total Net sales $ 23,400
$ 14,956
$ 8,444
56 %

~~Clinical Laboratories net sales increased~~ ~~$8.6 million~~ ~~during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~compared to the same period in 2010. Of this increase in revenue, $8.4 million is due to revenue from the FAMILION family of genetic tests, which we acquired on December 29, 2010.~~

~~Pharmacogenomic Services net sales of $1.8 million~~ ~~during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~increased $0.8 million~~ compared to the same period in 2010. The increase is due to the completion of a significant project with a pharmaceutical company client. Pharmacogenomics Services net sales have peaks due to the nature of project-related services performed on behalf of our clients. Each period for Pharmacogenomics Services should be considered on a stand alone basis and is not indicative of future net sales.

~~Diagnostic Tools net sales decreased~~ ~~$1.0 million, or~~ 9%~~, during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~as compared to the same period in 2010. The decrease was due to fewer instruments sold in the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~. We sold nine WAVE instruments in 2011 compared to twenty-two in 2010. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. Lower WAVE instrument sales are offset by slightly higher OEM Equipment instruments sold in 2011. We sold eight OEM Equipment instruments in the nine months ended September 30, 2011 compared to five in the same period in 2010. Bioconsumables net sales were down 10%, or $0.5 million, during the ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~compared to the same period in 2010.~~

~~Costs of Goods Sold.~~ Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Clinical Laboratories and Pharmacogenomics Services operations.

~~Gross Profit.~~ ~~Gross profit and gross margins for each of our business segments were as follows:~~

Dollars in Thousands
Nine Months Ended
September 30, Margin %
2011 2010 2011 2010
Clinical Laboratories $ 6,787
$ 1,159
59 % 42 %
Pharmacogenomic Services 764
(91 ) 42 % (9 )%
Diagnostic Tools 5,601
6,320
55 % 57 %
Gross Profit $ 13,152
$ 7,388
56 % 49 %

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~~Gross profit was $13.2 million~~ or ~~56%~~ ~~of total net sales during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011, compared to $7.4 million~~ or ~~49%~~ ~~during the same period of 2010. During the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011, the gross margin for Clinical Laboratories was~~ ~~$6.8 million~~ ~~as compared to~~ ~~$1.2 million~~ ~~in the same period of 2010. The~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~include gross profit from sales of the FAMILION family of genetic tests, which we acquired on December 29,2010. Pharmacogenomics Services gross margin increased from negative~~ 9% ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2010~~ to ~~42%~~ ~~for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2011. Pharmacogenomics Services have a relatively fixed-cost base so any increase or decrease in revenue directly impacts gross margins. Diagnostic Tools gross margin decreased from~~ ~~57%~~ ~~in the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2010~~ to ~~55%~~ ~~in the same period of 2011due to lower bioconsumable sales, which also have a relatively fixed-cost base.~~

~~Selling, General and Administrative Expenses.~~ Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. In addition, foreign currency revaluation is included here. Our selling, general and administrative costs increased from $~~7.6 million~~ ~~to $14.3 million~~ ~~during the~~ ~~nine~~ ~~month period ended~~ ~~September 30, 2011~~ compared to the same period in 2010. The primary increase in our selling, general and administrative costs is primarily due to $3.7 million in expenses related to the FAMILION family of genetic tests, which we acquired on December 29, 2010. In addition, we had $0.8 million in expense related to the vesting of the employee stock option grants, $0.9 million in amortization of the acquired intangibles and bad debt expense of $1.5 million. Foreign currency revaluation gain for the ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~was less than $0.1 million compared to $0.3 million in revaluation loss for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2010~~.

~~Research and Development Expenses.~~ Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. During the ~~nine~~ ~~months ended~~ ~~September 30, 2011~~ ~~and 2010 these costs totaled~~ ~~$1.7 million~~ ~~and~~ ~~$2.0 million, respectively.Research and development expenses totaled~~ 7% ~~and~~ ~~13%~~8% of net sales during the nine months ended September 30, ~~2011~~2012 and ~~2010, respectively. The decrease is due primarily to~~7% during the ~~consolidation of our research and development activities~~same period in ~~Omaha, Nebraska, the benefit which is partially offset by legal costs to defend a patent.~~2011.

Other Income (Expense). Other ~~income~~expense for the nine months ended September 30, 2012 and 2011 includes ~~an award~~interest expense of ~~a federal grant under~~$0.7 million and the ~~Qualifying Therapeutic Discovery Project~~income associated with the change in fair value of ~~$0.2~~our Common Stock Warrant Liability of $1.0 million ~~net of consulting fees.~~. Other expense in 2011 also includes ~~interest expense as well as~~ the expense associated with ~~the preferred stock and warrant, which is due to~~ the change in fair value of the ~~preferred stock~~Preferred Stock conversion ~~feature.~~feature and warrants of 6.9 million. The income or expense associated with the change in ~~value~~fair values of our Common Stock Warrant Liability and the preferred stock conversion feature ~~is a~~and warrants are non-cash ~~item.~~items.

Income Tax Expense (Benefit). Income tax expense for the nine months ended September 30, 2012 was $0.1 million. This is primarily comprised of taxes on income earned by our foreign subsidiary. Income tax benefit for the nine months ended September 30, 2011 was a benefit of $0.1 million. This is the result of the change in deferred tax assets and liabilities reported in the financial statements of our foreign subsidiary. This tax benefit is partially offset by tax expense related to state and franchise taxes as well as reserves for uncertain income taxes. We believe the recorded tax benefit will be offset in future periods by a tax expense, related to income reported in the financial statements of our foreign subsidiary. Income tax expense for the ~~nine~~ ~~months ended~~ ~~September 30, 2010~~ was $0.1 million.

Liquidity and Capital Resources

Our working capital positions at September 30, ~~2011~~2012 and December 31, ~~2010~~2011 were as follows:


	Dollars in Thousands							Dollars in Thousands
	September 30, 2011		December 31, 2010		Change			September 30, 2012		December 31, 2011		Change
Current assets (including cash and cash equivalents of $1,423 and $3,454, respectively)	$	13,656	$	15,034	$	(1,378	)
Current assets (including cash, cash equivalents and short term investments of $8,745 and $4,946, respectively)								$	22,494	$	17,198	$	5,296
Current liabilities	10,104		8,253		1,851			16,600		16,328		272
Working capital	$	3,552	$	6,781	$	(3,229	)	$	5,894	$	870	$	5,024

~~Working capital decreased due primarily~~

On February 7, 2012, we entered into a definitive agreement with institutional and other accredited investors and raised approximately $22.0 million in a private placement financing which included $3.0 million in convertible notes issued in December 2011 that were converted into shares of our common stock as part of the private placement financing. Net proceeds of the private placement financing were $17.4 million.

Pursuant to our equity financing completed in February 2012, we are obligated to pay PGxHealth, LLC (“PGx”) an aggregate of $5.5 million as a prepayment under the senior secured promissory note (the “Note”). We have accounted for the full prepayment amount as a current liability as of September 30, 2012. We have contacted PGx on numerous occasions to make arrangements for the prepayment to PGx in accordance with the terms of the Note, as well as to coordinate the timing of the prepayment. However, PGx has not responded to any of our outreach efforts. We made our initial payment ~~obligations~~of $1.2 million under the Note in June 2012, and intend to continue to comply with the original terms of the Note.

On September 21, 2012, we acquired certain intangible assets from Axial Biotech, Inc (Axial) related to the ScoliScore^TM assay. In consideration for the purchase of the intangible assets, we made a cash payment of approximately $3.4 million to Axial and certain of its creditors. In addition, within ten days following the transfer of all of the assets related to the ScoliScore^TM assay and confirmation that the ScoliScore^TM assay operates, within our ~~notes payable~~laboratories pursuant to protocol agreed upon by us and ~~capital leases,~~Axial,

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we will pay an additional $1.0 million to Axial and ~~increased accrued liabilities.~~certain of its creditors, $0.1 million of which will be placed into escrow for a period of one year from the closing of the transaction to secure Axial's indemnification obligations for, among other things, any breach of, or default under, any of Axial's representations, warranties, covenants or agreements contained in the asset purchase agreement.

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. Historically, we have been able to finance our operating losses through borrowings or from the issuance of additional equity. We currently have no plans to secure additional borrowings for this purpose, but instead are exploring alternative funding from certain existing holders of our equity securities as well as additional sources of liquidity. At September 30, ~~2011~~2012, we had cash, ~~and~~ cash equivalents and short term investments of $~~1.4~~8.7 million. We believe that existing sources of liquidity are sufficient

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to meet expected cash needs ~~into 2012, but we will need to increase our net sales and reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. It may also be necessary~~ for ~~us to secure additional funding in~~at least the ~~near future.~~next 12 months. However, we cannot ~~assure you~~be certain that we will be able to increase our net sales, further reduce our expenses or raise additional capital. Accordingly, we may not have sufficient sources of liquidity to continue our operations indefinitely.

Analysis of Cash Flows

Nine Months Ended September 30, ~~2011~~2012 and ~~2010~~2011

Net Change in Cash and Cash Equivalents. Cash and cash equivalents decreased by $0.2 million during the nine months ended September 30, 2012 compared to a decrease of $2.0 million during the nine months ended September 30, 2011 ~~compared to a decrease of~~ ~~$1.1 million~~ ~~during the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2010~~. During the nine months ended September 30, ~~2011~~2012 we used cash of $~~0.9~~7.8 million in operating activities, $~~0.4~~8.4 million in investing activities, ~~$0.8 million~~ ~~in financing activities~~ which was offset by cash provided by financing activities of $~~0.1~~15.9 million by. In the ~~effect of foreign currency exchange rate changes on cash. In 2010,~~nine months ended September 30, 2011, net cash used in operating activities was $0.9 million, $~~0.2~~0.4 million was used in investing activities and ~~less than $0.1~~$0.8 million was used in financing activities.

Cash Flows Used In Operating Activities. Cash flows used in operating activities totaled $7.8 million during the nine months ended September 30, 2012 compared to cash flows used in operating activities of $0.9 million during ~~both~~ the nine months ended September 30, 2011. The cash flows used in operating activities in 2012 include the net loss, increase in accounts receivable of $2.2 million and ~~2010.~~decrease in accounts payable of $1.1 million, offset by non-cash items including the warrant revaluation of $1.0 million, provision for losses on doubtful accounts of $1.6 million, stock option expense of $0.6 million and depreciation and amortization of $1.6 million. The cash flows used in operating activities in 2011 include the net loss and increase in accounts receivable of $1.4 million, offset by the non-cash items, ~~including the change in fair value~~which include revaluation of the preferred stock conversion feature and warrant liability ~~the~~of $6.9 million, provision for losses on doubtful accounts of $1.4 millionand depreciation and ~~amortization.~~amortization of $1.5 million.

Cash Flows Used In Investing Activities. Cash flows used in investing activities totaled $~~0.4~~8.4 million during the nine months ended September 30, ~~2011~~2012 compared to cash flows used in investing activities of $~~0.2~~0.4 million during the same period of ~~2010.~~2011. Cash flows used in investing activities in 2012 included purchases of short term investments of $9.0 million, acquisition of ScoliScore^TM assets of $3.4 million, purchases of property and equipment of $0.6 million and additions to our patents of $0.3 million , offset by proceeds from the sale of short term investments of $5.0 million. Cash flows used in investing activities in 2011 include purchases of property and equipment of $0.1 million and additions to our patents of $0.3 million.

Cash Flows Provided by or Used in Financing Activities. Cash flows provided by financing activities were $15.9 million for the nine months ended September 30, 2012. Cash provided by financing activities during the nine months ended September 30, 2012 included the proceeds from the issuance of 19.0 million shares of our common stock and from the issuance of our common stock in connection with the exercise of stock options for 20,000 shares. Cash flows used in ~~investing~~financing activities ~~in 2010 consisted primarily of purchases of property~~were for payments on debt and ~~equipment.~~

~~Cash Flows Used in Financing Activities.~~capital lease obligations. Cash flows used in financing activities were $0.8 million for the nine months ended September 30, 2011. Cash flows used in financing activities were for payments on debt and capital lease obligations and were partially offset by cash received from the issuance of common stock in connection with the exercise of stock options for 30,000 shares during the quarter. Cash flows used in financing activities were less than $0.1 million for the ~~nine~~ ~~months ended~~ ~~September 30, 2010. Cash flows used in financing activities were for principal payments on capital leases~~ offset by the cash received from issuance of common stock in connection with the exercise of stock options for ~~100,000~~10,000 shares during the ~~second quarter~~first nine months of ~~2010.~~2011.

Off-Balance Sheet Arrangements

At September 30, ~~2011~~2012 and December 31, ~~2010,~~2011, 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 that have or ~~other contractually narrow~~are reasonably likely to have a current or ~~limited purposes.~~future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies and Estimates

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

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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 judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies are discussed in our ~~annual report~~Annual Report on Form 10-K for the fiscal year ended December 31, ~~2010.~~2011 filed with the Securities and Exchange Commission on March 14, 2012.

Recently Issued Accounting Pronouncements

Please refer to our ~~annual report~~Annual Report on Form 10-K for the fiscal year ended December 31, ~~2010.~~2011 filed with the Securities and Exchange Commission on March 14, 2012. There have been no changes to those accounting pronouncements listed except as noted in ~~note~~Footnote B - Summary of Significant Accounting Policies to the notes to unaudited condensed consolidated financial statements contained in this report.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~Table~~

Foreign Currency Translation Risk

Sales of ~~Contents~~products in foreign countries are mainly completed in either the Euro or the British Pounds Sterling. Additionally, the British Pound Sterling is the functional currency of our wholly owned subsidiary, Transgenomic Limited. Results of operations and the balance sheet are translated from the functional currency of the subsidiary to our reporting currency of the U.S. Dollar. Results of operations for our foreign subsidiary 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 by Transgenomic Limited, whose functional currency is the British Pound Sterling. The majority of the transactions consummated by Transgenomic Limited are in Euro. As a result, we are subject to exchange rate risk and we do not currently engage in foreign currency hedging activities.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Management performed, with the participation of our Chief Executive Officer and our Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange ~~Act.~~Act of 1934, as amended (the "Exchange Act"). Our disclosure controls and procedures are designed to ~~provide reasonable assurance~~ensure that information required to be disclosed in the reports we file or submit under the Exchange Act are recorded, processed, summarized, and reported within the time periods specified in the ~~SEC’s~~Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, ~~the Company’s~~our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, ~~2011~~2012, ~~Transgenomic’s~~our disclosure controls and procedures were effective.

We have evaluated the changes in our internal control over financial reporting that occurred during the three months ended September 30, ~~2011~~2012 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

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


Item 1A.	Risk Factors

~~An investment~~

We may experience temporary disruptions and delays in processing tissue samples at our facilities.

We may experience delays in processing biological samples caused by software and other errors. In early 2012, our laboratory information management system (LIMS) installed in our ~~common stock involves~~New Haven, Connecticut laboratory testing facility experienced a ~~number of risks. You should carefully consider each~~software failure that resulted in reduced sample processing capacity. Although we have reviewed and improved our internal procedures to secure proper function of the ~~risks described~~LIMS and we believe that the full sample processing capacity has been restored, there are no assurances that we will not experience future temporary delays or disruptions in processing samples at our New Haven, Connecticut facility or at our other facilities. Any delay in processing samples could have an adverse effect on our business, financial condition and results of operations.

Except as set forth above, there have been no material changes in our risk factors from those previously disclosed in Part 1, Item 1A of our ~~annual report~~Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2010 before deciding to invest in our common stock. If any of~~2011 that was filed with the ~~risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline~~Securities and ~~you may lose all or part of your investment.~~

~~Note Regarding Risk Factors~~

~~The risk factors presented above and in Item 1A of our annual report~~Exchange Commission on Form 10-K for the fiscal year ended December 31, 2010 are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose part or all of your investment. March 14, 2012.~~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.~~

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Item 6.	Exhibits


(a)	Exhibits



2.1**			Asset Purchase Agreement among the Registrant, Scoli Acquisition sUb, Inc. and Axial Biotech, Inc. dated August 27, 2012

3.1			Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to ~~Registrant’s~~the Registrant's Quarterly Report on Form 10-Q (Registration No. 000-30975) filed on November 14, 2005)

3.2			Amended and Restated Bylaws of the Registrant (incorporated by reference to ~~Registrant’s~~Exhibit 3(ii) to the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on May 25, 2007)

3.3			Certificate of Designation of Series A Convertible Preferred Stock dated as of December 28, 2010 (incorporated by reference to Exhibit 3.1 to ~~Registrant’s~~the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)

3.4			Certificate of Amendment of Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on May 29, 2012)

3.5			Certificate of Amendment of Certificate of Designation of Series A Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on May 29, 2012)

4.1			Form of Certificate of the ~~Registrant’s~~Registrant's Common Stock (incorporated by reference to Exhibit 4 to the Registrant's Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

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

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

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

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

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

4.7			Common Stock Purchase Warrant by and between the Registrant and Oppenheimer & Co., Inc. dated October 27, 2005 (incorporated by reference to Exhibit 10.34 to the Registrant's Annual Report on Form 10-K filed on March 31, 2006)

4.8			Form of Series A ~~convertible~~Convertible Preferred Stock ~~Purchase Agreement, dated December 29, 2010, by and among Transgenomic, Inc.,~~Warrant issued to Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit ~~4.1~~4.2 to ~~Registrant’s~~the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)

~~4.3~~			~~Form of Warrant (incorporated by reference to Exhibit 4.2 to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)~~

~~4.4~~4.9			Registration Rights Agreement, dated December 29, 2010, by and among ~~Transgenomic, Inc.,~~the Registrant, Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.3 to ~~Registrant’s~~the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)

~~4.5~~4.10			First Amendment to Registration Rights Agreement dated November 8, 2011 (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed on November 14, 2011)

4.11			Secured Promissory Note, issued December 29, 2010 by ~~Transgenomic, Inc.~~the Registrant in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.4 to ~~Registrant’s~~the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)

~~4.6~~4.12			Secured Promissory Note, issued December 29, 2010 by ~~Transgenomic, Inc.~~the Registrant in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.5 to ~~Registrant’s~~the Registrant's Current Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)

Table of Contents

~~10.1~~

4.13			~~Sublease Agreement, dated December 29, 2010,~~Convertible Promissory Note by and between ~~Transgenomic, Inc.~~the Registrant and ~~Clinical Data, Inc.~~Third Security Senior Staff 2008 LLC dated December 30, 2011 (incorporated by reference to Exhibit ~~10.1~~10.2 to ~~Registrant’s~~the Registrant's Current Report on Form 8-K ~~(Registration No. 000-30975)~~ filed on January ~~4, 2011)~~6, 2012)

~~10.2~~4.14			~~Noncompetition~~Convertible Promissory Note by and ~~Nonsolicitation Agreement,~~between the Registrant and Third Security Staff 2010 LLC dated December ~~29, 2010~~30, 2011 (incorporated by reference to Exhibit 10.3 to the Registrant's Current Report on Form 8-K filed on January 6, 2012)

4.15			Convertible Promissory Note by and ~~among PGxHealth,~~between the Registrant and Third Security Incentive 2010 LLC ~~Clinical Data, Inc. and Transgenomic, Inc.~~dated December 30, 2011(incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on January 6, 2012)

4.16			Form of Warrant issued by the Registrant to the Third Security Entities on February 7, 2012 (incorporated by reference to Exhibit 10.2 to ~~Registrant’s~~the Registrant's Current Report on Form 8-K ~~(Registration No. 000-30975)~~ filed on ~~January 4, 2011)~~February 7, 2012)

~~10.3~~4.17			~~Security Agreement, dated December 29, 2010,~~Form of Warrant issued by ~~and between PGxHealth, LLC and Transgenomic, Inc.~~the Registrant to the Investors on February 7, 2012 (incorporated by reference to Exhibit 10.3 to ~~Registrant’s~~the Registrant's Current Report on Form 8-K ~~(Registration No. 000-30975)~~ filed on ~~January 4, 2011)~~February 7, 2012)

314.18			~~Certifications~~Form of Registration Rights Agreement entered into by and among the Registrant, the Third Security Entities and the Investors dated February 2, 2012 (incorporated by reference to Exhibit 10.4 to the Registrant's Current Report on Form 8-K filed on February 7, 2012)

10.1#			Employment Agreement between Registrant and Mark P. Colonnese (incorporated by reference Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 17, 2012)

31.1			Certification of Craig J. Tuttle, President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended

3231.2			~~Certifications~~Certification of Mark P. Colonnese, Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended

32.1			Certification of Craig J. Tuttle, President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended

32.2			Certification of Mark P. Colonnese, Executive Vice President Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended

101.INS			XBRL Instance Document *

101.SCH			XBRL Taxonomy Extension Schema Document *

101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document *

101.DEF			XBRL Taxonomy Extension Definition Linkbase Document *

101.LAB			XBRL Taxonomy Extension Label Linkbase Document *

101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document *

**			Pursuant to Item 601(b)(2) of Regulation S-K, the schedules to this agreement have been omitted. The Registrant agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request.

#			Indicates management contract or compensatory plan.

*			Attached as Exhibit 101 to this report are documents formatted in XBRL ~~information~~(Extensible Business Reporting Language). Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, the interactive data file is ~~furnished and~~deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 ~~and~~or 12 of the Securities Act of 1933, ~~and~~as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is otherwise not subject to liability under those sections, is not part of any registration statement or prospectus to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.these sections.

3032

Table of Contents

SIGNATURES

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




		TRANSGENOMIC, INC.

Date:	November ~~10, 2011~~8, 2012	By:	/S/ CRAIG J. TUTTLE
			Craig J. Tuttle President and Chief Executive Officer

3133



	Dollars in Thousands
	Asset Balances at
Classes of Property	September 30, 2011			December 31, 2010
Equipment	$	782		$	394
Less: Accumulated amortization	(119		)	(13		)
Total	$	663		$	381



	Number of Options		Weighted Average Exercise Price
Balance at January 1, 2011	2,565,001		$	2.11
Granted	2,335,500		1.17
Exercised	(30,000	)	(0.76		)
Forfeited	(334,501	)	(1.66		)
Cancelled	(363,000	)	(6.79		)
Balance at September 30, 2011	4,173,000		$	1.20
Exercisable at September 30, 2011	2,234,712		$	1.26



	Dollars in Thousands
	2011
	Clinical Laboratories			Pharmacogenomic Services		Diagnostic Tools			Total
Net Sales	$	11,435		$	1,824	$	10,141		$	23,400
Gross Profit	6,787			764		5,601			13,152
Net Income (Loss) before Taxes	(11,331		)	615		551			(10,165		)
Income Tax Expense (Benefit)	—			—		(120		)	(120		)
Net Income (Loss)	$	(11,331	)	$	615	$	671		$	(10,045	)
Depreciation/Amortization	1,113			184		151			1,448
Restructure	28			—		12			40
Interest Income (Expense)	(720		)	—		—			(720		)
	9/30/2011
Total Assets	$	20,822		$	953	$	8,199		$	29,974



	As reported			Pro-Forma
	Dollars in Thousands
	September 30, 2011			September 30, 2011
Total Assets	$29,974			$29,974

Total Liabilities	29,683			18,483
Redeemable Series A convertible preferred stock	1,796			—
Total Stockholders' Equity (Deficit)	(1,505		)	11,491
	$	29,974		29,974