D. OTHER ASSETS

At September 30, 2003,March 31, 2004, and December 31, 2002,2003, finite lived intangible assets and other assets consisted of the following:

Amortization expense for intangible assets was $205,000$243,000 and $623,000$218,000 during the three and nine months ended September 30,March 31, 2004, and 2003, respectively, and $29,043 and $98,905 during the three and nine months ended September 30, 2002, respectively. The Company expects amortization expense for intangible assets to be approximately $830,000 for the remainder of 2004, $1,022,000 in fiscal 2005, $367,000 in fiscal 2006, $377,000 in fiscal 2007, $77,000 in fiscal 2008 and $104,000 in fiscal 2009 and $104,000 in fiscal 2010.

E. GOODWILL

At March 31, 2004, and December 31, 2003, goodwill by operating segment consisted of the following:

(In thousands except share and per share data) (Continued)

D.   OTHER ASSETS (Continued)

to be approximately $172,000 for the balance of 2003, $922,000 in fiscal 2004, $872,000 in fiscal 2005, $216,000 in fiscal 2006, $253,000 in fiscal 2007 and $77,000 in fiscal 2008.

E.   GOODWILL

At September 30, 2003, and December 31, 2002, goodwill by operating segment consisted of the following:

F. STOCKHOLDERS’ EQUITY AND STOCK OPTIONS

Other Comprehensive Income.Results of operations for the Company’s foreign subsidiary are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. These translation adjustments, along with unrealized gains and losses on available-for-sale securities, are the Company’s only components of other comprehensive income.

Stock Options.During the ninethree months ended September 30, 2003,March 31, 2004, the Company granted 871,000120,000 options with an exercise prices ranging from $1.30 to $1.98price of $2.57 per share. The following table summarizes activity under the 1997 Stock Option Plan during the ninethree months ended September 30, 2003.March 31, 2004.

The weighted average fair value of options granted during the first ninethree months of fiscal 20032004 was $1.11$1.34 per share. At September 30, 2003, the weighted average remaining contractual life of options outstanding was 6 years. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in the first ninethree months of fiscal 2003:2004: no common stock dividends; risk-free interest rates of 3.25%3.84% to 4.00%4.37%; 85% volatility; and an expected option life of 3 years.

Transgenomic, Inc. and Subsidiaries
Notes to At March 31, 2004, the Consolidated Financial Statements (Unaudited)
(In thousands except share and per share data) (Continued)weighted average remaining contractual life of options outstanding was 6.2 years.

F.   STOCKHOLDERS’ EQUITY AND STOCK OPTIONS (Continued)

Sale of Common Stock .   In August 2003, the Company entered into Securities Purchase Agreements with certain existing shareholders for the sale of 4.5 million shares of its common stock. The sales price under the Agreements was $1.00 per share, or approximately a 10% discount to market at the time of the signing of the Agreements. One purchaser elected to close on 1.78 million shares in September 2003. The sale of the remaining 2.72 million shares will be closed in November 2003. Total proceeds from this transaction, net of fees and expenses, will be approximately $4.2 million.

G. INCOME TAXES

Due to the Company’s cumulative losses, in recent years, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company has not provided for an income tax benefit during the three months or nine months ended September 30, 2003,March 31, 2004, based on management’s determination that it was more likely than not that such benefits would not be realized. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate taxable income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. During the three months and nine months ended September 30, 2003, the Company recorded current tax expense related to its Japan branch operations.

As of September 30, 2003,March 31, 2004, and December 31, 2002,2003, the Company’s deferred tax assets were offset by a valuation allowance of approximately $28.8$32.1 million and $23.2$30.6 million, respectively, duerespectively.

Transgenomic, Inc. and Subsidiaries

Notes to the Company’s cumulative losses in recent years, expected losses in future yearsConsolidated Financial Statements (Unaudited)

(In thousands except share and inability to utilize any additional losses as carrybacks.per share data) (Continued)

H. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

The Company’s operations are managed based upon the nature of the products and services provided. Accordingly, the Company has determined that it operates in two segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in segment operating income.income (loss). Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income (loss) for the segment. Generally, decisions regarding asset allocation, financing, or other items impacting the Company’s balance sheet are made at the corporate level and, accordingly, balance sheet information is not typically reviewed by operating segment.

The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segment’s products are based upon separations chemistries and enzymology. Specifically, this segment’s main products are the WAVE System, related bioconsumables and research services.

The Nucleic Acids operating segment generates revenue from the sale of products and services based upon nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segment’s main products are nucleic acid building blocks or phosphoramidites, oligonucleotides, fluorescent markers, dyes and associated reagents and novel chemistry and process development services.

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

H.   OPERATING SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

The following is information for net sales and operating income (loss) by segment.

Fixed asset additions during the nine months ended September 30, 2003, were mainly in the Nucleic Acid operating segment. The net book value of fixed assets in this segment was $12.8 million at September 30, 2003, and $8.9 million at December 31, 2002.

I. LINE OF CREDIT AND LONG-TERM DEBT

On June 9,

In December 2003, the Company entered into a loan agreement with a financial institution for a securednew, $7.5 million line of credit up tofacility with Laurus Master Fund, Ltd. (“Laurus”) The term of the agreement is three years carrying an interest rate of 2.0% over the prime rate or a maximumminimum of $5.0 million. Collateral for the line of credit consists of all assets of Transgenomic, Inc.6.0%. Funds available under the line are are determined by a borrowing base equal to 80%90% of eligible accounts receivable balances plus up to $1.0 million related to inventory balances. This line of credit is secured by most of the Company’s assets. Payment of interest and principal can, under certain circumstances, be made with shares of the Company’s common stock at a fixed conversion price of $2.20 per share. Conversion of this debt to common stock may be made at the election of Laurus or the Company. The amountCompany may elect to convert only if its shares trade at a price exceeding $2.42 per share for ten consecutive trading days and such conversion is further subject to trading volume limitations and a limitation on the total beneficial ownership by Laurus of the Company’s common stock. In connection with the line of credit facility, the Company issued warrants to Laurus to acquire 550,000 shares of its common stock at exercise prices that exceed the average trading price of the Company’s common stock over the ten trading days prior to execution of the new line of credit.

In February 2004, the Company entered into a separate $2.75 million convertible note with Laurus,. The note carries an interest rate of 2.0% over the prime rate or a minimum of 6.0% and has a term of 3 years. The principal and interest on the note may be converted into common stock of the Company at a fixed conversion price of $2.61 per share. In connection with this agreement, the Company issued 125,000 warrants to Laurus to acquire 125,000 shares of its common stock. A portion of the proceeds from this transaction were used to retire the mortgage debt on the Company’s Glasgow facility. The remaining proceeds of approximately $750,000 will be used to complete the build-out of the Glasgow facility, complete the consolidation our operations into the new facility and provide funds for operations.

Certain features of the line of credit facility and convertable note require the Company to separately account for the value of certain amounts related to the warrants issued and the conversion feature of the facility. Specifically, Emerging Issues Task Force (“EITF”) No. 00-27,Application of Issue No. 98-5 to Certain Convertible Instruments, requires the Company to separately value the warrants issued and the “beneficial conversion premium” related to these agreements. Any borrowings under the line of credit facility may result in additional beneficial conversion premiums. The value of the warrants and the beneficial conversion premium have been recorded on the balance sheet as a debt discount and an increase to additional paid in capital. The debt discount recorded for these items will be amortized as expense to the income statement over the term of the facility or as the warrants are exercised or the debt is converted into common stock thereby increasing the effective interest rate on these agreements.

In February 2004, Laurus waived the borrowing base limitation on the Company’s line of credit, thereby making the full $7.5 million facility available to the Company regardless of the available collateral. The waiver will expire on December 19, 2004. As of March 31, 2004, the Company had approximately $4.4 million outstanding on this line of credit facility. In January and February 2004, Laurus exercised its conversion rights on the line of credit wasand converted $2.0 million of amounts outstanding on the line into approximately $1.4910,000 shares of common stock of the Company. In connection with the conversion of $2.0 million as of September 30, 2003. The total additional funds available ondebt incurred under the line of credit based upon eligible accounts receivable balances,facility in January and February 2004, the Company has accelerated the amortization of approximately $460,000 of the beneficial conversion premium.

The following table details the components of the Company’s line of credit and long-term debt as of September 30, 2003, were approximately $1.0 million. The term of the agreement is 1 year carrying an interest rate of 2.25% over bank prime (4.00% at September 30, 2003).March 31, 2004 and December 31, 2003.

J. CORPORATE RESTRUCTURING

The Company has historically experienced net losses and negative cash flows from operations. As a result, during the fourth quarter of fiscal 2002, management formulated a restructuring plan designed to reduce expenses thereby better aligning the Company’s expense structure with current business prospects. The plan included employee terminations, office closures, and termination of collaborations and write-offs of abandoned intellectual property. A significant portion of the plan was executed in the fourth quarter of 2002 resulting in the recording of $3.3 million in restructuring charges. Restructuring and restructuring related activities continued in the current year resulting in no additional restructuring charges for the three months ended September 30, 2003, and $738,000 for the nine months ended September 30, 2003. These charges consist of employee severance costs and the write-off of a note receivable related to the abandonment of product development collaboration. The write-off of the note receivable accounted for $364,000 of the year-to-date charges. The Company had accrued expenses and other liabilities associated with the restructuring activities of approximately $345,000$136,000 and $227,000 at September 30, 2003,March 31, 2004, and $1.4 million at December 31, 2002.2003, respectively. The accrued expenses at September 30, 2003,March 31, 2004, were related to lease payments associated with office closures. The accrued expenses at December 31, 2002, were primarily related to office closures and employee severance.

8

Item2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations.

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

Overview

We provide innovative products and services for the synthesis, purification and analysis of nucleic acids. The Company’s operations are managed based upon the nature of the products and services provided. Accordingly, the Company has determined that it operates in two segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment.

The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segment’s products are based upon separations chemistries and enzymology. Specifically, this segment’s main products are the WAVE System, related bioconsumables and research services. Since the WAVE System product introduction in 1997, we have sold over 1,000 instruments to customers in over 30 countries.

The Nucleic Acids operating segment generates revenue from the sale of products and services based upon nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segment’s main products are nucleic acid building blocks or phosphoramidites, oligonucleotides, fluorescent markers, dyes and associated reagents and novel chemistry and process development services.

Our technologies center around three core competencies: separation chemistries, enzymology, and nucleic acid chemistries. We develop, assemble, manufacture and market our products and services to the life sciences industry to be used in research focused on molecular genetics of humans and other organisms. Such research could lead to development of new diagnostics and therapeutics. Our products can be used to analyze DNA or RNA at the molecular level, amplify, separate, and isolate nucleic acid fragments of particular interest and synthesize conventional or chemically-modified nucleic acid molecules. These capabilities are central to research seeking to discover and understand variations in the genetic code, the relationship of these variations to disease and, ultimately, to develop diagnostics and therapeutics based on this understanding. Our business plan is to participate in the value chain associated with these activities by providing key technology, tools, consumables, biochemical reagents and services to those entities engaged in basic biomedical research and the development of diagnostics and therapeutic agents.

The Company’s operations are managed based upon the nature of the products and services provided. Accordingly, the Company has determined that it operates in two segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment.

The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segment’s products are based upon separations chemistries and enzymology. Specifically, this segment’s main products are the WAVE System, related bioconsumables and research services. Since the WAVE System product introduction in 1997, we have sold over 1,000 instruments to customers in over 30 countries.

The Nucleic Acids operating segment generates revenue from the sale of products and services based upon nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segment’s main products are nucleic acid building blocks or phosphoramidites, oligonucleotides, fluorescent markers, dyes and associated reagents and novel chemistry and process development services.

We have incurred significant losses resulting principally from costs incurred in research and development and selling, general and administrative costs associated with our operations. At September 30, 2003,March 31, 2004, we had an accumulated deficit of $64.1$76.6 million. We expect to continue to incur substantial research and development and selling, general and administrative costs.

Executive Summary

The following is a summary of significant items or events that have had an effect on the Company’s financial position, results of operations, and liquidity during the quarter:

Results of Operations Three Months Ending March 31, 2004 and 2003