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 and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes ¨ No x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934) Yes ¨ No x

As of ~~August 15,~~November 14, 2005, the number of shares of common stock outstanding was ~~34,241,281.~~49,172,079.


	June 30, 2005			December 31, 2004			September 30, 2005			December 31, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,714		$	1,002		$	1,361		$	1,002
Accounts receivable (net of allowances for bad debts of $998 and $1,051, respectively)		8,682			10,197
Short-term investments								1,556			—
Accounts receivable (net of allowances for bad debts of $896 and $1,051, respectively)								8,729			10,197
Inventories		4,585			5,366			4,101			5,366
Prepaid expenses and other current assets		912			1,343			652			1,343

Total current assets		15,893			17,908			16,399			17,908

PROPERTY AND EQUIPMENT:
Land and buildings		2,274			2,427			2,221			2,427
Equipment		18,528			19,263			18,066			19,263
Furniture and fixtures		5,876			5,781			5,833			5,781

		26,678			27,471			26,120			27,471
Less: accumulated depreciation		14,941			13,946			15,509			13,946

		11,737			13,525			10,611			13,525
GOODWILL		638			638			638			638
OTHER ASSETS		4,697			5,387			4,141			5,387

	$	32,965		$	37,458		$	31,789		$	37,458

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	2,501		$	3,431		$	2,463		$	3,431
Accrued expenses		5,430			7,318			4,383			7,318
Accrued compensation		761			636			530			636
Line of credit		6,570			6,514			6,935			6,514
Current portion of long-term debt		450			825			675			825

Total current liabilities		15,712			18,724			14,986			18,724
Long-term debt		1,494			2,199			1,226			2,199

Total liabilities		17,206			20,923			16,212			20,923

COMMITMENTS AND CONTINGENCIES (Note F)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding		—			—			—			—
Common stock, $.01 par value, 60,000,000 shares authorized, 34,241,281 and 29,330,874 shares outstanding, respectively		348			299
Common stock, $.01 par value, 60,000,000 shares authorized, 34,246,336 and 29,330,874 shares outstanding, respectively								348			299
Additional paid-in capital		124,993			120,798			125,058			120,798
Accumulated other comprehensive income		1,409			2,539			1,051			2,539
Accumulated deficit		(110,991	)		(107,101	)		(110,880	)		(107,101	)

Total stockholders’ equity		15,759			16,535			15,577			16,535

	$	32,965		$	37,458		$	31789		$	37,458


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Net sales	$	7,633		$	9,011		$	15,005		$	17,640		$	8,706		$	8,194		$	23,711		$	25,834
Cost of goods sold		4,450			5,858			8,848			11,627			4,761			6,857			13,609			18,484

Gross profit		3,183			3,153			6,157			6,013			3,945			1,337			10,102			7,350
Operating expenses:
Selling, general and administrative		3,537			4,268			7,138			8,513			2,885			4,353			10,023			12,866
Research and development		581			1,672			1,186			3,601			510			1,743			1,696			5,344
Impairment charges (Note C)		—			11,964			—			11,964
Impairment charges (Notes C and D)														247			—			247			11,964

		4,118			17,904			8,324			24,078			3,642			6,096			11,966			30,174
Loss from operations		(935	)		(14,751	)		(2,167	)		(18,065	)

Income (Loss) from operations														303			(4,759	)		(1,864	)		(22,824	)
Other income (expense):
Interest expense (Note E)		(83	)		(346	)		(1,738	)		(935	)		(181	)		(723	)		(1,919	)		(1,684	)
Loss on debt extinguishment														—			(2,859	)		—			(2,859	)
Other income (expense), net		34			(33	)		34			(87	)		(3	)		(100	)		31			(161	)

		(49	)		(379	)		(1,704	)		(1,022	)		(184	)		(3,682	)		(1,888	)		(4,704	)
Loss before income taxes		(984	)		(15,130	)		(3,871	)		(19,087	)

Income(loss) before income taxes														119			(8,441	)		(3,752	)		(27,528	)
Current income tax expense (benefit)		14			2			19			(95	)		8			1			27			(94	)

Net loss	$	(998	)	$	(15,132	)	$	(3,890	)	$	(18,992	)
Net income (loss)													$	111		$	(8,442	)	$	(3,779	)	$	(27,434	)

Basic and diluted weighted average shares outstanding		34,237,042			29,053,226			32,122,502			28,887,334			34,242,966			29,077,789			32,837,078			28,951,230
Net loss per common share—basic and diluted	$	(0.03	)	$	(0.52	)	$	(0.12	)	$	(0.66	)
Net income (loss) per common share—basic and diluted													$	0.00		$	(0.29	)	$	(0.12	)	$	(0.95	)


	Six Months Ended June 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,890	)	$	(18,992	)	$	(3,779	)	$	(27,434	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		2,101			2,410			3,294			3,607
Impairment charges		—			11,964			247			11,964
Loss on debt extinguishment								—			2,859
Non-cash financing costs		1,434			622			1,298			759
(Gain)/Loss on sale of securities		(9	)		27			(9	)		370
Other		2			—			2			12
Changes in operating assets and liabilities:
Accounts receivable		1,241			(1,926	)		(626	)		(2,469	)
Inventories		611			(422	)		960			819
Prepaid expenses and other current assets		399			(362	)		650			(69	)
Accounts payable		(841	)		61			(912	)		100
Accrued expenses		(2,220	)		(334	)		(3,101	)		774

Net cash flows from operating activities		(1,172	)		(6,952	)		(1,976	)		(8,708	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturities and sale of available for sale securities		617			932			617			2,768
Purchase of property and equipment		(671	)		(1,133	)		(554	)		(1,250	)
Proceeds from sales of property and equipment		139			—			139			—
Change in other assets		(1	)		(1	)		34			26

Net cash flows from investing activities		84			(202	)		236			1,544
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on line of credit		10,790			14,600			15,367			19,691
Payments on line of credit		(8,740	)		(9,014	)		(12,848	)		(13,594	)
Proceeds from long-term debt		—			2,750			—			2,750
Payments on long-term debt		(178	)		(1,729	)		(178	)		(1,729	)
Issuance of common stock, net of expenses		7			45			(35	)		67

Net cash flows from financing activities		1,879			6,652			2,306			7,185
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH		(79	)		(83	)		(207	)		(137	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		712			(585	)		359			(116	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,002			1,241			1,002			1,241

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	1,714		$	656		$	1,361		$	1,125

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	316		$	237		$	491		$	390
Income taxes, net		18			(95	)		27			(94	)
Non-cash transactions:
Available for sale securities acquired for goods and services		608			959
Available for sale securities received for goods and services								2,099			3,137
Conversions of debt to equity		2,579			2,000			2,535			2,000

The accompanying unaudited condensed consolidated financial statements of Transgenomic, Inc. and Subsidiaries (the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. In the opinion of management of the Company, all adjustments (consisting of only normal and recurring items) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented.

The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year.

Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the consolidated financial statements that are included in the Company’s annual report on Form 10-K for the year ended December 31, 2004, as amended.

~~The~~As discussed in Note L, the Company ~~has~~completed a private placement of additional common stock and warrants subsequent to September 30, 2005 which allowed it to repay outstanding indebtedness to Laurus Master Funds Ltd. (“Laurus”) and provided $5,374 in additional working capital. While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2006, we have experienced recurring net losses and ~~had an accumulated deficit of $110,991 at June 30, 2005. Based on~~have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To the ~~Company’s operating plan, management believes its existing sources of liquidity will be sufficient to meet its cash needs during 2005. If~~extent necessary, the Company’s management believes that they can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of the Company’s business plan. ~~Additionally, management may pursue financing alternatives.~~ Ultimately, ~~the Company~~we must achieve sufficient ~~revenue levels~~revenues in order to generate positive net earnings and cash flows from operations.

The Company develops, manufactures and sells innovative products for the analysis, synthesis and purification of nucleic acids through two operating segments, BioSystems and Nucleic Acids.

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

Bioinstruments. The flagship product of the BioSystems operating segment is the WAVE system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of 1,241 WAVE systems as of September 30, 2005. Additionally, this operating segment utilizes its sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.

Bioconsumables. The installed WAVE base generates a demand for consumables that are required for the system’s continued operation. These products are developed, manufactured and sold by this operating segment. In addition, the BioSystems operating segment manufactures and sells consumable products that can be used on multiple, independent platforms. These products include SURVEYOR Nuclease and a range of HPLC separation columns.

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

The Nucleic Acids operating segment develops, manufactures and markets chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical, oligonucleotide synthesis companies and research institutions throughout the world. These products are produced primarily in this operating segment’s only facility in Glasgow, Scotland. Prior to November 11, 2004, this operating segment also manufactured synthesized segments of large-scale, GMP nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, the assets associated with this facility were sold to an unaffiliated, third party. As a result, the Nucleic Acids operating segment no longer manufactures and sells these specialized oligonucleotides. A substantial portion of this operating segment’s revenues during 2005 and 2004 have been derived from one customer.

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

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

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

Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful ~~accounts during of the three and six months ended June 30, 2005 and 2004.~~accounts.


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	June 30, 2005		June 30, 2004		June 30, 2005		June 30, 2004		September 30, 2005		September 30, 2004		September 30, 2005		September 30, 2004
Beginning balance	$	1,030	$	550	$	1,051	$	549	$	998	$	550	$	1,051	$	549
Charges to income		—		30		—		46		—		30		—		46
Deductions from reserves		32		—		53		15		102		—		155		15

Ending balance	$	998	$	580	$	998	$	580	$	896	$	580	$	896	$	580

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

services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At ~~June~~September 30, 2005 and December 31, 2004, deferred revenue associated with the Company’s service contracts was approximately ~~$1,856~~$1,600 and ~~$1,478~~$1,432 respectively, and is included in “accrued expenses” in the accompanying unaudited consolidated balance sheets.

During the ~~six~~nine months ended ~~June~~September 30, 2004, the Company recognized approximately ~~$196~~$646 of product sales under bill-and-hold arrangements. Under these arrangements, the customer had accepted title and risk of ownership to the product, but had requested that the Company store the product on behalf of the customer, in a rented freezer, until the ~~six~~nine months ended ~~June~~September 30, 2004. There were no sales under ~~bill-and –hold~~bill-and-hold arrangements recognized during the ~~six~~nine months ended ~~June~~September 30, 2005.

The Company accounts for its employee stock option grants under the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s common stock at the date of grant over the stock option exercise price. Stock option grants to non-employees are accounted for using the fair value method of accounting in accordance with SFAS No. 123,Accounting for Stock-Based Compensation, using the Black-Scholes model.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation.


	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004			September 30, 2005			September 30, 2004			September 30, 2005			September 30, 2004
Net Loss:
Net Income (Loss):
As reported	$	(998	)	$	(15,132	)	$	(3,890	)	$	(18,992	)	$	111		$	(8,442	)	$	(3,779	)	$	(27,434	)
Less pro forma stock-based employee compensation expense determined under fair value method, net of related tax		(73	)		(221	)		(143	)		(484	)		(361	)		(280	)		(504	)		(764	)

Pro forma	$	(1,071	)	$	(15,353	)	$	(4,033	)	$	(19,476	)	$	(250	)	$	(8,722	)	$	(4,283	)	$	(28,198	)
Basic and Diluted Loss Per Share:

Basic and Diluted Income (Loss) Per Share:
As reported	$	(0.03	)	$	(0.52	)	$	(0.12	)	$	(0.66	)	$	0.00		$	(0.29	)	$	(0.12	)	$	(0.95	)
Pro forma	$	(0.03	)	$	(0.53	)	$	(0.13	)	$	(0.67	)	$	0.00		$	(0.30	)	$	(0.13	)	$	(0.97	)

The weighted average fair value of options granted during the nine months ended September 30, 2005 and 2004 was $0.63 per share and $1.34 per share, respectively. 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 during the nine months ended September 30, 2005 and 2004: no common stock dividends; risk-free interest rates of 4.14% to 4.79%; 95% volatility in 2005 and 85% in 2004; and an expected option life of 3 years. At September 30, 2005, the weighted average remaining contractual life of options outstanding was 5.5 years.

Financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. The adjustments to translate those amounts into U.S. dollars are accumulated in a separate account in stockholders’ equity and are included in other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net ~~income.~~income(loss). Foreign currency transaction adjustments ~~adversely affected loss from operations~~reduced operating expenses by approximately ~~$228~~$191 and ~~$8 for~~$263 during the three months ended ~~June~~September 30, 2005 and 2004, ~~respectively, and~~respectively. Foreign currency transaction adjustments increased operating expenses by approximately ~~$428 and $128 for~~$237 during the ~~six~~nine months ended ~~June~~September 30, 2005 and reduced operating expenses by approximately $135 during the nine months ended September 30, 2004.

Basic earnings or loss per share ~~are~~is calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings or loss per share includes shares issuable upon exercise of outstanding stock options and warrants or conversion of convertible notes, where dilutive. For all periods presented, basic and diluted weighted average shares outstanding and loss per share are identical, since all potentially dilutive securities are antidilutive. Potentially dilutive securities consist of stock options and warrants representing ~~4,759,547~~5,5541,015 and 1,159,421 shares of

common stock, respectively, at ~~June~~September 30, 2005, ~~respectively.~~. Additionally, ~~certain portions of~~ the Company’s ~~debt are~~gross indebtedness to Laurus totaling $8,263 at September 30, 2005 is convertible into the Company’s common stock at ~~prices that were greater than~~$1.00 per share, which was the ~~market~~closing price of the Company’s common stock ~~at June~~on September 30, 2005. As described in Note L, this indebtedness was repaid subsequent to September 30, 2005.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, ~~Share-Based Payment.~~“Share-Based Payment”. SFAS No.123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company expects to adopt this standard on January 1, 2006. The Company is currently assessing the final impact of this standard on its financial position, results of operations or cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.

On November 24, 2004, the FASB issued SFAS No. 151, ~~Inventory Costs~~“Inventory Costs” – an amendment of ARB No. 43. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overhead to be based on the normal capacity of the production facilities. SFAS No. 151 will be effective atfor the ~~beginning of~~Company on January 1, 2006. The Company is currently assessing the final impact of this standard on its financial position, results of operations or cash flows.

Inventories consisted of the ~~following at June 30, 2005 and December 31, 2004:~~following:


	BioSystems Operating Segment				Nucleic Acids Operating Segment				Total				BioSystems Operating Segment				Nucleic Acids Operating Segment				Total
	June 30, 2005		December 31, 2004		June 30, 2005		December 31, 2004		June 30, 2005		December 31, 2004		September 30, 2005		December 31, 2004		September 30, 2005		December 31, 2004		September 30, 2005		December 31, 2004
Finished goods	$	2,260	$	2,637	$	2,159	$	2,380	$	4,419	$	5,017
Finished Goods													$	2,155	$	2,637	$	1,529	$	2,380	$	3,684	$	5,017
Raw materials and work in process		504		780		2,217		2,275		2,721		3,055		516		780		2,393		2,275		2,909		3,055
Demonstration inventory		123		153		—		—		123		153		123		153		—		—		123		153

		2,887		3,570		4,376		4,655		7,263		8,225		2,794		3,570		3,922		4,655		6,716		8,225
Less inventory classified as a long-term asset		—		—		2,678		2,859		2,678		2,859		—		—		2,615		2,859		2,615		2,859

Net Inventory	$	2,887	$	3,570	$	1,698	$	1,796	$	4,585	$	5,366	$	2,794	$	3,570	$	1,307	$	1,796	$	4,101	$	5,366

The Nucleic Acids operating segment inventory at ~~June~~September 30, 2005 and December 31, 2004 consisted primarily of chemical building blocks for synthetic nucleic acids (know as phosphoramadites) and the raw materials to produce phosphoramadites which are used and produced at the Company’s facility in Glasgow, Scotland. As of ~~June~~September 30, 2005, the Company has classified a portion of this inventory as a long-term other asset based on its existing sales forecasts for these products.

The Company periodically evaluates its inventory of phosphoramadites to determine whether they continue to meet quality and other specifications and over what time period such products are expected to be sold. Product that does not meet quality and other specifications can generally be re-worked to enhance purity. Costs to purify such product and related yield losses are expensed as incurred.

Goodwill totaled $638 at September 30, 2005 and December 31, 2004 and related entirely to the BioSystems operating segment. The following summarizes goodwill adjustments for the nine months ended September 30, 2005 and 2004.

The Company recorded a charge of $9,865 during the nine months ended September 30, 2004 related to the impairment of goodwill associated with the Nucleic Acids operating segment. The amount of the impairment charges was based, in part, on an independent valuation performed by an unaffiliated valuation firm. The charge resulted from an interim period impairment test performed during the second quarter of 2004.

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

The Company also recorded a charge of $2,100 during the nine months ended September 30, 2004 related to the impairment of property and equipment associated with the Nucleic Acids operating segment.

Goodwill totaled $638 at June 30, 2005 and December 31, 2004 and related entirely to the BioSystem operating segment. The following summarizes goodwill adjustments for the three and six months ended June 30, 2005 and 2004.

During the three months ended March 31, 2004, the Company’s Board of Directors directed management to explore strategic alternatives for the Nucleic Acids operating segment. The process included significant due diligence by management, its advisors and prospective independent buyers and other interested parties. Based upon information obtained through this process during the three months ended JuneSeptember 30, ~~2004,~~2005, management determined that ~~it was more likely than not that~~certain international patent pursuits were no longer consistent with the ~~assets of the Nucleic Acids business were impaired.~~Company’s strategic plan. Accordingly, the Company ~~engaged~~recorded an ~~external valuation firm to assist with the completion of a mid-year~~ impairment ~~test. As a result, the Company recorded a non-cash~~ charge of ~~$11,964 related to its Nucleic Acids segment during the three months ended June 30, 2004. The charge consisted of $9,864~~$247 related to the ~~impairment~~abandonment of ~~goodwill and $2,100 related to the impairment of property and equipment.~~such pursuits.

~~At June 30, 2005 and December 31, 2004, finite lived intangible assets and other assets consisted of the following:~~

Amortization expense for intangible assets was approximately ~~$245~~$222 and $242 during the three months ended ~~June~~September 30, 2005 and 2004, respectively, and ~~$495~~$717 and ~~$486~~$728 for the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, respectively. Amortization expense for intangible assets is expected to be approximately ~~$518~~$297 for the remainder of 2005, $342 in 2006, $331 in 2007, $62 in 2008, $134 in 2009, $134 in 2010 and $26 in 2011.

~~At June 30, 2005 and December 31, 2004, debt~~Debt consisted of the following:


	June 30, 2005			December 31, 2004			September 30, 2005			December 31, 2004
Credit Line (“Credit Line”) with Laurus Master Funds, Ltd (“Laurus”)
Gross amount due (accruing interest at 2% above prime or 8.00% and 7.25% at June 30, 2005 and December 31, 2004, respectively, due December 2006)	$	6,119		$	5,948
Credit Line (“Credit Line”) with Laurus
Gross amount due (accruing interest at 2% above prime or 8.75% and 7.25% at September 30, 2005 and December 31, 2004, respectively, due December 2006)							$	6,588		$	5,948
Debt premium		516			1,004			435			1,004
Debt discount - warrants		(65	)		(85	)		(61	)		(85	)
Debt discount - beneficial conversion premium		—			(353	)		(27	)		(353	)

	$	6,570		$	6,514		$	6,935		$	6,514

Long-Term Debt with Laurus (“Term Note”)
Convertible debt (accruing interest at 2% above prime or 8.00% and 7.25% at June 30, 2005 and December 31, 2004, respectively, due February 2007)	$	1,675		$	2,550
Debt Premium		269			474
Convertible debt (accruing interest at 2% above prime or 8.75% and 7.25% at September 30, 2005 and December 31, 2004, respectively, due February 2007)							$	1,675		$	2,550
Debt premium								226			474
Less current portion		(450	)		(825	)		(675	)		(825	)

	$	1,494		$	2,199		$	1,226		$	2,199

Funds available under the Credit Line are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1,000 related to inventory balances.

On August 31, 2004, Laurus agreed to extend a then existing borrowing base waiver, defer certain payments due under the Term Note and reduce the interest rate on both of the Laurus Loans to 0% for any day the closing sale price of the Company’s common stock is at or above $1.75 per share. In return, the Company lowered the conversion price on each of the Laurus Loans to $1.00 per share and issued a warrant to Laurus covering an additional 400,000 common shares at an exercise price of $1.25 per share. The closing price of the Company’s common stock on August 31, 2004 was $1.20 per share.

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

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

On March 18, 2005, Laurus agreed to further extend ~~an existing~~the waiver of the borrowing base until March 31, 2006. In connection with this extension, the Company agreed to allow Laurus to convert $1,879 of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock at $0.52 per share. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $650 of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock at $0.52 per share. Laurus agreed to apply this Term Note conversion against substantially all remaining 2005 scheduled principal payments on such loan. The closing market price of the Company’s common stock the day before each of these conversions was $0.58 per share. No other provisions of the Company’s Credit Line or Term Note (collectively, the “Laurus Loans”) were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions, the Company accelerated amortization of $409 of related debt premiums and discounts and recorded a charge of $1,365 related to the fair value of incremental shares received by Laurus.


	Three Months Ended					Six Months Ended					Three Months Ended					Nine Months Ended
	June 30, 2005			June 30, 2004		June 30, 2005			June 30, 2004		September 30, 2005			September 30, 2004		September 30, 2005			September 30, 2004
Interest paid or accrued on outstanding debt	$	134		$	152	$	305		$	237	$	172		$	494	$	477		$	761
Amortization of debt premiums		(124	)		—		(692	)		—		(124	)		—		(816	)		—
Amortization of debt discounts – warrants		9			—		20			—		4			—		24			—
Amortization of debt discount – beneficial conversion feature		15			158		644			618		81			191		725			809
Fair value of incremental shares received by Laurus		—			—		1,365			—		—			—		1,365			—
Deferred Financing Costs		49			36		96			80		48			38		144			114

	$	83		$	346	$	1,738		$	935	$	181		$	723	$	1,919		$	1,684

~~Principal~~As of September 30, 2005 principal repayments under the Term Note are scheduled as follows: $0 for the remainder of 2005, $875 in 2006, and $800 in 2007. As describe in Note L, the Company repaid the entire principal balance and terminated the Laurus Loans subsequent to September 30, 2005 with the proceeds from the private placement. Accordingly, the Company no longer has any borrowings which require scheduled principal and interest payments.

The Company was named as a defendant in a lawsuit filed in Spain by a prospective distributor who claims that the Company breached a promise to grant the plaintiff a distributorship for certain of the Company’s products in a specific geographic area in Europe. The plaintiff was seeking monetary relief of approximately $500. During the three months ended June 30, 2005, a court dismissed this matter in favor of the Company.

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

The Company leases certain equipment, vehicles and operating facilities. The Company’s leases related to its operating facilities currently expire on various dates through 2010. At ~~June~~September 30, 2005, the future minimum lease payments required under ~~non-cancellable~~non-cancelable lease provisions ~~are~~were approximately ~~$858~~$359 for the remainder of 2005, ~~$1,230~~$1,233 in 2006, ~~$441~~$443 in 2007, ~~$187~~$189 in 2008, ~~$191~~$193 in 2009, and ~~$165~~$167 in 2010. Rent expense related to all operating leases was approximately $306 and $521 for the three months ended ~~June~~September 30, 2005 and 2004, ~~was approximately $310 and $588,~~ respectively, and ~~$663~~$968 and ~~$1,173~~$1,689 for the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, respectively.

At ~~June~~September 30, 2005, the Company had firm commitments totaling ~~$468 to a vendor~~$872 to purchase components used in WAVE Systems.

Income tax recorded during the three and ~~six~~nine months ended ~~June~~September 30, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions offset by refunds received.

Due to the Company’s cumulative losses, 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 and ~~six~~nine months ended ~~June~~September 30, 2005 or 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. As of ~~June~~September 30, 2005 and December 31, 2004, the Company’s deferred tax assets were offset by a valuation allowance of approximately ~~$39,747~~$41,227 and $38,287, respectively.

The following shows changes to the components of stockholders’ equity during the ~~six~~nine months ended ~~June~~September 30, 2005.


	Common Stock			Additional Paid in Capital			Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total				Common Stock				Additional Paid in Capital		Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total
	Outstanding Shares	Par Value									Accumulated Other Comprehensive Income (Loss)			Outstanding Shares	Total				Par Value						Accumulated Deficit				Accumulated Other Comprehensive Income (Loss)				Total
Balance, January 1, 2005	29,330,874	$	299	Additional Paid in Capital	$	120,798	Accumulated Deficit		$	(107,101	)		$	2,539			$	16,535		29,330,874		$	Additional Paid in Capital	299	$	120,798		$	(107,101	)		$	2,539			$	16,535

Net loss	—		—		—			(3,890	)			(3,890	)			(3,890	)		—		—			—		(3,779	)			(3,779	)			(3,779	)

Other comprehensive income (loss):

Foreign currency translation adjustment	—		—		—			—				(1,130	)			(1,130	)		—		—			—		—				(1,553	)			(1,553	)

Unrealized gain on available for sale securities																			—		—			—		—				65				65

Comprehensive loss	—		—		—			—				(5,020	)						—		—			—		—				(5,267	)

Beneficial conversion premium	—		—		292			—				—				292			—		—			399		—				—				399
Issuance and shares upon conversion of Laurus Loans	4,900,000		48		2,531			—				—				2,579

Issuance of shares upon conversion of Laurus Loans																			4,900,000		48			2,487		—				—				2,535

Fair value of incremental shares issued	—		—		1,365			—				—				1,365			—		—			1,365		—				—				1,365
Issuaance of shares for employee stock purchase plan	10,407		1		7			—				—				8

Balance, June 30, 2005	34,241,281	$	348	$	124,993		$	(110,991	)		$	1,409			$	15,759
Issuance of shares for employee stock purchase plan																			15,462		1			9		—				—				10

Balance, September 30, 2005																			34,246,336	$	348		$	125,058	$	(110,880	)		$	1,051			$	15,577

During the three and ~~six~~nine months ended ~~June~~September 30, 2005, the Company issued zero and 4,900,000 shares, respectively, of common stock in conjunction with conversions under the Laurus Loans.


Date	Price		Shares Issued	Proceeds		Facility	Applied To	Price		Shares Issued	Proceeds		Facility	Applied To
January 2005	$	1.00	50,000	$	50	Term Note	Principal	$	1.00	50,000	$	50	Term Note	Principal
March 2005	$	0.52	3,600,000		1,879	Credit Line	Principal	$	0.52	3,600,000		1,835	Credit Line	Principal
March 2005	$	0.52	1,250,000		650	Term Note	Principal	$	0.52	1,250,000		650	Term Note	Principal

			4,900,000	$	2,579					4,900,000	$	2,535

Options representing 951,000 and 1,123,500 shares of the Company’s common stock were granted during the three and nine months ended September 30, 2005, respectively, with weighted average exercise prices of $1.03 per share and $1.04 per share, respectively. The following table summarizes activity under the 1997 Stock Option Plan during the nine months ended September 30, 2005.

~~No options were granted during the three months ended June 30, 2005. The following table summarizes activity under the 1997 Stock Option Plan during the six months ended June 30, 2005.~~

The weighted average fair value of options granted during the six months ended June 30, 2005 was $0.61 per share. 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 during the six months ended June 30, 2005: no common stock dividends; risk-free interest rates of 4.14% to 4.79%; 85% volatility; and an expected option life of 3 years. At June 30, 2005, the weighted average remaining contractual life of options outstanding was 4.7 years.

The following table summarizes information about options outstanding as of ~~June~~September 30, 2005:


	Options Outstanding				Options Exercisable			Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number Exercisable	Weighted-Average Exercise Price		Number Outstanding	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number Exercisable	Weighted-Average Exercise Price
		(in years)							(in years)
$ 1.00—$ 1.30	448,333	7.3	$	1.23	258,333	$	1.26	1,360,167	9.2	$	1.08	558,384	$	1.12
$ 1.31—$ 2.60	849,833	7.6	$	1.90	521,518	$	1.89	798,167	7.6	$	1.91	510,682	$	1.92
$ 2.61—$ 3.90	35,000	7.3	$	2.90	23,334	$	2.90	35,000	7.1	$	2.90	23,334	$	2.90
$ 3.91—$ 5.20	2,086,200	2.5	$	5.00	2,086,200	$	5.00	2,074,700	2.3	$	5.00	2,074,700	$	5.00
$ 5.21—$ 6.50	718,950	5.8	$	6.15	688,350	$	6.15	692,750	5.6	$	6.15	662,150	$	6.15
$ 6.51—$ 9.10	10,000	5.9	$	9.00	10,000	$	9.00	10,000	5.6	$	9.00	10,000	$	9.00
$ 9.11—$10.40	316,500	5.6	$	9.89	312,500	$	9.89	300,500	5.3	$	9.88	296,500	$	9.88
$10.41—$13.00	294,731	4.5	$	12.82	270,031	$	12.84	269,731	4.6	$	12.80	260,531	$	12.83

	4,759,547	4.7	$	5.07	4,170,266	$	5.44	5,541,015	5.5	$	4.37	4,396,281	$	5.11

~~The Company operates in two reportable segments,~~Operations for the BioSystems and Nucleic ~~Acids. Operations for these~~Acids operating 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. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company’s balance sheet are made at the corporate level and, accordingly, operating segment balance sheet information is not ~~typically~~ reviewed by operating decision makers.

The ~~BioSystems~~following table sets forth net sales and operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segment’s products are based upon two of the Company’s three core competencies: 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 all three of the Company’s core competencies: nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segment’s main products are nucleic acid building blocks or “phosphoramidites,” fluorescent markers, dyes and associated reagents and novel chemistry and process development services.

~~The following table sets forth net sales and operating income (loss) by segment.~~

During the three and ~~six~~nine months ended ~~June~~September 30, 2005, sales to ~~Novartis Pharmaceuticals, Inc. (“Novartis”)~~a large pharmaceutical company totaled ~~$667~~$599 and ~~$1,410,~~$2,009, respectively, and represented ~~9.7%~~9.0% and ~~10.2%~~9.8%, respectively, of net sales within the Company’s BioSystems operating segment and ~~8.7%~~6.9% and ~~9.4%~~8.5%, respectively, of total consolidated net sales. Sales to ~~Novartis~~this customer are governed by a non-binding master services agreement dated August 22, 2002.

During the three and ~~six~~nine months ended ~~June~~September 30, 2005, sales to Geron Corporation (“Geron”) totaled ~~$54~~$1,624 and ~~$105,~~$1,729, respectively, and represented ~~7.3%~~79.5% and ~~8.8%~~53.5%, respectively, of net sales within the Company’s Nucleic Acids operating segment and ~~less than 1% of~~18.7% and 7.3%, respectively, total net consolidated sales. During the three and ~~six~~nine months ended ~~June~~September 30, 2004, sales to Geron totaled ~~$1,174~~$1,695 and ~~$1,896,~~$3,591, respectively, and represented ~~48%~~62.9% and ~~40%~~48.6%, respectively, of net sales within the Company’s Nucleic Acids operating segment and ~~13%~~20.7% and ~~11%~~13.9%, respectively, of total consolidated net sales. Sales to Geron are governed by a non-binding supply agreement dated June 15, 2002, as amended. Under the supply agreement and related addendums, Geron has historically paid the Company for goods and services with its common stock. The terms of each addendum generally provide that Geron pre-pay 50% of the total sales price of goods sold under the addendum upon execution of the addendum and the remaining 50% upon acceptance of the related goods and services. Geron shares received by the Company are restricted for resale until they are registered with the Securities and Exchange Commission. The Company assumes all market risk related to the value of these securities and any selling costs are paid by the Company. Once registered, it has been the Company’s intent and practice to sell such securities as soon as practical.

The following is a summary of Geron shares received and sold during the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004.

The 101,801 Geron shares received by the Company in April 2005 were a prepayment for products that are expected to be completed and delivered to Geron in the second half of 2005. The related deferred revenue of $608 is included in “accrued expenses” in the accompanying unaudited consolidated balance sheet at June 30, 2005.

The Company had accrued expenses associated with its 2004 restructuring plan of ~~$581~~$368 and ~~$1,910~~$1,909 at ~~June~~September 30, 2005 and December 31, 2004, respectively. The balance at ~~June~~September 30, 2005 relates primarily to future rents on closed facilities (net of projected sublease rents) of which ~~$283~~$27 is expected to be paid during the remainder of 2005 and ~~$272~~$341 in 2006 and thereafter.

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

Contemporaneously with the closing of the private placement, the Company repaid all outstanding principal and accrued interest on the Laurus Loans, including fees to facilitate the private placement and prepayment penalties to Laurus in the sum of $824. As a result, the Credit Line with Laurus has been cancelled and is no longer available to the Company.

The Company is required to register all shares of common stock sold in the Offering and issuable upon exercise of the warrants. The common stock issued to these institutional investors may be sold in the secondary market at any time once such registration is effective. Failure to register these shares in a timely manner will subject the Company to liquidated damages of 1.5% of the aggregate purchase price per month for each successive 30-day period, calculated on a pro rata basis for any partial 30-day period.

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

~~We provide~~The Company develops, manufactures and sells innovative products for the analysis, synthesis and purification of nucleic acids through two operating segments, BioSystems and Nucleic Acids.

Bioinstruments. The flagship product of the BioSystems operating segment is the WAVE system which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There was a world-wide installed base of 1,269 WAVE systems as of September 30, 2005. Additionally, this operating segment utilizes its sales and distribution network to sell a number of independent, third party equipment platforms. Service contracts to maintain installed systems are sold and supported by technical support personnel.

Bioconsumables. The installed WAVE base generates a demand for consumables that are required for the ~~synthesis, purification~~system’s continued operation. These products are developed, manufactured and ~~analysis of nucleic acids. Our operations fall into two principal business units,~~sold by this operating segment. In addition, the BioSystems operating segment manufactures and ~~Nucleic Acids. Our BioSystems~~sells consumable products that can be used on multiple, independent platforms. These products include ~~our WAVE~~^® ~~automated instrument systems, WAVE associated consumable products~~SURVEYOR Nuclease and ~~other related consumable products. Our~~a range of HPLC separation columns.

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

The Nucleic Acids ~~products consist principally of~~operating segment develops, manufactures and markets chemical building blocks for nucleic acid ~~synthesis. Both business units have service offerings as well, including genetic variation discovery and analysis services and custom~~ synthesis ~~of specialty nucleic acids.~~

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

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

Our third core competency is nucleic acid chemistries. Our synthetic nucleic acid products consist of chemical building blocks of nucleic acids (known as phosphoramidites). We also manufacture related specialty chemicals such as fluorescent markers and molecular tags, dyes, quenchers, linkers, and solvents used to modify nucleic acids for subsequent detection or manipulation. These products are used by research organizations, diagnosticbiotechnology, pharmaceutical, oligonucleotide synthesis companies and ~~pharmaceutical companies.~~research institutions throughout the world. These products are produced primarily in ~~our~~this operating segment’s only facility in Glasgow, ~~Scotland facility.~~Scotland. Prior to November 11, 2004, ~~we had~~this operating segment also manufactured synthesized segments of large-scale, GMP nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, ~~we sold~~ the assets associated with this facility were sold to ~~a subsidiary of Eyetech Pharmaceuticals, Inc.~~an unaffiliated, third party. As a result, ~~of this sale, we~~the Nucleic Acids operating segment no longer ~~manufacture~~manufactures and ~~sell~~sells these specialized oligonucleotides.

~~Our operations are managed based upon the nature~~ A substantial portion of ~~the products~~this operating segment’s revenues during 2005 and services provided. Accordingly, we operate in two reportable segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income or loss. See the Notes to the accompanying unaudited consolidated financial statements for detailed segment information.2004 have been derived from one customer.

Since 2000 (the year of our initial public offering), we have incurred net losses of ~~$98.15~~$98.54 million largely related to our Nucleic Acids operating segment. We instituted significant changes during the fourth quarter of 2004 designed to, among other things, better align our cost structure with projected revenues, focus on opportunities in our BioSystems operating segment, and minimize the adverse financial effect of our Nucleic Acids operating segment. Specifically, during the fourth quarter of 2004, we sold our manufacturing facility in Boulder, Colorado and implemented a restructuring plan (the “2004 Restructuring Plan”). While the primarily goals of these changes were to provide the foundation for a self-sustaining, growth-oriented company with positive cash flows and earnings, there can be no assurance that we can achieve these goals.

Our liquidity and working capital positions improved during the first ~~six~~nine months of 2005 due principally to conversions of $2.53 million of borrowings under our credit line (“Credit Line”) and term note (“Term Note”) (collectively, the “Laurus Loans”) with Laurus Master Fund, Ltd. (“Laurus”) into common stock. At ~~June~~September 30, 2005, we had working capital of $1.21 million and an accumulated deficit of ~~$110.99~~$110.88 million. Subsequent to

September 30, 2005, we finalized the private placement of securities to institutional investors that resulted in gross proceeds of $15.08 million that were used to repay the Laurus Loans and for our future general working capital purposes.

As discussed more thoroughly below and throughout this report, the quarter was one of progress on many fronts. From a product perspective, we introduced a new WAVE platform. We ~~achieved a number~~expect this will provide for additional instrument sales and upgrade opportunities in the coming quarters. We also enhanced our laboratory infrastructure and product offerings in order to capitalize on the increasing demand for molecular-based personalized medicine. For the first time in our history, we reported positive quarterly income from operations and net income. These results were driven by 21% year-over-year revenue growth in our BioSystems operating segment and the production and sale of significant ~~milestones during~~amount of customized phosperamidates from our Nucleic Acids operating segment. Lastly, we completed a private placement of common stock and warrants on October 31, 2005 that allowed us to eliminate our debt with Laurus Master Funds, Ltd. (“Laurus”), enhanced our existing institutional shareholder base and added approximately $5.40 million of cash to our consolidated balance sheet.

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

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

We generated quarterly income from operations and net ~~loss during~~income which continues a positive trend that began in the first quarter ~~ended June 30, 2005~~ of ~~$0.94 million and $1.00 million, respectively, were the best in our public-company history.~~this year.

Year-over-year net sales increases of 5%21% in our BioSystems operating segment, ~~together with~~sales from our Nucleic Acids operating segment to Geron Corporation (“Geron”), and cost reductions ~~from~~associated with our 2004 Restructuring Plan led to our record performance. Recurring net sales ~~(consumables plus service contract revenue)~~ associated with our increasing installed base of 1,269 WAVE systems grew to represent ~~40%~~32% of consolidated net sales and nearly ~~45%~~42% of net sales in our ~~BioSystem~~BioSystems operating segment. We ~~expect that we can leverage on our existing cost structure~~consider net sales of consumables and service contracts to ~~support annual revenues ranging up to $40.00.~~be recurring.

~~Operating cash flows continue~~Subsequent to ~~validate~~September 30, 2005, we finalized the ~~effectiveness~~private placement of ~~our 2004 Restructuring Plan.~~securities to institutional investors that resulted in gross proceeds to the Company of $15.08 million. ~~Cash used in operations~~On October 31, 2005, we closed a private placement of the following securities to institutional investors: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share. The aggregate purchase price for the ~~three~~securities sold in the private placement was $1.01 per share of common stock initially being sold for $15.08 million. The proceeds from the private placement allowed us to enhance our liquidity and ~~six months ended June 30, 2005 totaled $1.03~~overall working capital positions by eliminating all convertible debt with Laurus and adding approximately $5.37 million ~~and $1.17 million, respectively. This represents significant improvement over historical levels~~ of cash ~~used in operations that have ranged from $1.76 million~~ to ~~$5.73 million and demonstrates significant progress toward a major goal of neutral to positive operating cash flows by the end of 2005.~~

~~We completed testing of~~ our ~~new generation WAVE platform and expect to roll it out during the third quarter of 2005.~~There are significant technical and functional enhancements designed into the WAVE 4500 (our fourth generation WAVE platform) that offer users enhanced flexibility, speed and ease of operation, throughput, and sensitivity. We expect the WAVE 4500 to drive new product and upgrade sales in the second half of 2005 and into 2006.consolidated balance sheet.

~~Our investment in Discovery Services continues to yield significant growth.~~For the six months ended June 30, 2005, net sales from Discovery Services totaled $1.45 million compared to $0.89 million for the same period of 2004, an increase of 63%. These contract research service offerings represent a relatively new area of business for us. We plan to continue to seek opportunities to provide genetic variation discovery and analysis services to pharmaceutical and other customers and believe that these services provide us significant opportunities to expand revenue in the future.


Amounts in thousands	2005		2004		Change			% Change
Dollars in thousands										2005			2004			Change			% Change
Net Sales
Bioinstruments	$	3,734	$	3,966	$	(232	)	(6	)%	$	3,745		$	2,932		$	813		28	%
Bioconsumables		2,494		2,059		435		21	%		2,210			2,057			153		7	%
Discovery Services		661		538		123		23	%		708			512			196		38	%

Total BioSystems Business Unit		6,889		6,563		326		5	%		6,663			5,501			1,162		21	%

Chemical Building Blocks		744		1,740		(996	)	(57	)%		2,043			2,280			(237	)	(10	)%
Specialty Oligonucleotides and Services		—		708		(708	)	(100	)%		—			413			(413	)	(100	)%

Total Synthetic Nucleic Acids Business Unit		744		2,448		(1,704	)	(70	)%		2,043			2,693			(650	)	(24	)%

Total Net Sales		7,633		9,011		(1,378	)	(15	)%		8,706			8,194			512		6	%

Cost of Goods Sold
Bioinstruments		1,753		1,656		97		6	%		1,818			1,198			620		52	%
Bioconsumables		1,065		982		83		9	%		1,116			1,077			39		4	%
Discovery Services		583		327		256		78	%		611			386			225		58	%

Total BioSystems Business Unit		3,401		2,965		436		15	%		3,545			2,661			884		33	%

Chemical Building Blocks		1,049		1,335		(286	)	(21	)%		1,216			2,659			(1,443	)	(54	)%

Specialty Oligonucleotides and Services		—		1,558		(1,558	)	(100	)%		—			1,537			(1,537	)	(100	)%

Total Synthetic Nucleic Acids Business Unit		1,049		2,893		(1,844	)	(64	)%		1,216			4,196			(2,980	)	(71	)%

Total Cost of Goods Sold		4,450		5,858		(1,408	)	(24	)%		4,761			6,857			(2,096	)	(31	)%

Selling, General and Administrative Expenses		3,537		4,268		(731	)	(17	)%		2,885			4,353			(1,468	)	(34	)%
Research and Development Expenses		581		1,672		(1,091	)	(65	)%		510			1,743			(1,233	)	(71	)%
Impairment Charges		—		11,964		(11,964	)	(100	)%
Impairment charge											247			—			247		100	%
Other Income (Expense)											(184	)		(3,682	)		(3,498	)	(95	)%

Net Sales. Net sales for the quarter ended ~~June~~September 30, 2005 ~~decreased $1.38~~increased $0.51 million or ~~15%~~6% from the same period of 2004 as a result of a ~~$0.33~~$1.16 million or 5%21% increase in sales in our BioSystems operating segment offset by a ~~$1.70~~$0.65 million or ~~70%~~24% decrease in sales in our Nucleic Acids operating segment.

The increase in sales in our BioSystems operating segment resulted from ~~an decrease~~increases of ~~$0.23~~$0.81 million or 6%28% from bioinstruments, ~~increases in sales of bioconsumables of $0.44~~$0.15 million or ~~21%~~7% from bioconsumables and ~~increases~~$0.20 million or 38% from Discovery ~~Services of $0.12 million or 23%.~~Services. WAVE Systems sold totaled 2528 during the quarter ended ~~June~~September 30, 2005 compared to 3419 during the same period of 2004. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of approximately ~~1,241~~1,269 units at ~~June~~September 30, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in ~~Discovery Services~~discovery services revenue during 2005 was primarily attributable to the discovery services agreements that we entered into with ~~Novartis Pharmaceuticals, Inc. (“Novartis”)~~a large pharmaceutical company to support their clinical development of oncology therapeutics. During the three months ended ~~June~~September 30, 2005, Discovery Services sales to ~~Novartis~~this customer totaled ~~$0.67~~$0.60 million and represented ~~10%~~9% of net sales within the BioSystems operating segment and 9%7% of total consolidated net sales. We have no long-term agreement with ~~Novartis,~~this customer, therefore, sales will fluctuate and may be zero. Future revenues from our BioSystems operating segment would be substantially reduced if ~~Novartis’s~~this customer’s need for our products declined.

Nucleic Acids operating segment sales decreased by ~~$1.71~~$0.65 million or ~~70%~~24% during the quarter ended ~~June~~September 30, 2005 compared to the same period of 2004 as a result of fewer chemical building block sales to Geron Corporation (“Geron”) and the sale of our specialty oligonucleotides facility in Boulder, Colorado. Sales to Geron during the ~~second~~third quarter of 2005 totaled ~~$0.05~~$1.62 million compared to ~~$1.17~~$1.73 million during the ~~second~~third quarter of 2004. Net sales to Geron during the quarter ended ~~June~~September 30, 2005 represented 7%80% of net sales in our Nucleic Acids operating segment and ~~did not represent a significant portion~~19% of total consolidated net sales. Net sales to Geron during the quarter ended ~~June~~September 30, 2004 represented ~~48%~~63% of net sales within our Nucleic Acids operating segment and ~~13%~~21% of total consolidated net sales. We have no long-term agreement with Geron, therefore, sales will fluctuate and may be zero. Future ~~revenues~~revenue from our Nucleic Acids operating segment would be substantially reduced if Geron’s need for our products declined. As a result of the sale of our facility in Boulder, Colorado, net sales of specialty oligonucleotides decreased by ~~$0.71~~$0.41 million. We no longer manufacture or sell oligonucleotides.

Costs of Goods Sold.Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs and supplies) associated with our Discovery Services operations. Depreciation expense included in costs of goods sold totaled ~~$0.56~~$0.70 million and ~~$0.59~~$0.76 million during the quarters ended ~~June~~September 30, 2005 and 2004, respectively.

Costs of goods sold during the quarter ended ~~June~~September 30, 2005 decreased ~~$1.41~~$2.10 million or ~~24%~~31% from the same period of 2004 as a result of a ~~$0.43~~$2.98 million or ~~15% increase~~71% decrease in our ~~BioSystems~~Nucleic Acids operating segment offset by a ~~$1.84~~$0.88 million or ~~64% decrease~~33% increase in our ~~Nucleic Acids~~BioSystems operating segment. The overall decrease was primarily attributable to the sale of our oligonucleotide facility and from termination of associated personnel and the elimination of facilities related costs in conjunction with our 2004 Restructuring Plan.

Gross profit was ~~$3.18~~$3.95 million or ~~42%~~45% of total net sales during the ~~second~~third quarter of 2005 compared to ~~$3.15~~$1.34 million and ~~35%~~16% during the same period of 2004. A summary of gross profit by operating segment follows (dollars in thousands):


	Quarter Ended June 30,										Quarter Ended September 30,
	2005					2004					2005				2004
	Gross Profit/(Loss)			Percent of Revenue		Gross Profit/(Loss)			Percent of Revenue		Gross Profit		Percent of Revenue		Gross Profit/(Loss)			Percent of Revenue
BioSystems operating segment	$	3,488		46	%	$	3,598		40	%	$	3,118	47	%	$	2,840		52	%
Nucleic Acids operating segment		(305	)	(4	)%		(445	)	(5	)%		827	41	%		(1,503	)	(56	)%

	$	3,183		42	%	$	3,153		35	%	$	3,945	45	%	$	1,337		16	%

The ~~increase~~decrease in BioSystems operating segment gross profit as a ~~percentage~~percent of revenue to ~~46%~~47% from ~~40%~~52% for the quarters ended ~~June~~September 30, 2005 and 2004, respectively, is largely attributable to changes in the composition of products sold. Generally, sales of WAVEs and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from discovery services are currently less than expected due to the continuing build out of capacity and expansion of product offerings. Our Nucleic Acids operating segment continues to have excess capacity in its Glasgow, Scotland manufacturing facility that will adversely impact costs of goods sold and gross profit until demand for our Nucleic Acids building block products increase.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled ~~$3.54~~$2.89 million during the quarter ended ~~June~~September 30, 2005 compared to ~~$4.27~~$4.35 million during the same period of 2004, a decrease of ~~$0.73~~$1.47 million or ~~17%~~34%. As a percentage of net sales, selling, general and administrative expenses totaled 33% and 53% during the quarters ended September 30, 2005 and 2004, respectively. This decrease resulted primarily from termination of associated personnel and the elimination of facilities related costs in conjunction with the 2004 Restructuring ~~Plan, offset~~Plan. Foreign currency transaction adjustments reduced operating expenses by ~~the effects of unfavorable foreign currency transactions that totaled $0.23~~approximately $0.19 million and ~~$0.01~~$0.26 million during the ~~quarters~~three months ended ~~June~~September 30, 2005 and ~~2004, respectively.~~2004. Depreciation expense included in selling, general and administrative expenses totaled ~~$0.19~~$0.14 million and ~~$0.25~~$0.27 million during the quarters ended ~~June~~September 30, 2005 and 2004, respectively.

~~As a percentage of revenue, selling, general and administrative expenses totaled just over 46% and 47% during the quarters ended June 30, 2005 and 2004, respectively.~~

Research and Development Expenses. Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled ~~$0.58~~$0.51 million during the quarter ended ~~June~~September 30, 2005 compared to ~~$1.67~~$1.74 million during the same period of 2004, a decrease of ~~$1.09~~$1.23 million or ~~65%~~71%. The decrease resulted primarily from the 2004 Restructuring Plan, which resulted in the elimination of substantially all research and development efforts associated with our Nucleic Acids operating segment. Depreciation expense included in research and development expenses included ~~$0.12~~$0.13 million and ~~$0.22~~$0.25 million during the quarters ended ~~June~~September 30, 2005 and 2004, respectively.

As a percentage of ~~revenue,~~net sales, research and development expenses totaled 8%6% and ~~19%~~21% of revenue during the quarters ended ~~June~~September 30, 2005 and ~~2004.~~2004, respectively. We expect to continue to invest ~~a substantial portion~~up to 10% of our revenues in research and development activities primarily associated with our BioSystems operating segment. Research and development costs are expensed in the period in which they are incurred.

Impairment Charge. During the quarter ended September 30, 2005, we determined that certain international patent pursuits were no longer consistent with our strategic plan. Accordingly, we recorded an impairment charge of $247 related to the abandonment of such pursuits.

Other Income (Expense). Other ~~income/(expense)~~expense during the quarter ended ~~June~~September 30, 2005 of ~~$0.04~~$0.18 million consisted primarily of interest ~~expense of $0.08 million and other income net of $.03 million.~~expense. Other expense during the quarter ended ~~June~~September 30, 2004 consisted of interest expense of ~~$0.35~~$0.72 million, loss on debt extinguishment of $2.86 million and $0.10 million of other expense, ~~net of $0.03 million,~~ which consisted primarily of net investment losses associated with sales of Geron stock.


	Quarter Ended June 30,					Quarter Ended September 30,
	2005			2004		2005			2004
Interest paid or accrued on outstanding debt	$	134		$	152	$	172		$	494
Amortization of debt premiums		(124	)		—		(124	)		—
Amortization of debt discounts – warrants		9			—		4			—
Amortization of debt discount – beneficial conversion feature		15			158		81			191
Other		49			36		48			38

	$	83		$	346	$	181		$	723

The decrease in interest paid or accrued on outstanding debt resulted from lower average debt balances partially offset by higher interest rates. Gross debt (before related premiums and discounts) totaled ~~$7.79~~$8.26 million at ~~June~~September 30, 2005 with an interest rate of 8.75% compared to $8.50 million at December 31, ~~2004.~~2004 with an interest rate of 7.25%. Our Laurus Loans had average balances during the quarters ended ~~June~~September 30, 2005 and 2004 of ~~$7.65~~$8.07 million and ~~$8.25~~$9.15 million, ~~respectively, with weighted average interest rates of 8.00% and 6.00%,~~ respectively. The high and low borrowings under our Credit Line during the quarter ended ~~June~~September 30, 2005 were ~~$6.49~~$6.83 million and ~~$5.26~~$5.88 million, respectively.

Income Tax Expense.Income tax recorded during the three months ended ~~June~~September 30, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions, offset by refunds received.

Due to the Company’s cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company ~~has~~did not provided for an income tax benefit during the three months ended ~~June~~September 30, 2005 or 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. As of ~~June~~September 30, 2005, the Company’s deferred tax assets were offset by a valuation allowance of approximately ~~$39.7~~$41.2 million.

Results of Operations ~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004


Amounts in thousands	2005		2004		Change			% Change
Dollars in thousands										2005			2004			Change			% Change
Net Sales
Bioinstruments	$	7,598	$	7,833	$	(235	)	(3	)%	$	11,343		$	10,766		$	577		5	%
Bioconsumables		4,767		4,229		538		13	%		6,977			6,286			691		11	%
Discovery Services		1,451		886		565		64	%		2,159			1,398			761		54	%

Total BioSystems Business Unit		13,816		12,948		868		7	%		20,479			18,450			2,029		11	%
Chemical Building Blocks		1,189		3,308		(2,119	)	(64	)%		3,232			5,588			(2,356	)	(42	)%
Specialty Oligonucleotides and Services		—		1,384		(1,384	)	(100	)%		—			1,796			(1,796	)	(100	)%

Total Synthetic Nucleic Acids Business Unit		1,189		4,692		(3,503	)	(75	)%		3,232			7,384			(4,152	)	(56	)%

Total Net Sales		15,005		17,640		(2,635	)	(15	)%		23,711			25,834			(2,123	)	(8	)%
Cost of Goods Sold
Bioinstruments		3,578		3,203		375		12	%		5,396			4,401			995		23	%
Bioconsumables		2,217		1,903		314		17	%		3,334			2,981			353		12	%
Discovery Services		1,133		655		478		73	%		1,744			1,041			703		68	%

Total BioSystems Business Unit		6,928		5,761		1,167		20	%		10,474			8,423			2,051		24	%
Chemical Building Blocks		1,920		2,794		(874	)	(31	)%		3,135			5,452			(2,317	)	(43	)%
Specialty Oligonucleotides and Services		—		3,072		(3,072	)	(100	)%		—			4,609			(4,609	)	(100	)%

Total Synthetic Nucleic Acids Business Unit		1,920		5,866		(3,946	)	(67	)%		3,135			10,061			(6,926	)	69	%

Total Cost of Goods Sold		8,848		11,627		(2,779	)	(24	)%		13,609			18,484			(4,875	)	(26	)%
Selling, General and Administrative Expenses		7,138		8,513		(1,375	)	(16	)%		10,023			12,866			(2,843	)	(22	)%
Research and Development Expenses		1,186		3,601		(2,415	)	(67	)%		1,696			5,344			(3,648	)	(68	)%
Impairment Charges		—		11,964		(11,964	)	(100	)%		247			11,964			(11,717	)	(98	)%
Other Income (Expense)											(1,888	)		(4,704	)		(2,816	)	(60	)%

Net Sales. Net sales for the ~~six~~nine months ended ~~June~~September 30, 2005 decreased ~~$2.64~~$2.12 million or ~~15%~~8% from the same period of 2004 as a result of a ~~$0.87~~$4.15 million or ~~7% increase~~56% decrease in net sales infrom our ~~BioSystems~~Nucleic Acids operating segment offset by a ~~$3.50~~$2.03 million or ~~75% decrease~~11% increase in net sales in our ~~Nucleic Acids~~BioSystems operating segment.

The increase in net sales in our BioSystems operating segment resulted from ~~a decrease~~an increase of ~~$0.24~~$0.58 million or 3%5% from bioinstruments, ~~increases in sales of bioconsumables of $0.54~~$0.69 million or ~~13%~~11% from bioconsumables, and ~~increases from Discovery Services of $0.57~~$0.76 million or ~~64%.~~54% from discovery services. WAVE Systems sold totaled 4876 during the ~~six~~nine months ended ~~June~~September 30, 2005 compared to 6685 during the same period of 2004. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of approximately 1,269 units at September 30, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in ~~Discovery Services~~discovery services revenue during 2005 was primarily attributable to the discovery services agreements that we entered into with ~~Novartis~~a large pharmaceutical company to support their clinical development of oncology therapeutics. During the ~~six~~nine months ended ~~June~~September 30, 2005, ~~Discovery Services~~discovery services sales to ~~Novartis~~this customer totaled ~~$1.41~~$2.01 million and represented 10% of net sales within the BioSystems operating segment and 9% of total consolidated net sales. We have no long-term agreement with ~~Novartis,~~customer, therefore, ~~Sales~~sales will fluctuate and may be zero. ~~Future revenues from our Nucleic Acids operating segment would be substantially reduced if Geron’s need for our products declined.~~ Future revenues from our BioSystems operating segment would be substantially reduced if ~~Novartis’s~~this customer’s need for our products declined.

Nucleic Acids operating segment sales decreased by ~~$3.50~~$4.15 million or ~~75%~~56% during the ~~six~~nine months ended ~~June~~September 30, 2005 compared to the same period of 2004 as a result of fewer chemical building block sales to Geron and the sale of our specialty oligonucleotides facility in Boulder, Colorado. Net sales to Geron during the ~~six~~nine month ended ~~June~~September 30, 2005 totaled ~~$0.10~~$1.73 million compared to ~~$1.90~~$3.59 million during the same period of 2004. Net sales to Geron during the ~~six~~nine months ended ~~June~~September 30, 2005 represented 8%54% of net sales in our Nucleic Acids operating segment and ~~did not represent a significant portion~~7% of total consolidated net sales. Net sales to Geron during the ~~six~~nine months ended ~~June~~September 30, 2004, represented ~~18%~~49% of net sales within our Nucleic Acids operating segment and ~~11%~~14% of total consolidated net sales. We have no long-term agreement with Geron, therefore, sales will fluctuate and may be zero. Future revenue from our Nucleic Acids operating segment would be substantially reduced if Geron’s need for our products declined. As a result of the sale of our facility in Boulder, Colorado, net sales of specialty oligonucleotides decreased by ~~$1.38~~$1.80 million. We no longer manufacture or sell ~~oligonucleotides~~

Costs of Goods Sold.Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs and supplies) associated with our Discovery Services operations. Depreciation expense included in costs of goods sold totaled ~~$1.14~~$2.23 million and ~~$1.15~~$2.22 million during the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, respectively.

Costs of goods sold during the ~~six~~nine months ended ~~June~~September 30, 2005 decreased ~~$2.78~~$4.88 million or ~~24%~~26% from the same period of 2004 as a result of a ~~$1.17~~$6.93 million or ~~20% increase in our BioSystems operating segment and a $3.95 million or 67%~~69% decrease in our Nucleic Acids operating segment offset by a $2.05 million or 24% increase in our BioSystems operating segment. The overall decrease was primarily attributable to the sale of our oligonucleotide facility and from termination of associated personnel and the elimination of facilities related costs in conjunction with our 2004 Restructuring Plan.

Gross profit was ~~$6.16~~$10.10 million or ~~41%~~43% of total net sales during the ~~six~~nine months ofended September 30, 2005 compared to ~~$6.01~~$7.35 million and ~~34%~~28% during the same period of 2004. A summary of gross profit by operating segment follows (dollars in thousands):


	Six Months Ended June 30,										Nine Months Ended September 30,
	2005					2004					2005				2004
	Gross Profit (Loss)			Percent of Revenue		Gross Profit (Loss)			Percent of Revenue		Gross Profit		Percent of Revenue		Gross Profit/(Loss)			Percent of Revenue
BioSystems operating segment	$	6,888		46	%	$	7,187		41	%	$	10,005	49	%	$	10,027		54	%
Nucleic Acids operating segment		(731	)	(5	)%		(1,174	)	(7	)%		97	3	%		(2,677	)	(36	)%

	$	6,157		41	%	$	6,013		34	%	$	10,102	43	%	$	7,350		28	%

The ~~increase~~decrease in BioSystems operating segment gross profit as a ~~percentage~~percent of revenue to ~~46%~~49% from ~~41%~~54% for the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, respectively, is largely attributable to changes in the composition of products sold. Generally, sales of WAVEs and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from discovery services are currently less than expected due to the continuing build out of capacity and expansion of product offerings. Our Nucleic Acids operating segment continues to have excess capacity in its Glasgow, Scotland manufacturing facility that will adversely impact costs of goods sold and gross profit until demand for our Nucleic Acids building block products increase.

As a percentage of revenue, selling, general and administrative expenses totaled ~~just over 48%~~42% and 50% during the ~~six~~nine months ended ~~June~~September 30, 2005 and ~~2004.~~2004, respectively. This decrease resulted primarily from termination of associated personnel and the elimination of facilities related costs in conjunction with the 2004 Restructuring Plan. Foreign currency transaction adjustments increased operating expenses by approximately $0.24 million during the nine months ended September 30, 2005 compared to the same period of 2004 when foreign currency transaction adjustments reduced operating expenses by approximately $0.14 million. Depreciation expense included in selling, general and administrative expenses totaled $0.50 million and $0.74 million during the nine months ended September 30, 2004 and 2004, respectively.

Research and Development Expenses. Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled ~~$1.19~~$1.70 million during the ~~six~~nine months ended ~~June~~September 30, 2005 compared to ~~$3.60~~$5.34 million during the same period of 2004, a decrease of ~~$2.41~~$3.65 million or ~~67%~~68%. The decrease related primarily to the 2004 Restructuring Plan, which resulted in the elimination of substantially all research and development efforts associated with our Nucleic Acids operating segment. Depreciation expense included in research and development expenses included ~~$0.25~~$0.42 million and ~~$0.43~~$0.75 million during the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, respectively.

As a percentage of revenue, research and development expenses totaled 8%7% and ~~20%~~21% of revenue during the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, respectively. We expect to continue to invest ~~a substantial portion~~up to 10% of our revenues in research and development activities primarily associated with our BioSystems operating segment. Research and development costs are expensed in the year in which they are incurred.

Impairment Charges.During the nine months ended September 30, 2005, we determined that certain international patent pursuits were no longer consistent with our strategic plan. Accordingly, we recorded an impairment charge of $247 related to the abandonment of such pursuits.

During the second quarter of 2004, our Board of Directors directed us to explore strategic alternatives for the Nucleic Acids operating segment. The process included significant due diligence by us, our advisors and prospective independent buyers and other interested parties. Based upon information obtained through this process, we determined that it was more likely than not that the value of the assets associated with this business was impaired. We engaged an external valuation firm to assist us in conducting an interim period impairment test that resulted in us recording a non-cash charge of $11.96 million related to these assets during the nine months ended September 30, 2004. The charge consisted of $9.87 million related to the impairment of goodwill and $2.10 million related to the impairment of property and equipment.

Other Income (Expense). Other expense during the ~~six~~nine months ended ~~June~~September 30, 2005 of ~~$1.70~~$1.89 million consisted of interest expense of ~~$1.74~~$1.92 million and other income ~~net~~ of ~~$.04~~$0.03 million. Other expense during the ~~six~~nine months ended ~~June~~September 30, 2004 consisted of interest expense of ~~$0.94~~$1.68 million, loss on debt extinguishment of $2.86 million and other ~~income net~~expense of ~~$0.07~~$0.16 million, which consisted primarily of net investment losses associated with sales of Geron stock.


	Six months Ended June 30,					Nine months Ended September 30,
	2005			2004		2005			2004
Interest paid or accrued on outstanding debt	$	305		$	237	$	477		$	761
Amortization of debt premiums		(692	)		—		(816	)		—
Amortization of debt discounts – warrants		20			—		24			—
Amortization of debt discount – beneficial conversion feature		644			618		725			809
Valuation charge associated with March 2005 conversions		1,365			—		1,365			—
Other		96			80		144			114

	$	1,738		$	935	$	1,919		$	1,684

The increase in interest paid or accrued on outstanding debt resulted from higher average debt balances and interest rates. Gross debt (before related premiums and discounts) totaled ~~$7.79~~$8.26 million at ~~June~~September 30, 2005 with an interest rate of 8.75% compared to $8.50 million at December 31, ~~2004.~~2004 with an interest rate of 7.25%. During the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004, we had average debt of ~~$8.01~~$8.03 million and ~~$7.01~~$7.81 million, ~~respectively, with weighted average interest rates of 7.67% and 6.0%,~~ respectively. The high and low borrowings under our Credit Line during the ~~six~~nine months ended ~~June~~September 30, 2005 were $6.90 million and $4.75 million, respectively.

On March 18, 2005, the Company agreed to allow Laurus to convert $1.88 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock at $0.52 per share. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock at $0.52 per share. Laurus agreed to apply this Term Note conversion against substantially all remaining 2005 scheduled principal payments on such loan. The closing market price of the Company’s common stock the day before each of these conversions was $0.58 per share. No other provisions of our Credit Line or Term Note were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions we accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge of $1.37 million related to the fair value of incremental shares received by Laurus.

Loss on debt extinguishment totaled $2.86 million during the nine months ended September 30, 2004. As described in Note E to the accompanying consolidated financial statements, certain August 31, 2004 modifications to our Laurus Loans were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the original and modified agreements was greater than 10%. As such, we recorded a loss on extinguishment of debt of $2.86 million at August 31, 2004 reflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7.43 million and (ii) the fair value of the new debt instrument of $10.29 million plus the fair value of the new warrants of $0.11 million. The difference between the fair value of the new debt of $10.29 million and the face value of the debt of $8.57 million represents a premium, which will be reflected as a reduction of interest expense over the life of the new debt.

Income Tax Expense.Income tax recorded during the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions, offset by refunds received.

determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. As of ~~June~~September 30, 2005, the Company’s deferred tax assets were offset by a valuation allowance of approximately ~~$39.7~~$41.2 million.

Our working capital positions at ~~June~~September 30, 2005 and December 31, 2004 were as follows ~~(amounts are in~~(in thousands):


	June 30, 2005		December 31, 2004			Change			September 30, 2005		December 31, 2004			Change
Current assets⁽¹⁾	$	15,893	$	17,908		$	(2,015	)	$	16,399	$	17,908		$	(1,509	)
Current liabilities		15,712		18,724			(3,012	)		14,986		18,724			(3,738	)

Working Capital	$	181	$	(816	)	$	997		$	1,413	$	(816	)	$	2,229

The improvement in our working capital position during the first ~~six~~nine months of 2005 was due primarily to conversions of $2.58 million of borrowings under our Laurus Loans into shares of our common stock.

~~While we expect~~ We had $0.91 million available under our existing sources of liquidity to be sufficient to meet our cash needs for the remainder of 2005 and beyond, there can be no assurances that they will be, especially if we do not generate net positive cash flows from operations. It is essential that we achieve revenue growth in our BioSystems operating segment and manage costs according to our existing plan. Our projected liquidity needs may or may not be realized based upon actual operating results and capital project requirements. Accordingly, if our existing cash balances, cash generated by operations, and available borrowings under the Credit Line ~~are insufficient~~at September 30, 2005. On October 31, 2005, we closed the private placement of securities to satisfy our liquidity requirements, we may need to sell additional equity or debt securities or obtain additional credit arrangements, sell certain assets or further reduce expenses. We are monitoring our liquidity position and are prepared to take appropriate measures, as needed, to address liquidity. We cannot assure youinstitutional investors that ~~any financing arrangement will be available~~resulted in ~~amounts or on terms acceptable to us. Our failure to raise additional capital, if needed, would harm our financial condition, results of operations and our business.~~

~~Laurus Loans~~. The Credit Line is a $7.50 million line of credit that we entered into with Laurus in December 2003. The term of the Credit Line is three years carrying an interest rate of 2.0% over the prime rate or a minimum of 6.0% (8.00% at June 30, 2005). Funds available under the Credit Line are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1.00 million related to inventory balances. The Credit Line is secured by most of our assets. Prior to amendmentsgross proceeds to the ~~Credit Line discussed below, payment~~Company of ~~interest and principal could, under certain circumstances, be made with shares~~$15.08 million. The securities sold in the private placement consisted of our 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. We could elect to convert only if our 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 our common stock. Upon entering into the Credit Line, we issued warrants to Laurus to acquire 550,000(i) 14,925,743 shares of the ~~our~~Company’s common stock, atand (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price ~~exceeding~~of $1.20 per share. The aggregate purchase price for the ~~average trading price~~securities sold in the private placement was $1.01 per share of ~~our~~ common stock ~~over~~initially being sold. Contemporaneously with the ~~ten trading days prior to the date~~closing of the ~~warrant.~~

~~In February 2004,~~private placement, we entered into the $2.75 million Term Note with Laurus. The Term Note carries an interest rate of 2.0% over the prime rate or a minimum of 6.0% (8.00% at June 30, 2005) and has a term of 3 years. Prior to amendments to the Term Note discussed below, therepaid all outstanding principal and accrued interest on the Term Note could be converted into our common stock at a fixed conversion price of $2.61 per share. Upon entering into the Term Note, we issued warrants to Laurus to acquire 125,000 shares of our common stock. Borrowings under the Term Note were primarily used to retire the mortgage debt on our Glasgow, Scotland facility. Remaining borrowings of approximately $0.75 million were used to complete the build-out of the Glasgow facility, complete the consolidation our Glasgow operations into the new facility and provide funds for operations.

In February 2004, Laurus waived the borrowing base limitation on the Credit Line, thereby making the full $7.50 million facility available to us regardless of the available collateral. On August 31, 2004, Laurus agreed to extend the borrowing base waiver on the Credit Line through March 19, 2005. In addition, Laurus deferred certain payments due under the Term Note and reduced the interest rate on both of the Laurus Loans, including fees to ~~0% for any day~~facilitate the ~~closing sale price of our common stock is at or above $1.75 per share. In return, we lowered the conversion price on each of the Laurus Loans to $1.00 per share~~private placement and ~~issued a warrant~~prepayment penalties to Laurus ~~covering an additional 400,000 common shares at an exercise price~~in the sum of ~~$1.25 per share. The closing price of our common stock on August 31, 2004 was $1.20 per share.~~

~~On March 18, 2005, Laurus agreed to extend the borrowing base waiver on~~$0.82 million. As a result, the Credit Line ~~until March 31, 2006. In connection~~ with ~~this waiver,~~Laurus has been cancelled and is no longer available to the Company.

While we ~~agreed~~believe that existing sources of liquidity are sufficient to ~~allow Laurus~~meet expected cash needs through 2006, we have experienced recurring net losses and have historically relied upon cash flows from investing and financing activities to ~~convert $1.87 million~~offset significant cash outflows from operating activities. To the extent necessary, we believe that we can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of our business plan. Ultimately, we must achieve sufficient revenues in order to generate positive net earnings and cash flows from operations.

The following shows the actual and as adjusted effects of the ~~outstanding principal~~private placement and debt repayment on the Company’s September 30, 2005 consolidated balance ~~under~~sheet as if the ~~Credit Line into 3,600,000 shares of our common stock at $0.52 per share. In addition,~~transaction had occurred on ~~March 24,~~September 30, 2005 we agreed to allow Laurus to convert $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of our common stock at $0.52 per share. Laurus agreed to apply this Term Note

conversion against substantially all remaining 2005 scheduled principal payments on such loan. The market price of our common stock on March 18 and 24, 2005 was $0.58. No other provisions of our loans with Laurus were modified, including the $1.00 conversion price on remaining debt.(in thousands).

Net Change in Cash and Cash Equivalents.Cash and cash equivalents increased ~~$0.71~~$0.32 million during the ~~six~~nine months ended ~~June~~September 30, 2005 as a result of net cash from investing activities and financing activities of ~~$0.08~~$0.24 million and ~~$1.88~~$2.35 million, respectively, offset by net cash used in operating activities of ~~$1.17~~$2.06 million, and changes in foreign currency exchange rates of ~~$0.08~~$0.21 million.

Cash Flows from Operating Activities. Cash flows used in operating activities totaled ~~$1.17~~$2.06 million during the ~~six~~nine months ended ~~June~~September 30, 2005 compared to ~~$7.0~~$8.71 million during the same period of 2004. The use in 2005 related primarily to a net loss of ~~$3.89~~$3.78 million offset by non-cash charges of ~~$3.53~~$4.59 million. Non-cash charges consisted primarily of depreciation and amortization and certain financing costs. Working capital and other adjustments decreased cash flows from operating activities by ~~$0.81~~$2.87 million. We spent ~~$1.33~~$1.54 million during the ~~six~~nine months ended ~~June~~September 30, 2005 related to the 2004 Restructuring Plan. We had accrued expenses associated with this plan of ~~$0.58~~$0.37 million at ~~June~~September 30, 2005. This balance relates primarily to future rents on closed facilities (net of projected sublease rents) of which ~~$0.28~~$0.03 million is expected to be paid during the remainder of 2005 and ~~$0.27~~$0.34 million in 2006 and thereafter.

Cash Flows from Investing Activities. Cash flows provided by investing activities totaled ~~$0.84~~$0.24 million during the ~~six~~nine months ended ~~June~~September 30, 2005 compared to cash flows used in investing activities of ~~$0.20~~$1.54 million during the same period of 2004. The ~~use~~principal source of cash flows from investing activities in 2005 ~~related primarily to~~were sales of available for sale securities (Geron stock) of $0.62 million that were offset by purchases ~~totaling $0.67~~of $0.55 million of property and equipment primarily associated with the build out of our Glasgow, Scotland manufacturing facility that is substantially ~~complete, offset by sales of available for sale securities (Geron stock) of $0.62 million. We do not anticipate this level of capital expenditures to recur during any remaining quarter in 2005.~~complete. We currently estimate that consolidated capital expenditures will not exceed ~~$0.50~~$0.25 million for the remainder of 2005.

Cash Flows from Financing Activities. Cash flows from financing activities totaled ~~$1.88~~$2.35 million during the ~~six~~nine months ended ~~June~~September 30, 2005 compared to ~~$6.65~~$7.19 million during 2004. The principal source of cash flows from financing activities in 2005 ~~related primarily to~~was net draws on our Credit Line that were offset by payments on our Term Note. There are no scheduled principal payments for the remainder of 2005 on our Term Note.

Our ongoing capital commitments consist of debt service requirements and obligations under capital leases. The following table sets forth our contractual obligations as of ~~June~~September 30, 2005 along with cash payments due in each period ~~indicated:~~indicated (in thousands):


	Payments Due by Period
	Total		2005		2006		2007		2008		2009 and thereafter		Payments Due by Period
	In Thousands												Total		2005		2006		2007		2008		2009 and thereafter
Credit Line⁽¹⁾	$	6,119	$	6,119	$	—	$	—	$	—	$	—	$	6,119	$	6,119	$	—	$	—	$	—	$	—
Term Note⁽¹⁾		1,675		—		875		800		—		—		1,675		—		875		800		—		—
Operating lease payments⁽²⁾		4,178		1,964		1,230		441		187		356		2,584		359		1,233		443		189		360
Purchase obligations		468		468		—		—		—		—		872		248		370		254		—		—

Total contractual obligations	$	12,440	$	8,551	$	2,105	$	1,241	$	187	$	356	$	11,250	$	6,726	$	2,478	$	1,497	$	189	$	360

(2)

These are gross lease commitments. Certain facilities underlying these commitments are sublet to independent third parties. Annual rents from these subtenants are expected to total ~~$0.32~~$0.04 million, $0.17 million, and $0.02 million in for the remainder of 2005, 2006 and thereafter, respectively.

~~(3)~~

~~At June 30, 2005, we had firm commitments totaling $0.47 million to Hitachi High Technologies America to purchase components used in our WAVE Systems. These commitments will be fulfilled during 2005.~~

At September 30, 2005, we had firm commitments totaling $0.88 million to purchase components used in our WAVE Systems.

At ~~June~~September 30, 2005 and December 31, 2004, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of the Company’s accounting policies are considered critical as they are both important to the portrayal of the Company’s financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgment or estimates may vary under different assumptions or circumstances. The Company’s critical accounting policies are discussed in our annual report on Form 10-K, as amended, for the year ended December 31, 2004. There have been no significant changes with respect to these estimates during the ~~six~~nine months ended ~~June~~September 30, 2005.

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, ~~Share-Based Payment.~~“Share-Based Payment”. SFAS No.123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. We expect to adopt this standard on January 1, 2006. We are currently assessing the final impact of this standard on our financial position, results of operations or cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.

On November 24, 2004, the FASB issued SFAS No. 151, ~~Inventory~~“Inventory Costs – an amendment of ARB No. ~~43.~~43”. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overhead to be based on the normal capacity of the production facilities. SFAS No. 151 will be effective atfor the ~~beginning of~~Company on January 1, 2006. We are currently assessing the final impact of this standard on our financial position, results of operations or cash flows.

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

During the last three fiscal years, our international sales have represented approximately 50-65% of our net sales. These sales of products in foreign countries are mainly completed in either British Pounds Sterling or the Euro. Additionally, we have two wholly owned subsidiaries, Transgenomic, LTD., and Cruachem, LTD., whose operating currency is British Pounds Sterling and the Euro. Results of operations for the Company’s foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. As a result we are subject to exchange rate risk. The operational expenses of our foreign subsidiaries help to reduce the currency exposure we have based on our sales denominated in foreign currencies by converting foreign currencies directly into goods and services. As such, we feel do not have a material exposure to foreign currency rate fluctuations at this time.

This report contains a number of “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Many of these forward-looking statements refer to our plans, objective, expectations and intentions, as well as our future financial results. You can identify these forward-looking statements by forward-looking words such as “expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “feels,” “seeks,” “estimates,” and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors would include the growth of the markets for DNA analysis technology and consumable products, the acceptance of our technology, our ability to continue to improve our products, the development of competing technologies, and our ability to protect our intellectual property rights.

~~Our~~Previously, our principal market risk was interest rate risk on our variable-rate borrowings under the Laurus Loans. Subsequent to September 30, 2005, we repaid the entire principal balance of the Laurus Loans ~~carry a variable~~with the proceeds from the private placement and have terminated these loans. Accordingly, we no longer have any borrowings which subject us to material interest rate ~~of 2% over the prime rate or a minimum of 6% (8.00% at June 30, 2005), and therefore, expose us to interest rate~~ risk. ~~Based on the outstanding balance of these loans at June 30, 2005 of $6.91 million, a 1% increase in the prime rate would increase our interest expense by approximately $0.07 million annually.~~

A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective. There have been no changes in the Company’s internal control over financial reporting subsequent to the date of their evaluation. There were no material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.

~~The Company~~ is subject to a number of ~~other~~ claims of various amounts, which arise out of the normal course of its business. In the opinion of management, the disposition of claims currently pending will not have a material adverse effect on the Company’s financial position, results of operations or cash flows after considering amounts already reflected in the consolidated financial statements.

The Company made no repurchases of its common stock during the ~~second~~third quarter of 2005; therefore, tabular disclosure is not presented.

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.


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


		Page No.
PART I.	FINANCIAL INFORMATION	1

Item 1.	Financial Statements	1

	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004	1

	Unaudited ~~Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004~~	1

	~~Unaudited~~Condensed Consolidated Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004	2

	Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Six~~Nine Months Ended ~~June~~September 30, 2005 and 2004	3

	Notes to Unaudited Condensed Consolidated Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1315

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2426

Item 4.	Controls and Procedures	2426

PART II.	OTHER INFORMATION	26

Item 1.	Legal Proceedings	2426

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2526

Item 6.	Exhibits	2527

Signatures		2628


	September 30, 2005							December 31, 2004
	Cost		Accumulated Amortization			Net Book Value		Cost		Accumulated Amortization		Net Book Value
Finite Lived Intangible Assets
Capitalized software	$	2,132	$	1,978		$	154	$	2,132	$	1,468	$	664
Intellectual property		765		518			247		765		476		289
Patents		651		114	��		537		1,071		194		877

		3,548		2,610			938		3,968		2,138		1,830

Other Assets
Long Term Inventory		2,615		—			2,615		2,859		—		2,859
Deferred Financing Costs		576		326			250		576		183		393
Other		543		205			338		452		147		305

		3,734		531			3,203		3,887		330		3,557

Total	$	7,282	$	3,141		$	4,141	$	7,855	$	2,468	$	5,387


	June 30, 2005						December 31, 2004
	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Finite Lived Intangible Assets
Capitalized software	$	2,132	$	1,824	$	308	$	2,132	$	1,468	$	664
Intellectual property		765		503		262		765		476		289
Patents		1,077		205		872		1,071		194		877

		3,974		2,532		1,442		3,968		2,138		1,830

Other Assets
Long Term Inventory		2,678		—		2,678		2,859		—		2,859
Deferred Financing Costs		576		279		297		576		183		393
Other		448		168		280		452		147		305

		3,702		447		3,255		3,887		330		3,557

Total	$	7,676	$	2,979	$	4,697	$	7,855	$	2,468	$	5,387


	Number of Options		Weighted Average Exercise Price
Balance at December 31, 2004	5,088,037		$	5.09
Granted	172,500			1.09
Forfeited	(500,990	)		3.95

Balance at June 30, 2005	4,759,547		$	5.07

Exercisable at June 30, 2005	4,170,266		$	5.44


	Number of Options		Weighted Average Exercise Price
Balance at January 1, 2005	5,088,037		$	5.09
Granted	1,123,500		$	1.04
Cancelled	(670,522	)	$	4.21

Balance at September 30, 2005	5,541,015		$	4.37

Exercisable at September 30, 2005	4,396,281		$	5.11


Date Received	Shares	Product Sales Price		Date Sold	Net Proceeds		Gain (Loss)
January 2004	85,855	$	959	February 2004	$	932	$	(27	)
March 2004	33,662	$	289	July 2004	$	263	$	(26	)
April 2005	101,801	$	608	May 2005	$	617	$	9


Date Received	Shares	Product Sales Price		Date Sold	Net Proceeds		Gain (Loss)
January 2004	85,855	$	959	February 2004	$	932	$	(27	)
March 2004	33,662	$	289	July 2004	$	263	$	(26	)
April 2005	101,801	$	608	May 2005	$	617	$	9
August 2005	151,550	$	1,491	October 2005	$	1,534	$	43


	2005 Quarters Ended								Nine Months Ended September 30, 2005
	September 30		June 30			March 31			Nine Months Ended September 30, 2005
Income (loss) from operations	$	303	$	(935	)	$	(1,232	)	$	(1,864	)
Net income (loss)	$	111	$	(998	)	$	(2,892	)	$	(3,779	)


	September 30, 2005
	Actual		As Adjusted
Cash and cash equivalents	$	1,322	$	6,696	⁽¹⁾⁽³⁾

Line of credit	$	6,935	$	—	⁽¹⁾⁽²⁾

Current portion of long-term debt	$	675	$	—	⁽¹⁾⁽²⁾

Long-term debt	$	1,226	$	—	⁽¹⁾⁽²⁾

Total stockholder’s equity	$	15,662	$	29,415	^(1)(2)(3)


(3.1)		~~Second~~Third Amended and Restated Certificate of Incorporation of the Registrant ~~(incorporated by reference to Exhibit 2 to Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on May 17, 2000)~~

(3.2)		Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on March 10, 2000)

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

~~(31)~~(10.1)		~~Certifications~~Form of Securities Purchase Agreement by and between the Registrant and various counterparties dated September 22, 2005

(31.1)		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

~~(32)~~(31.2)		~~Certifications~~Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

(32.1)		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

(32.2)		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)


	TRANSGENOMIC, INC.

Date: ~~August 15,~~November 14, 2005	By:	/s/ MICHAEL A. SUMMERS
		Michael A. Summers Chief Financial Officer (authorized officer and principal financial officer)