SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended June 30, 2007March 31, 2008

Or

For the transition period fromto            

Commission file number: 000-30975

TRANSGENOMIC, INC.

(Exact name of registrant as specified in its charter)

(402) 452-5400

(Registrant’s telephone number, including area code)

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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller Reporting Company  x

                            (Do not check if a smaller reporting company)

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 14, 2007,May 7, 2008, the number of shares of common stock outstanding was 49,189,672.

TRANSGENOMIC, INC.

INDEX

PART I. FINANCIAL INFORMATION

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

See notes to unaudited condensed consolidated financial statements.

TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

See notes to unaudited condensed consolidated financial statements.

TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

SixThree Months Ended June 30, 2007March 31, 2008

(Dollars in thousands except per share data)

See notes to unaudited condensed consolidated financial statements.

TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

See notes to unaudited condensed consolidated financial statements.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SixThree Months Ended June 30,March 31, 2008 and 2007 and 2006

(Dollars in thousands except per share data and as noted)

Business Description.

Transgenomic, Inc. (the “Company”) provides innovative products for the synthesis, purification and analysis of nucleic acids used in the life sciences industry for research focused on molecular genetics and diagnostics. The CompanyWe also providesprovide genetic variation analytical services to the medical research, clinical and pharmaceutical markets. Net sales are categorized as bioinstruments, bioconsumablesinstrument related and discoverylaboratory services.

Instrument Related Business:

Laboratory Services:

Historically, the Companywe operated a segment (the “Nucleic Acids operating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis. In the fourth quarter of 2005, the Companywe implemented a plan to exit the Nucleic Acids operating segment and during the three months ended March 31, 2007, the Companywe completed the sale of the remaining assets associated with this segment. Accordingly, the assets and results of the Nucleic Acids operating segment are reflected as discontinued operations for all periods presented in this filing.

Although the Company hasprior to this time we experienced declining sales and recurring net losses (resulting in an accumulated deficit of $127$128 million at June 30, 2007)March 31, 2008), managementwe have recently shown increases in sales and have had slight net income in the last two quarters. Management believes existing sources of liquidity, including cash and cash equivalents of $7.9$5.8 million, are sufficient to meet expected cash needs through 2007. The Companyduring 2008. Our business consolidation efforts have helped control our operating costs, however, we will need to increase net sales and further reduce operating expenses in order to meet itsour liquidity needs for the existing business on a long-term basis. The Company has announced consolidation plans which are underway and will help reduce operating costs. ThereIn future periods, there is no assurance that the Companywe will be able to increase net sales or further reduce expenses and, accordingly, the Companywe may not have sufficient sources of liquidity to continue operations indefinitely. If necessary, management believes they can further reduce costs and expenses to conserve working capital. However, such cost and expense reductions could have an adverse impact on the Company’s new product pipeline and ultimately net sales. The Company could also pursue additional financing, but ultimately, the Company must achieve sufficient net sales to consistently generate net income and cash flows from operations.

Principles of Consolidation.

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

Use of Estimates.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SixThree Months Ended June 30,March 31, 2008 and 2007 and 2006

(Dollars in thousands except per share data and as noted)

financial statements and the reported amounts of net sales and expenses during the reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments 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.

Basis of Presentation.

The consolidated balance sheet as of December 31, 2007 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three months ended March 31, 2008 and 2007 are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007 contained in our Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Cash and Cash Equivalents.

Cash and cash equivalents include cash and temporary overnight investments with original maturities at acquisition of three months or less. Such investments presently consist of only temporary overnight investments.

Accounts Receivable.

Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful accounts during the three and six months ended June 30, 2007March 31, 2008 and 2006:2007:

While payment terms are generally 30 days, the Company haswe have also provided extended payment terms of up to 90 days in certain cases. The Company reviewsWe review accounts receivablesreceivable on a quarterly basis and adjusts itsadjust our bad debt reserve accordingly.

Inventories.

Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process.

Equipment, FurnitureProperty and Fixtures.Equipment.

Equipment, furnitureProperty and fixturesequipment are carried at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the related assets as follows:

Depreciation and amortization during the three months ended June 30,March 31, 2008 and 2007, and 2006, respectively, included $218$0.2 million and $350,$0.2 million, respectively, related to depreciation of property and equipment. Depreciation

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2008 and amortization during the six months ended June 30, 2007 and 2006, respectively, included $463 and $721, respectively, related to depreciation of property and equipment.

GoodwillGoodwill.

Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets,provides that goodwill willis not be amortized, but will beis tested for impairment annually. The Company performsWe perform this impairment analysis during the fourth quarter of each year. Impairment occurs when the carrying value is determined to be not recoverable thereby causing the fair value of the goodwill to exceed the carrying value. If impaired, the asset’s carrying value is reduced to its fair value.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

Other Assets.

Long-Lived Assets

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144) which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30,Reporting the Results of Operations, for a disposal of a segment of a business. The Company periodically reviews the carrying value of its long-lived assets to assess recoverability and impairment. The Company recorded no impairments during the three and six months ended June 30, 2007 or 2006.

Other assets include intellectual property, patents, other intangible assets, and other long-term assets.

Intellectual Property. Initial costs paid to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.

Patents. The Company capitalizes external and in-houseWe capitalize legal costs, filing fees and other expenses associated with obtaining patents on its new discoveries and amortizesamortize these costs using the straight-line method over the shorter of the economic life or the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued.patent.

Other Intangible Assets. Identifiable intangible assets with definite lives are amortized over their estimated useful lives andlives.

All of these assets are treated as long-lived assets for purposes of SFAS No. 144, which provides that long-lived assets will be tested for impairment ason an annual basis. We review the carrying value of our long-lived assets during the fourth quarter of each year to assess whether events or changes in circumstances indicate the carrying amount of the assetthese assets may be impaired.

Other Long-Term Assets. Other long-term assets consist primarily of demonstration inventory that has been at customer or prospective customer sites for greater than one year and security deposits on leased facilities. Long-term demonstration inventory is stated at the lower of cost or market.

Stock Based Compensation.

All stock options awarded to date have exercise prices equal to the market price of the Company’sour common stock on the date of grant and have ten-year contractual terms. Unvested options as of June 30, 2007March 31, 2008 had vesting periods of three years from date of grant. None of the stock options outstanding at June 30, 2007March 31, 2008 are subject to performance or market-based vesting conditions.

The Company adopted Financial Accounting Standards Board (FASB) Statement No. 123(R),Share-Based Payment (“FAS 123(R)”), on January 1, 2006. FAS 123(R) requires the Company toWe measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense isoptions based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period).

On December 28, 2005, the Company’s Directors approved a plan to accelerate the vesting of all outstanding stock options. Aside from the acceleration of the vesting date, the terms and the conditions of the stock option award agreements governing the underlying stock option grants remained unchanged. As a result of this plan, options to purchase approximately 1,081,845 shares became immediately exercisable. All such options were out-of-the-money and, accordingly, the accelerated vesting resulted in no compensation expense since there was no intrinsic value associated with these fixed awards at the date of modification. Accelerating the vesting of these options allowed the Company to avoid recognition of compensation expense associated with these options in future periods.

During the sixthree months ended June 30, 2007 and 2006, the CompanyMarch 31, 2008, we recorded compensation expense of $46 and $0, respectively,$0.1 million within the general administrative expense related to the vesting of 685,000 and 01,410,000 options. During the three months ended March 31, 2007, we recorded compensation expenses of less than $0.1 million related to the vesting of 540,000 options. As of March 31, 2008, there was $0.6 million of unrecognized compensation expense related to unvested stock options, respectively during these periods. which is expected to be recognized over a weighted average period of nearly three years.

The fair value of the options issued during the quarters ended March 31, 2008 and 2007 was estimated on their respective grant dates using the Black-Scholes option pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 4.71%4.97% to 5.08%, based on the U.S.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 2 to 10 years, based on historical exercise activity behavior; and volatility of 89.14% and 79.10% for grants issued for the three months ended March 31, 2007 and June 30, 2007, respectively,67.58% based on the historical volatility of our stock over a time that is consistent with the expected life of the option. Asoption A small group of June 30, 2007, there was $272senior executives hold the majority of unrecognized compensation expense related to unvestedthe stock options which isand are expected to be recognized over a weighted average period of nearly three years.hold the options until they are vested. Therefore, no forfeitures were assumed.

Income Taxes.

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2008 and 2007

Revenue Recognition.

Revenue (referred to as “net sales”) 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 under a purchase order. The Company’sOur sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the Company’s 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 CompanyWe also entersenter into various service contracts that cover installed instruments. These contracts cover specific time periods and net sales associated with these contracts are deferred and recognized over the service period. At June 30,March 31, 2008 and 2007, and December 31, 2006, deferred revenue, mainly associated with the Company’sour service contracts, included in the Company’s balance sheet in other accrued expenses, was approximately $2,047$2.0 million and $1,591,$1.7 million, respectively.

Revenue from our Molecular Clinical Reference Laboratory is recognized on an individual test basis and takes place when the test report is completed, reviewed and sent to the client. In our Pharmacogenomics Research Services Group, we recognize revenue based on a proportionate performance measurement for each project. At March 31, 2008 and 2007, deferred revenue associated with the pharmacogenomics research projects included in the balance sheet in other accrued expenses, was less than $0.1 million for each period.

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

Research and Development.

Research and development costs are charged to expense when incurred.

Translation of Foreign Currency.

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 accumulated other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net income. Foreign currency transaction adjustments from continuing operations increased/decreasedincreased net income (loss) by $69 and $99$0.2 million during the three and six months ended June 30, 2007, respectively, and reducedMarch 31, 2008. Foreign currency transaction adjustments from continuing operations increased net loss by $72 and $180less than $0.1 million during the three and six months ended June 30, 2006, respectively.March 31, 2007.

Comprehensive Income.

Accumulated other comprehensive income at June 30, 2007March 31, 2008 and December 31, 20062007 consisted of foreign currency translation adjustments, net of applicable tax of zero. The Company deems itstax. We deem our foreign investments to be permanent in nature and doesdo not provide for taxes on currency translation adjustments arising from converting its investments in a foreign currency to U.S. dollars.

Earnings Per Share.

Basic earnings per share is calculated based on the weighted-averageweighted average number of common shares outstanding during each period. Diluted earnings per share includeincludes shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of the Company’sour common stock. Options,At March 31, 2008, there were outstanding options, warrants and conversion rights pertaining to 12,175,141 and 13,538,84112,223,879 shares of the Company’sour common stock have beenof which options to acquire 33,334 shares were included in the calculation of diluted earnings per share. At March 31, 2007, there were outstanding options, warrants and conversion rights pertaining to 13,729,241 shares of our common stock all of which were excluded from the computation of diluted earnings per share at June 30, 2007 and 2006, respectively, because the exercise or conversion price of these instruments exceededeffect would be anti-dilutive due to the market price of the Company’s common stock on those dates.net loss from continuing operations in that period.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SixThree Months Ended June 30,March 31, 2008 and 2007 and 2006

(Dollars in thousands except per share data and as noted)

Recently Issued Accounting PronouncementsPronouncements.

In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. The Company adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

In September 2006, the FASB issued Statement No. 157,Fair Value Measurement (“FAS 157”). While this Statement does not require new fair value measurements, it provides guidance on applying fair value and expands required disclosures. FAS 157 is effective for the Company beginning in the first quarter of 2008. The Company isWe are currently assessing the impact, if any, of SFAS 157 and FSP FAS 157 may have157-2 on its Consolidated Financial Statements.our consolidated financial statements.

In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). This Statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 will becomebecame effective for the Companyus beginning with the first quarter of 2008. The CompanyWe currently have no financial assets or financial liabilities for which SFAS 159 is applicable.

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) changes several underlying principles in applying the purchase method of accounting. Among the significant changes, SFAS 141(R) requires a redefining of the measurement date of a business combination, expensing direct transaction costs as incurred, capitalizing in-process research and development costs as an intangible asset and recording a liability for contingent consideration at the measurement date with subsequent re-measurements recorded in the results of operations. SFAS 141(R) also requires that costs for business restructuring and exit activities related to the acquired company will be included in the post-combination financial results of operations and also provides new guidance for the recognition and measurement of contingent assets and liabilities in a business combination. In addition, SFAS 141(R) requires several new disclosures, including the reasons for the business combination, the factors that contribute to the recognition of goodwill, the amount of acquisition related third-party expenses incurred, the nature and amount of contingent consideration, and a discussion of pre-existing relationships between the parties. SFAS 141(R) is effective as of January 1, 2009. We currently assessing thedo not have any plans for a business combination, therefore SFAS No.141 (R) is expected to have no impact FAS 159 may have on itsour Consolidated Financial Statements.

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

In the fourth quarter of 2005, the Companywe implemented a plan to exit itsthe Nucleic Acids operating segment. Accordingly, the Companywe now reflectsreflect the results related to this operating segment as discontinued operations for all periods presented. Expenses that are not directly identified to the Nucleic Acids operating segment or that are considered corporate overhead have not been allocated in arriving at the loss from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows:

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2008 and 2007

Assets associated with the Nucleic Acids segment consisted principally of the Company’sour facility in Glasgow, Scotland. During the six monthsquarter ended June 30,March 31, 2007, the Companywe completed the sale of the Glasgow facility and the associated equipment for $2.9 million, net of selling expenses, which resulted in a gain of $0.1 million. The gain is reflected in the operating expenses of discontinued operations during the period.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

The assets and liabilitiesonly remaining asset of the former Nucleic Acids operating segment were as follows:

Liabilitiesis $0.2 million in Accounts Receivable which is fully reserved at March 31, 2008. There are related to expenses to be paid during 2007 for final closing costs ofno liabilities associated with the Glasgow facility.former Nucleic Acids operating segment at March 31, 2008.

The Company recorded restructuring charges totaling $624,000 and $624,000 for the three and six months ended June 30, 2007. The restructuring charges were comprised of severance totaling $364,000 and facility closure costs totaling $260,000. Restructuring charges related to three events: A restructuring plan completed in the second quarter of 2007, which resulted from the termination of 4 employees in Omaha, Nebraska; facility closure activities to close the Cramlington, England production facility and consolidate production in the Omaha, Nebraska facility; and facility closure activities to close an administrative office outside Paris, France, with those functions performed elsewhere in the organization.

Inventories consisted of the following:

Finite lived intangible assets and other assets consisted of the following:

Amortization expense for intangible assets was $24 and $133less than $0.1 million during the three months ended June 30,March 31, 2008 and 2007, and 2006, respectively, and $46 and $150 during the six months ended June 30, 2007 and 2006, respectively. Amortization expense for intangible assets is expected to be approximately $46less than $0.1 million for each of the remainder of 2007, $86 inyears 2008 $75 in 2009, $50 in 2010, $38 in 2011, and $32 in 2012 and 2013.through 2014.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SixThree Months Ended June 30,March 31, 2008 and 2007 and 2006

(Dollars in thousands except per share data and as noted)

The Company isWe are subject to a number of claims of various amounts, which arise out of the normal course of business. In the opinion of management, the disposition of pending claims will not have a material adverse effect on the Company’sour financial position, results of operations or cash flows.

The Company leasesWe lease certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2014. The future minimum lease payments required under these leases are approximately $541$0.7 million for the remainder of 2007, $863 in 2008, $770$0.9 million in 2009, $657$0.7 million in 2010, $500$0.5 million in 2011, $226$0.3 million in 2012, and $98$0.1 million thereafter. Rent expense for continuing operations related all to operating leases for the three months ended June 30,March 31, 2008 and 2007 and 2006 was approximately $246$0.2 million and $303, respectively, and for the six months ended June 30, 2007 and 2006 was approximately $527 and $596,$0.3 million, respectively.

At June 30, 2007,March 31, 2008, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $1,254. The Company expects to satisfy these purchase commitments during 2007.$1.1 million.

In July 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. The Company adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more than likely not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

Upon adoption of FIN 48 on January 1, 2007, the Company recognized a $129 increase in the liability for unrecognized tax benefits. This increase in the liability was offset by an increase to the January 1, 2007 balance in the accumulated deficit. The gross amount of unrecognized tax benefits as of the date of adoption was $129, all of which would affect the effective tax rate if recognized. Included in this amount is an aggregate of $72 of interest and penalties. The Company’s policy is to recognize interest and penalties directly related to income taxes as part of income tax expense.

The Company filesWe file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. The Company hasWe have statutes of limitation open for Federal income tax returns related to tax years 2004 through 2006. The Company has2007. We have state income tax returns subject to examination primarily for tax years 2003 through 2006.2007. Open tax years related to foreign jurisdictions remain subject to examination. The Company’sOur primary foreign jurisdiction is the United Kingdom which has open tax years for 2005 through 2006. The Company is not2007. We are currently under examination in any jurisdiction.by the Internal Revenue Service for the tax year ending December 31, 2006.

During the three and six months ended June 30, 2007,March 31, 2008, there were no material changes to the liability for uncertain tax positions.

The Company maintainsWe maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. The Company matchesWe match the employees’ contributions at the rate of 50% on the first 6% of contributions. The CompanyWe may, at the discretion of itsour Board of Directors, make additional contributions on behalf of the Plan’s participants. Company contributionsContributions to the 401(k) plan were $39 and $41less than $0.1 million for each of the three months ended June 30,March 31, 2008 and 2007.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2008 and 2007 and 2006, respectively, and $81 and $83 for the six months ended June 30, 2007 and 2006, respectively.

Common Stock Warrants.

No common stock warrants were issued during the three and six months ended June 30, 2007March 31, 2008 or 2006.2007. At June 30, 2007, the Company had 8,062,577March 31, 2008, there are 8,048,815 common stock warrants outstanding.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

The following table summarizes stock option activity during the sixthree months ended June 30, 2007:March 31, 2008:

During the sixthree months ended June 30, 2007, the CompanyMarch 31, 2008, we granted 345,00055,000 stock options at a weighted average exercise price of $0.73$0.49 under itsour 2006 Equity Incentive Plan (formerly, the 1997 Stock Option Plan).Plan. The weighted average grant date fair value per share of options granted during the six months ended June 30, 2007 was $0.56.

During the six months ended June 30, 2007 and 2006, the Company recorded compensation expense of $46 and $0, respectively, within the general administrative expense related to the vesting of 685,000 and 0 options, respectively during these periods. The fair value of the options was estimated on their respective grant dates using the Black-Scholes option pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 4.71% to 5.08%, based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 2 to 10 years, based on historical exercise activity behavior; and volatility of 89.14% and 79.10% for grants issued for the three months ended March 31, 2007 and June 30, 2007, respectively, based on the historical volatility of our stock over a time that is consistent with the expected life of the option. As of June 30, 2007, there2008 was $272 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of nearly three years.$0.49.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SixThree Months Ended June 30,March 31, 2008 and 2007 and 2006

(Dollars in thousands except per share data and as noted)

The Company hasWe have one reportable operating segment. Although net sales are analyzed by type, net financial results are analyzed as one segment due to the integrated nature of the products. Net sales by product were as follows:

Net cost of goods sold was as follows:

Net sales by geographic region were as follows:

No customer accounted for more than 10% of consolidated net sales during the three and six months ended June 30, 2007March 31, 2008 and 2006.2007.

Substantially all of the Company’s long-lived assets are within the United States.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We develop, assemble, manufacture and market versatileTransgenomic, Inc. provides innovative products for the synthesis, purification and analysis of nucleic acids used in the life sciences industry for research focused on molecular genetics and diagnostics. We also provide genetic variation 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 35 dealers and distributors located in those local markets. Net sales are categorized as bioinstruments, bioconsumablesInstrument Related and discovery services.Laboratory Services.

Instrument Related Business:

Laboratory Services:

Historically, we operated a segment (the “Nucleic Acids operating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and oligonucleotide synthesis companies and research institutions throughout the world.synthesis. In the fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids operating segment and during the three months ended March 31, 2007, we completed the sale of the remaining assets associated with this operating segment. Accordingly, the assets and results of thisthe Nucleic Acids operating segment are reflected as discontinued operations for all periods presented in this filing. In the first quarter of 2007, the Company completed the sale of the remaining assets associated with the segment.

Executive Summary

Net sales for the three months ended June 30, 2007March 31, 2008 increased by 1%20%, compared to the same period in 2006.2007. The increase is allprimarily attributable to our DiscoveryLaboratory Services products. Net sales from bioinstruments were down 10%up 15%. Fewer WAVE sales were the cause of this decrease. Net sales from bioconsumables were down by 3%.flat. Net sales from DiscoveryLaboratory Services grew more than 300%164%, or $521,000,$0.6 million, compared to the same quarter in 2006. The majority2007. Both areas of the increase was relatedLaboratory Services showed growth compared to the CLIA laboratory services. We also had strong sequentialsame quarter in 2007. The Molecular Clinical Reference Laboratory showed growth of $0.2 million or 74% and Pharmacogenomics Research Services showed growth of $0.4 million or 491%. Gross margins improved year over quarter growth in sales of CLIA laboratory services of 82%, or $300,000 in net sales. We continue to see improvement in gross margins.year. Our gross profit margins improved from 49%52% in the secondfirst quarter of 20062007 to 54%58% in the current quarter ended June 30, 2007.March 31, 2008. The largest contributor to this increase is our DiscoveryLaboratory Services product line which went from a negative gross profit in both the second quarter of 2006 and the first quarter of 2007 to a positive gross profit margin of 29%40% in the quarter ended June 30, 2007. Overall operating expenses included $624,000 of restructuring charges, primarily related to closings in France and the United Kingdom.March 31, 2008. Net profitincome was $226,000$0.1 million for the second quarter ended June 30,March 31, 2008. This is an improvement of $1.3 million or 110% over the same quarter in 2007. This included two non-recurring items. First, we completed the sale of an investment in equity securities realizing a gain of $937,500. The second item noted above was the $624,000 of restructuring charges. As of the end of the second quarter ended June 30, 2007,March 31, 2008, we had cash and cash equivalents of $7.9 million and believe we will have sufficient liquidity to meet our operating needs throughout the year.$5.8 million.

Outlook

We continue to work toward our objective of generating income from continuing operations and positive cash flows from continuing operations. To accomplish these goals, we must generate sequential growth in net sales and continue to control manufacturing and other operating expenses. SalesWe are investing in all parts of bioinstruments, including both our WAVE Systembusiness to drive improved sales in 2008 and instruments we

sellhave added experienced sales staff. We have worked hard to develop a significant number of collaboration opportunities for other manufacturers, continue to be affected by competition from other technologies.our pharmacogenomics research business. In addition, ongoing changeswe have strengthened our Board of Directors, added key senior management and formed a Scientific Advisory Board to advise us on the latest developments and scientific opportunities in the marketplacecancer detection screening and the funding arrangements of our customers have led to sporadic sales in some markets. We continue to work to develop new applications for our WAVE System in an attempt to expand its market and sales. Sales of our OEM instruments continue to be a priority. We are also focusing increased efforts to expand our Discovery Services sales. In particular, the growth in our CLIA laboratory services has been promising and we believe we will continue to see ongoing growth from this business. We recently announced further cost reduction initiatives, including the closing of facilities in Europe. While the effects of these efforts have not been realized in the first half of 2007, we expect to see a more noticeable impact in the second half of the year.mitochondrial disease diagnosis.

Results of Continuing Operations

Three Months Ended June 30,March 31, 2008 and 2007 and 2006

Net Sales.Sales. Net sales consisted of the following (dollars in thousands):following:

The bioinstrument net sales decreaseincrease of 10%15% was due to fewer WAVEmore OEM Systems being sold. SixteenThere were four OEM instrument sales in the first quarter of 2008 compared to two in the first quarter of 2007. Nine WAVE Systems were sold during the three months ended June 30, 2007,March 31, 2008, compared to 24fourteen during the same period of 2006.2007. The increased OEM sales were in the European markets. WAVE sales in each period include sales of refurbished WAVEs. This decrease resulted from lower demand primarily in our largest markets throughout Western Europe. The sale of OEM instruments increased from 2 in the three months ended June 30, 2006We continue to 3 in the same period in 2007. There areface significant competitive challenges for our instrument sales from traditional (i.e. sequencing) and evolving technologies. Net sales of consumables related to our WAVE Systems and other third-party instruments were down slightlyflat year over year, primarily related to our separations product.year. The largest growth in net sales was infrom our discovery services net sales.laboratory services. The 347%164% increase was all attributable to CLIA laboratory services.growth in both our Molecular Clinical Reference Laboratory of 74% or $0.2 million and pharmocogenomics research services which had growth of almost 500% or $0.4 million compared to the same quarter in 2007.

Costs of Goods Sold.Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our discoverylaboratory services operations. Cost of goods sold consisted of the following (dollars in thousands):following:

Gross profit was $3.4$3.6 million or 54%58% of total net sales during the three months ended June 30, 2007,March 31, 2008, compared to $3.0$2.7 million or 49%52% during the same period of 2006. Although net sales declined, gross2007. Gross profits as percentage of net sales increased due to lower consumable materialsales of instruments with higher profit margins and manufacturing costs and also due to the leverage of the discoveryincrease in laboratory services costs. Some of the decrease in manufacturing costs was due to a shifting of personnel to research and development efforts. The Company continuesvolumes. We continue to have a large fixed expense base outside of direct material costs. DiscoveryLaboratory services costs have a large fixed component, so increases in net sales drive gross profit improvement. The laboratory services revenue increase quarter over quarter was 164% while the increase in cost of goods sold was only 27%. In 2007, overall gross margin for laboratory services was negative.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $3.1 million during the three months ended June 30, 2007,were flat compared to $2.8 million during the same period of 2006, an increase of $0.3 million or 11%. This increase was primarily due to increased compensation expense associated with personnel reassigned from Nucleic Acids production. These expenses are consistent with the third and fourth quarters of 2006 which we believe is a better comparison as all three quarters are comparable with no realignment of expenses between areas.2007.

Research and Development Expenses.Research and development expenses primarily include personnel costs, outside services, supplies, and facility costs and are expensed in the period in which they are incurred. These costs remained flat anddecreased by $0.5 million compared to the same period of 2007. They totaled $0.5$0.6 million during the three months ended June 30, 2007,March 31, 2008, compared to $0.5$1.1 million during the same period of 2006.2007. The 2007 expenses were higher due to expenditures for collaboration expense on new WAVE applications and patent costs for laboratory services.

Research and development expenses totaled 8%9% and 9%20% of net sales during the three months ended June 30,March 31, 2008 and 2007, and 2006, respectively.

Restructuring Charges. Restructuring charges consist of costs related to a reduction in force at our Omaha, Nebraska facility, ongoing activities to close a production facility in Cramlington, England, and ongoing activities to close an administrative office outside of Paris, France.

Other Income (Expense).Other income during the three months ended June 30, 2007 was $1.0 million as compared to less than $0.1 million for the three months ended June 30, 2006. The increase was attributable to the sale of an investment in equity securities. On May 10, 2007, the Company sold 250,000 shares of stock in Pinnacle Pharmaceuticals, Inc. at a price of $3.75 per share. Gross proceeds realized from the sale were $937,500 which resulted in a gain of $937,500 and is reflected in other income during the period. Remaining other income consistedconsists primarily of interest income from cash and cash equivalents invested in overnight instruments.

Income Tax Expense.In July 2006, Other income totaled less than $0.1 million during both the FASB issued Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. We adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.

Six Months Ended June 30, 2007 and 2006

Net Sales. Net sales consisted of the following (dollars in thousands):