SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended September 30, 2008March 31, 2009

Or

For the transition period from             toto

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). )    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.Act. (Check one):

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

As of October 30, 2008,May 14, 2009, 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

NineThree Months Ended September 30, 2008March 31, 2009

(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

NineThree Months Ended September 30,March 31, 2009 and 2008 and 2007

Business Description.

Transgenomic, Inc. provides innovative products for the 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. Net sales are categorized as instrument relatedInstrument Related Business and 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. 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 segment. Accordingly, the assets and results of the Nucleic Acids operating segment are reflected as discontinued operations for all periods presented in this filing.

Management believes existing sources of liquidity, including cash and cash equivalents of $4.8 million, are sufficient to meet expected cash needs intoduring 2009. Our business consolidation efforts, recent reduction in force and cost containment management have helped control our operating costs, however, we have added sales and marketing costs over the last two years in an effort to drive increased sales. In future periods, there is no assurance that we will be able to increase net sales or further reduce expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations indefinitely.

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.

UseRisks and Uncertainties.

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

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. In addition, estimates

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2008 and 2007

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.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2009 and 2008

No customer accounted for more than 10% of consolidated net sales during the three months ended March 31, 2009 and 2008. For the three months ended March 31, 2009 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 17% of the Laboratory Services net sales.

Concentrations of Cash.

From time to time, we may maintain a cash position with financial institutions in amounts that exceed federally insured limits. We have not experienced any losses on such accounts as of March 31, 2009.

Basis of Presentation.

The consolidated balance sheet as of December 31, 20072008 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three and nine months ended September 30,March 31, 2009 and 2008 and 2007 are unaudited and reflect all 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, 20072008 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 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 nine months ended September 30, 2008March 31, 2009 and 2007:2008:

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

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.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2009 and 2008

Property and Equipment.

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

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2008 and 2007

Depreciation and amortization during the three months ended September 30,March 31, 2009 and 2008, and 2007, respectively, included $0.2 million, for each period related to depreciation of property and equipment. Depreciation and amortization during the nine months ended September 30, 2008 and 2007, respectively, included $0.5 million and $1.0 million, respectively, related to depreciation of property and equipment.

Goodwill.

Goodwill is not amortized, but is tested for impairment annually. We 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.

Other Assets.

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. We capitalize legal costs, filing fees and other expenses associated with obtaining patents on new discoveries and amortize these costs using the straight-line method over the shorter of the economic life or the legal life of the patent.patent or its economic life beginning on the date the patent is issued.

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

AllEach of these assets areis treated as long-lived assets for purposes of SFASFAS No. 144, which provides that long-lived assets will be tested for impairment on an annual basis.basis or when a significant event occurs which may impact impairment. We periodically review the carrying value of our long-lived assets during the fourth quarter of each year to assess whether eventsrecoverability and impairment. We recorded no impairment in the three months ended March 31, 2009 or changes in circumstances indicate the carrying amount of these2008.

Other Assets. Other assets may be impaired.include US security deposits and deferred tax assets.

Stock Based Compensation.

All stock options awarded to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of September 30, 2008March 31, 2009 had vesting periods of three years from date of grant. None of the stock options outstanding at September 30, 2008March 31, 2009 are subject to performance or market-based vesting conditions.

We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock optionsoptions. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period). During the ninethree months ended September 30, 2008,March 31, 2009, we recorded compensation expense of $0.2$0.1 million within the selling, general and administrative expense related toas a result of the vesting of 1,560,000 options.options exercisable for the purchase of 1,715,000 shares. During the ninethree months ended September 30, 2007,March 31, 2008, we recorded compensation expenses of $0.1 million related towithin selling, general and administrative expense as a result of the vesting of 870,000 options.options exercisable for the purchase of 1,410,000 shares. As of September 30, 2008,March 31, 2009, there was $0.5$0.2 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of nearly three years.

The fair value of the options issuedgranted during the quarters ended September 30,March 31, 2009 and 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 1.78%1.36% to 4.97%1.55%, 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 76.48%101.92% and 89.14%62.93% based on the historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives hold the majority of the stock options and are expected to hold the options until they are vested. Therefore, no forfeitures were assumed.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NineThree Months Ended September 30,March 31, 2009 and 2008 and 2007

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.

RevenueNet Sales Recognition.

Revenue (referred to as “net sales”)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. Our sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. We also enter into various service contracts that cover installed instruments. These contracts cover specific time periods and net sales associated with these contracts are deferred and recognized over the service period. At September 30,March 31, 2009 and March 31, 2008, and 2007, deferred revenue,net sales, mainly associated with our service contracts, included in the balance sheet in other accrued expenses, was approximately $1.6$1.4 million and $1.9$2.0 million, respectively.

RevenueNet sales from our Molecular Clinical Reference Laboratory isServices are recognized on an individual test basis and takes place when the test report is completed, reviewed and sent to the client.client less the reserve for insurance, Medicare and Medicaid expected payment. There are no deferred net sales associated with our Molecular Clinical Reference Laboratory. In our Pharmacogenomics Research Services Group, we recognize revenuenet sales based on a proportionate performance measurement for each project. At September 30,March 31, 2009 and 2008, and 2007, deferred revenuenet sales 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 revenuenet sales producing transactions are recorded net with no effect on the income statement.

Research and Development.

Research and development and various collaboration 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 translationrevaluation gains or losses resulting from changes in currency exchange rates are included in the determination of net income. Foreign currency translationrevaluation adjustments from continuing operations had a nominal impact onincreased operating expenses and net loss by $0.2 million for the three months ended September 30, 2008,March 31, 2009, and decreased operating expenses and increased net lossincome by $0.5 million for the nine months ended September 30, 2008. Foreign currency translation adjustments from continuing operations decreased net loss by $0.1 million and $0.2 million during the three and nine months ended September 30, 2007, respectively.March 31, 2008.

Comprehensive Income.

Accumulated other comprehensive income at September 30, 2008March 31, 2009 and December 31, 20072008 consisted of foreign currency translation adjustments, net of applicable tax.tax of zero. We deem our foreign investments to be permanent in nature and do not provide for taxes on currency translation adjustments arising from converting investments in a foreign currency to U.S. dollars.

Earnings Per Share.

Basic earnings per share is calculated based on the weighted average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. At September 30, 2008,March 31, 2009, there were outstanding options, warrants and conversion rights pertaining to 12,046,70411,500,720 shares of our common stock all of which were excluded from the

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NineThree Months Ended September 30,March 31, 2009 and 2008 and 2007

all of which were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive due to the net loss from continuing operations in that period. At September 30, 2007,March 31, 2008 there were outstanding options, warrants and conversion rights pertaining to 12,201,14112,223,879 shares of our common stock all of which options to acquire 33,334 shares were excluded fromincluded in the computationcalculation of diluted earnings per share because the effect would be anti-dilutive due to the net loss from continuing operations in that period.share.

Recently Issued Accounting Pronouncements.

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. SFASFAS 157 is effective as of January 1, 2008 for financial assets and financial liabilities within its scope and it is not expected to have a material impact on our consolidated financial statements.scope. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which defers the effective date of SFASFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of FSP FAS 157-2. We are currently assessing the impact, if any, of SFAShave implemented FAS 157 and FSP FAS 157-2 and FSP 157-3 onwith no impact to 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 became effective for us beginning with the first quarter of 2008. We currently have no financial assets or financial liabilities for which SFAS 159 would be applicable.

In December 2007, the FASB issued SFASFAS No. 141(R) “Business Combinations” (“SFASFAS 141(R)”). SFASFAS 141(R) changes several underlying principles in applying the purchase method of accounting. Among the significant changes, SFASFAS 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. SFASFAS 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, SFASFAS 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. SFASFAS 141(R) is effective as of January 1, 2009. We currently do not have any plans for a business combination, therefore FAS No. 141 (R) has no impact on our consolidated financial statements.

In December 2007, the FASB issued SFASFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51”, (“SFASFAS 160”). SFASFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFASFAS 160 requires noncontrolling interests in subsidiaries initially to be measured at fair value and classified as a separate component of equity. SFASFAS 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. SFASFAS 160 iswas effective as of January 1, 2009. We currently do not expect SFAS No.have a noncontrolling interest in a subsidiary nor have we deconsolidated a subsidiary, therefore, FAS 160 to have an impact on our Consolidated Financial Statements.is not applicable at this time.

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP No. FAS 142-3”). FSP No. FAS 142-3 requires companies estimating the useful life of a recognized intangible asset to consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market participants would use about renewal or extension as adjusted for SFASFAS No. 142’s, Goodwill and Other Intangible Assets, entity-specific factors. FSP No. FAS 142-3 is effective for fiscal years beginning after December 15, 2008 (fiscal 2010 for the Company). We are currently assessing thewas adopted on January 1, 2009 and had no impact if any, of FAS 142-3 on our consolidated financial statements.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2008 and 2007

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles (“FAS 162”). This Standard identifiesidentified the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. FAS 162 directs the hierarchy to the entity, rather than the independent auditors, as the entity is responsible for selecting accounting principles for financial statements that are presented in conformity with generally accepted accounting principles. The Standard isFAS 162 was effective November 15, 2008. FAS 162 is2008 and did not expected to have an impact on our financial statements.

In June 2008 the fourth quarter of 2005, we implemented a planFASB issued Abstract Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to exitan Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 clarifies the Nucleic Acids operating segment. Accordingly, we now reflect the results related to this operating segment as discontinued operations for all periods presented. Expensesexceptions that are not directly identified to the Nucleic Acids operating segmentallowable under FAS 133, “Accounting for Derivative Instruments and Hedging Activities” in paragraph 11A. Under FAS 133 most derivatives are recorded as assets or that are considered corporate overhead have not been allocatedliabilities with changes in arriving at the loss from discontinued operations. Income for the nine months ended September 30, 2007 was less than $0.1 million. No income or loss has been reported in 2008.

Assets associated with the Nucleic Acids segment consisted principally of our facility in Glasgow, Scotland. During the quarter ended March 31, 2007, we completed the saletheir fair value being recorded through earnings. One of the Glasgow facility and the associated equipment for $2.9 million, netexceptions outlined in paragraph 11A of selling expenses, which resulted in a gain of $0.1 million.

The only remaining asset of the former Nucleic Acids operating segment is $0.2 million in Accounts Receivable which is fully reserved at September 30, 2008. There are no liabilities associated with the former Nucleic Acids operating segment at September 30, 2008.

We recorded restructuring charges totaling $.7 and $1.3 million for the three and nine months ended September 30, 2007. The restructuring charges were comprised of severance totaling $0.9 million, facility closure costs totaling $0.3 million and other costs totaling $0.2 million. Restructuring charges related to three events: A restructuring plan completed in the second quarter of 2007, which resulted from the termination of four 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, and combine those operations with those functions performed elsewhere in the organization.

Restructuring charges of less than $0.1 million during the first nine months of 2008 related to the relocation of laboratory personnel from Gaithersburg, Maryland to Omaha, Nebraska.

Inventories consisted of the following:

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NineThree Months Ended September 30,March 31, 2009 and 2008

FAS 133 states that if a derivative is indexed to the entity’s own stock and 2007is classified in shareholder’s equity, the derivative accounting is avoided. EITF 07-5 clarifies whether or not a derivative is indexed to an entity’s own stock. EITF 07-5 was adopted on January 1, 2009. We have assessed our warrants and determined the fair value is $0 so there is no impact to our financial statements.

Inventories consisted of the following:

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

Amortization expense for intangible assets was less than $0.1 million during the three months ended September 30,March 31, 2009 and 2008, and 2007, respectively, and less than $0.1 million during the nine months ended September 30, 2008 and 2007, respectively. Amortization expense for intangible assets is expected to be less thanapproximately $0.1 million for each of the years 20082009 through 2014.2013.

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

We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2014. Some of our leases have early termination clauses. The future minimum lease payments required under these leases are approximately $0.3$0.7 million for the remainder of 2008,2009, $0.9 million in 2009, $0.7 million in 2010, $0.5$0.6 million in 2011, $0.3 million in 2012, and $0.1 million thereafter. Rent expense for continuing operations related allrelating to operating leases for the three months ended September 30,March 31, 2009 and 2008 and 2007 was approximately $0.2 million and $0.3 million, respectively and for the nine months ended September 30, 2008 and 2007 was approximately $0.6 million and $0.8$0.2 million, respectively.

At September 30, 2008,March 31, 2009, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $0.8$0.4 million.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. We have statutes of limitation open for Federal income tax returns related to tax years 2004 through2005 and 2007. We have state income tax returns subject to examination primarily for tax years 20032005 through 2007. Open tax years related to foreign jurisdictions remain subject to examination. Our primary foreign jurisdiction is the United Kingdom which has open tax years for 2005 through 2007. Our examination by the Internal Revenue Service for the tax year ending December 31, 2006 is now complete. There were no material adjustments found in the audit.

During the three and nine months ended September 30, 2008,March 31, 2009, there were no material changes to the liability for uncertain tax positions.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2009 and 2008

We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. We currently match the employees’employee’s contributions at the rate of 50% on the first 6% of contributions. The Transgenomic, Inc. Savings and Retirement Plan was modified to state that the employer may make a discretionary matching contribution equal to a uniform percentage or dollar amount of the employee’s elective payroll deferral. Each year we will determine the formula for the discretionary matching contribution. We may, at the discretion of our Board of Directors, make additional contributions on behalf of the Plan’s participants. Effective June 1, 2009, Transgenomic will not match employee 401(k) contributions. Contributions to the 401(k) plan were less than $0.1 million for each of the three months ended September 30, 2008March 31, 2009 and 2007, and $0.1 million for each of the nine months ended September 30, 2008 and 2007.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended September 30, 2008 and 20072008.

Common Stock.

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

Common Stock Warrants.

No common stock warrants were issued or exercised during the three and nine months ended September 30, 2008March 31, 2009 or 2007.2008. At September 30, 2008,March 31, 2009, there were warrants outstanding which were exercisable to purchase 8,039,6407,978,156 shares of common stock.

Preferred Stock.

The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following table summarizeswith respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock option activity duringmay be issued with a preference over the nine months ended September 30, 2008:

Duringcommon stock as to the nine months ended September 30, 2008, we granted 205,000payment of dividends. The Company has no current plans to issue any series of preferred stock. Classes of stock options atsuch as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a weighted average exercise pricemerger or otherwise to gain control of $0.73 under our 2006 Equity Incentive Plan. The weighted average grant date fair value per sharethe Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of options granted during the nine months ended September 30, 2008 was $0.60.holders of the common stock.

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NineThree Months Ended September 30,March 31, 2009 and 2008 and 2007

The following table summarizes stock option activity during the three months ended March 31, 2009:

During the three months ended March 31, 2009, we granted 25,000 stock options at a weighted average exercise price of $0.36 under our 2006 Equity Incentive Plan. The weighted average fair value per share on grant date of options granted during the three months ended March 31, 2009 was $0.28.

Our company’s chief decision-maker as defined in FAS 131, Disclosures about Segments of an Enterprise and Related Information, is the Chief Executive Officer, who regularly evaluates our performance based on net sales and gross profit. The preparation of this segment analysis required management to make estimates and assumptions around expense below the gross profit level. While we believe the segment information to be directionally correct, actual results could differ from the estimates and assumptions used in preparing this information.

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

We have onetwo reportable operating segment. Although net sales are analyzed by type, net financial results are analyzedsegments.

Segment information for the three months ended March 31, 2009 and 2008 is as one segment due to the integrated nature of the products. follows:

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2009 and 2008

Net sales by product were as follows:

Net cost of goods sold was as follows:

Net sales for the three months ended March 31, 2009 by geographic regioncountry were as follows:

No other country accounted for more than 5% of total net sales.

No customer accounted for more than 10% of consolidated net sales during the three and nine months ended September 30, 2008March 31, 2009 and 2007.2008. For the ninethree months ended September 30, 2008 two customers eachMarch 31, 2009 one customer made up more than 10% of the Laboratory Services net sales. Combined they represent 35%This customer represented 17% of the Laboratory Services net sales.

Substantially all80% of theour long-lived assets are within the United States. Substantially all of the remaining long-lived assets are within Europe.

Item 2.

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

Overview

Transgenomic, Inc. provides innovative products for the 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. Net sales are categorized as Instrument Related Business and 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. 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 segment. Accordingly, the assets and results of the Nucleic Acids operating segment are reflected as discontinued operations for all periods presented in this filing.

Executive Summary

Net sales for the nine months ended September 30, 2008 increased by $1.2 million or 7% compared to the same period in 2007. Net sales from bioinstruments were down 5% and net sales of consumables were up 5% for the comparable nine month periods. During the nine months ended September 30, 2008, net sales from Laboratory Services grew 74%, or $1.3 million, compared to the same nine month period in 2007. The Clinical Reference Laboratory showed growth of 55% and Pharmacogenomics Research Services grew by 126%. Gross margins improved year over year. Our gross profit margin improved from 53% for the nine months ended September 30, 2007 to 58% for the same period in 2008. The largest contributor to our improved gross margin was our Laboratory Services product line which went from 10% gross profit in the nine months ended September 30, 2007 to 42% for the same period in 2008. Net loss was $0.3 million for the nine months ended September 30, 2008 compared to a net loss of $2.3 million for the nine months ended September 30, 2007.

Net sales for the three months ended September 30, 2008 were upMarch 31, 2009 decreased by 4%$1.3 million or $0.2 million,20% compared to the same period in 2007. For2008. Net sales in our Instrument Related Business were down 29% or $1.5 million for the third quarter of 2008 netthree months ended March 31, 2009 compared to the same period in 2008. Net sales from bioinstruments were down 7%, while37% and net sales of consumables were up 4% compared todown 19% for the third quarter of 2007. Netcomparable three month periods. During the three months ended March 31, 2009, net sales from Laboratory Services grew 46%29%, or $0.3 million, compared to the same quarterthree month period in 2007.2008. The Molecular Clinical Reference Laboratory showed revenue growth of $0.3 million or 66%88% and net sales from Pharmacogenomics Research Services was flat. Gross margins improved year over year.decreased by 35%. Our gross profit margin decreased from 58% for the three months ended March 31, 2008 to 56% for the same period in 2009. Laboratory Services gross margin improved from 51%40% gross profit in the third quarter of 2007three months ended March 31, 2008 to 54%49% for the same period in the quarter ended September 30, 2008. The largest contributor to this increase is our Laboratory Services product line which went from a gross profit of 10% in the third quarter of 2007 to a gross profit margin of 40% in the quarter ended September 30, 2008.2009. Net loss was $0.5 million for the quarter ended September 30, 2008 compared to a net loss of $1.3$1.0 million for the three months ended September 30, 2007. March 31, 2009 compared to net income of $0.1 million for the three months ended March 31, 2008.

As of September 30, 2008,March 31, 2009, we had cash and cash equivalents of $4.8 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. We are investingAs a result of the current economic outlook in 2009 and our businessfirst quarter sales performance, we initiated a cost cutting initiative in April 2009. This was necessary to drive improved salesensure that we remain financially strong and try to maintain cash in 20082009. The cost cutting initiative included a reduction in force, a freeze on new hires and have added experienced sales staff. We continue to work on developmentbackfills, no merits or other bonuses, effective June 1, 2009 there will be no 401(k) company match, reduction in travel and elimination of collaborative opportunities for our Molecular Clinical Reference Laboratory and Pharmacogenomics Research Services business. In addition, during 2008 we have strengthened our Board of Directors, added key senior management and formed a Scientific Advisory Board to advise us on the latest developments and scientific opportunities in cancer detection screening and mitochondrial disease diagnosis.investor relations firm.

Uncertainties

The uncertainty of the current general economic conditions could negatively impact our business in the future.

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

We have historically operated at a loss until recently and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we may not be able to obtain such funding due to the tightened credit markets. At September 30, 2008March 31, 2009 we had cash and cash equivalents of $4.8 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs intoduring 2009.

* Markets for our instrument related products may develop slowly.

There are many factors that affect the market demand for our products and services that we cannot control. Demand for our instrument related businessInstrument Related Business is affected by the needs and budgetary resources of research institutions, universities and hospitals. The instrument purchase represents a significant expenditure by these types of customers and often requires a long sales cycle. These customers may not have the funding available to purchase our instruments.

Results of Continuing Operations

Three Months Ended September 30,March 31, 2009 and 2008 and 2007

Net Sales.Net sales consisted of the following:

The bioinstrumentBioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, net sales decreasefrom service contracts that we enter into with purchasers of 7% was due to fewerour instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems being sold. Two WAVE Systems were soldin order to access customers that may not be able to afford new systems. Bioinstrument net sales are down $1.1 million, or 37%, during the three months ended September 30, 2008,March 31, 2009 as compared to fourteen during the same period of 2007.in 2008. The averagedecrease in bioinstrument net sales price of the WAVE’s increasedwas due to the fact that both sales were in our European market. WAVE sales in 2007 include sales of refurbished WAVEs. There were three OEM instrument sales in the third quarter of 2008. In 2007 there were nofewer OEM instruments sold in the third quarter. We continuefirst quarter of 2009. There was only one sold in 2009 and at a lower average sales price than the four in 2008. This accounted for the majority of the decrease. In addition, we sold two fewer WAVE instruments in the first quarter 2009 as compared to face2008, and the average sales price was lower due to the geographic make up of the sales. The foreign currency conversion rate difference between 2009 and 2008 impacted the average net sales price on our European sales. This decrease resulted from lower demand in all major geographic markets and among both research and diagnostic users particularly in our largest markets. Demand for WAVE Systems has been affected by significant competitive challenges for our instrument sales from traditional (i.e. sequencing) and evolving technologies. During the third quarter of 2008, net

Net sales of consumables related to our WAVE Systems and other third-party instruments increased 4%bioconsumables decreased during the three months ended March 31, 2009 compared to 2008. The primary decrease in consumables is due to the same quarter in 2007. The largest growth in netnegative impact of the foreign currency exchange rates, primarily the Great British Pound to the US Dollar.

Net sales was from ourof Laboratory Services group. The 46% increase was attributableincreased during the three months ended March 31, 2009 compared to growth in our2008 by approximately $0.3 million. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of 66% or $0.3 million. Pharmacogenomics research services was flat compared$1.0 million increased 88% over the three months ended March 31, 2008. The Molecular Clinical Reference Laboratory Services net sales growth is attributable to the sameincreased sales focus. We increased the number of sales employees during 2008. The Pharmacogenomics Research Services net sales of $0.3 million during the three months ended March 31, 2009 decreased 35% from the 3 months ended March 31, 2008. The decrease in Pharmacogenomics Research Services is due to one large customer in the first quarter in 2007.of 2008 which has completed their project. The Pharmacogenomics Research Services net sales has peaks due to the nature of project related business.

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 Laboratory Services operations. Cost of goods sold consisted of the following:

Gross profit was $2.9$2.8 million or 54%56% of total net sales during the three months ended September 30, 2008,first quarter of 2009, compared to $2.7$3.6 million or 51%58% during the same period of 2007. Gross profit as2008. Cost of sales for the Instrument Related Business decreased by only 25% for the first quarter of 2009 compared to the same period of 2008 on a percentage of net sales increaseddecrease of 29%. This reflects a largely fixed expense base. This is primarily due to fewer instruments sold during the leverage related toquarter. The Laboratory Services revenue increased 29% for the first quarter of 2009 over the first quarter of 2008, while cost of goods sold increased only 11%. During the three months ended March 31, 2009, the gross margin for the Laboratory Services net sales. The reductionwas 49% as compared to 40% in manufacturing costs is attributable to our restructuring plan which was executed in 2007.the same period of 2008. Laboratory Services costs have a large fixed component, so increases in net sales drive gross profit improvement. The Laboratory Services revenue increased 46% for the third quarter of 2008 over the third quarter of 2007, while there was a decrease in cost of goods sold of 2%. During the 3 months ended September 30, 2008, the gross margin for the Laboratory Services was 40% as comparedcontinue to 10% in the same period of 2007.

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. For the third quarter of 2008 these costs increased by $0.1 million compared to the same period of 2007. The increase is due to the additions of executive staff, sales team and the Scientific Advisory Board.

Research and Development Expenses.Research and development expenses primarily include personnel costs, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. For the third quarter of 2008 these costs remained flat compared to the same period of 2007. They totaled $0.7 million during the three months ended September 30, 2008 and September 30, 2007.

Research and development expenses totaled 13% and 14% of net sales during the three months ended September 30, 2008 and 2007, respectively.

Other Income (Expense).Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income during the three months ended September 30, 2008 was less than $0.1 million as compared to $0.1 million for the three months ended September 30, 2007.

Income Tax Expense.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. 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.

Nine Months Ended Sept. 30, 2008 and 2007

Net Sales. Net sales consisted of the following: