SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A10-Q

(Mark One)

For the Quarterly Period Ended JuneSeptember 30, 20042005

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 an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934,1934)    Yes  ¨    No  x

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

As of August 13, 2004,November 14, 2005, the number of shares of common stock outstanding was 29,070,651.49,172,079.

EXPLANATORY NOTETRANSGENOMIC INC.

INDEX

TRANSGENOMIC INC.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

See notes to consolidated financial statements.

TRANSGENOMIC INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

See notes to consolidated financial statements.

TRANSGENOMIC INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands except per share data)

See notes to consolidated financial statements.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the consolidated financial statements that are included in the Company’s annual report on Form 10-Q10-K for the quarteryear ended JuneDecember 31, 2004, as amended.

As discussed in Note L, the Company completed a private placement of additional common stock and warrants subsequent to September 30, 20042005 which allowed it to repay outstanding indebtedness to Laurus Master Funds Ltd. (“Laurus”) and provided $5,374 in additional working capital. While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2006, we have experienced recurring net losses and have historically relied upon cash flows from investing and financing activities to offset significant cash outflows from operating activities. To the extent necessary, the Company’s management believes that they can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions would likely delay implementation of the Company’s business plan. Ultimately, we must achieve sufficient revenues in order to amend “Item 6. Exhibitsgenerate positive net earnings and Reports on Form 8-K”cash flows from operations.

Business Description

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

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

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

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

Principles of Consolidation.

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

Use of Estimates.

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

Cash and Cash Equivalents.

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

Accounts Receivable.

Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful accounts.

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

Revenue Recognition.

Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed WAVE systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At September 30, 2005 and December 31, 2004, deferred revenue associated with the Company’s service contracts was approximately $1,600 and $1,432 respectively, and is included in “accrued expenses” in the accompanying unaudited consolidated balance sheets.

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

Stock Based Compensation.

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

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

The weighted average fair value of options granted during the nine months ended September 30, 2005 and 2004 was $0.63 per share and $1.34 per share, respectively. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted during the nine months ended September 30, 2005 and 2004: no common stock dividends; risk-free interest rates of 4.14% to 4.79%; 95% volatility in 2005 and 85% in 2004; and an expected option life of 3 years. At September 30, 2005, the weighted average remaining contractual life of options outstanding was 5.5 years.

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

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 other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net income(loss). Foreign currency transaction adjustments reduced operating expenses by approximately $191 and $263 during the three months ended September 30, 2005 and 2004, respectively. Foreign currency transaction adjustments increased operating expenses by approximately $237 during the nine months ended September 30, 2005 and reduced operating expenses by approximately $135 during the nine months ended September 30, 2004.

Earnings or Loss Per Share.

Basic earnings or loss per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings or loss per share includes shares issuable upon exercise of outstanding stock options and warrants or conversion of convertible notes, where dilutive. For all periods presented, basic and diluted weighted average shares outstanding and loss per share are identical, since all potentially dilutive securities are antidilutive. Potentially dilutive securities consist of stock options and warrants representing 5,5541,015 and 1,159,421 shares of common stock, respectively, at September 30, 2005,. Additionally, the Company’s gross indebtedness to Laurus totaling $8,263 at September 30, 2005 is convertible into the Company’s common stock at $1.00 per share, which was the closing price of the Company’s common stock on September 30, 2005. As described in Note L, this indebtedness was repaid subsequent to September 30, 2005.

Recently Issued Accounting Pronouncements

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

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

B. INVENTORIES

Inventories consisted of the following:

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

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

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

C. GOODWILL

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

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

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

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

D. OTHER ASSETS

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

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

During the three months ended September 30, 2005, management determined that certain international patent pursuits were no longer consistent with the Company’s strategic plan. Accordingly, the Company recorded an impairment charge of $247 related to the abandonment of such pursuits.

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

E. DEBT

Debt consisted of the following:

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

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

The August 31, 2004 Laurus modifications were treated as extinguishments for financial reporting purposes since the change in present value of expected cash flows between the Registrantoriginal and Goldsmith, Agio, Helms Securities, Inc., dated March 19,modified agreements is greater than 10%. As such, the Company recorded a loss on extinguishment of debt of $2,859 at August 31, 2004 (the “Engagement Agreement”), as an exhibit thereto. A redacted versionreflecting the difference between (i) the recorded amount of debt, net of related discounts, of $7,427 and (ii) the fair value of

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

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

On March 18, 2005, Laurus agreed to further extend the waiver of the borrowing base until March 31, 2006. In connection with this extension, the Company agreed to allow Laurus to convert $1,879 of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock at $0.52 per share. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $650 of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock at $0.52 per share. Laurus agreed to apply this Term Note conversion against substantially all remaining 2005 scheduled principal payments on such loan. The closing market price of the Company’s common stock the day before each of these conversions was filed as Exhibit 10.10$0.58 per share. No other provisions of the Company’s Credit Line or Term Note (collectively, the “Laurus Loans”) were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions, the Company accelerated amortization of $409 of related debt premiums and discounts and recorded a charge of $1,365 related to the original Form 10-Qfair value of incremental shares received by Laurus.

Interest expense consisted of the following:

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

F. COMMITMENTS AND CONTINGENCIES

The Company is 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 claims currently pending will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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

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

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

G. INCOME TAXES

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

Due to the Company’s cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company has not provided for an income tax benefit during the three and nine months ended September 30, 2005 or 2004 based on management’s determination that it was more likely than not that such benefits would not be realized. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate taxable income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. As of September 30, 2005 and December 31, 2004, the Company’s deferred tax assets were offset by a valuation allowance of approximately $41,227 and $38,287, respectively.

H. STOCKHOLDERS’ EQUITY

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

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

I. STOCK OPTIONS

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

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

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

J. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

Operations for the BioSystems and Nucleic Acids operating segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company’s balance sheet are made at the corporate level and, accordingly, operating segment balance sheet information is not reviewed by operating decision makers.

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

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

During the three and nine months ended September 30, 2005, sales to a large pharmaceutical company totaled $599 and $2,009, respectively, and represented 9.0% and 9.8%, respectively, of net sales within the Company’s BioSystems operating segment and 6.9% and 8.5%, respectively, of total consolidated net sales. Sales to this customer are governed by a non-binding master services agreement dated August 22, 2002.

During the three and nine months ended September 30, 2005, sales to Geron Corporation (“Geron”) totaled $1,624 and $1,729, respectively, and represented 79.5% and 53.5%, respectively, of net sales within the Company’s Nucleic Acids operating segment and 18.7% and 7.3%, respectively, total net consolidated sales. During the three and nine months ended September 30, 2004, sales to Geron totaled $1,695 and $3,591, respectively, and represented 62.9% and 48.6%, respectively, of net sales within the Company’s Nucleic Acids operating segment and 20.7% and 13.9%, respectively, of total consolidated net sales. Sales to Geron are governed by a non-binding supply agreement dated June 15, 2002, as amended. Under the supply agreement and related addendums, Geron has historically paid the Company for goods and services with its common stock. The terms of each addendum generally provide that Geron pre-pay 50% of the total sales price of goods sold under the addendum upon execution of the addendum and the Registrant filed a requestremaining 50% upon acceptance of the related goods and services. Geron shares received by the Company are restricted for resale until they are registered with the Securities and Exchange Commission seeking confidential treatment forCommission. The Company assumes all market risk related to the information omitted from this redacted version under Rule 24b-2value of these securities and any selling costs are paid by the Securities Exchange Act of 1934,Company. Once registered, it has been the Company’s intent and practice to sell such securities as amended (the “Exchange Act”). The Registrant intends to withdraw its request for confidential treatment for this information.soon as practical.

No other modificationsThe following is a summary of Geron shares received and sold during the nine months ended September 30, 2005 and 2004.

K. RESTRUCTURING PLAN

The Company had accrued expenses associated with its 2004 restructuring plan of $368 and $1,909 at September 30, 2005 and December 31, 2004, respectively. The balance at September 30, 2005 relates primarily to future rents on closed facilities (net of projected sublease rents) of which $27 is expected to be paid during the original Form 10-Q are being made with this amendmentremainder of 2005 and accordingly, this amendment contains only Part II, Item 6. Exhibits$341 in 2006 and Reports on Form 8-K and the complete copy of the Engagement Agreement as Exhibit 10.10 hereto and new certifications of the Chief Executive Officer and Chief Financial Officer of the Registrant required by Rule 12b-15 under the Exchange Act.thereafter.

L. SUBSEQUENT EVENT

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

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

TRANSGENOMIC INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

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

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

Overview

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

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

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

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

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

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

Executive Summary

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

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

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

We generated quarterly income from operations and net income which continues a positive trend that began in the first quarter of this year.

Year-over-year net sales increases of 21% in our BioSystems operating segment, sales from our Nucleic Acids operating segment to Geron Corporation (“Geron”), and cost reductions associated with our 2004 Restructuring Plan led to our record performance. Recurring net sales associated with our increasing installed base of 1,269 WAVE systems grew to represent 32% of consolidated net sales and nearly 42% of net sales in our BioSystems operating segment. We consider net sales of consumables and service contracts to be recurring.

Subsequent to September 30, 2005, we finalized the private placement of securities to institutional investors that resulted in gross proceeds to the Company of $15.08 million. On October 31, 2005, we closed a private placement of the following securities to institutional investors: (i) 14,925,743 shares of the Company’s common stock, plus (ii) five-year, non-callable warrants to purchase another 5,970,297 shares of common stock with an exercise price of $1.20 per share. The aggregate purchase price for the securities sold in the private placement was $1.01 per share of common stock initially being sold for $15.08 million. The proceeds from the private placement allowed us to enhance our liquidity and overall working capital positions by eliminating all convertible debt with Laurus and adding approximately $5.37 million of cash to our consolidated balance sheet.

Results of Operations Three Months Ended September 30, 2005 and 2004

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

The increase in sales in our BioSystems operating segment resulted from increases of $0.81 million or 28% from bioinstruments, $0.15 million or 7% from bioconsumables and $0.20 million or 38% from Discovery Services. WAVE Systems sold totaled 28 during the quarter ended September 30, 2005 compared to 19 during the same period of 2004. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of approximately 1,269 units at September 30, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in discovery services revenue during 2005 was primarily attributable to the discovery services agreements that we entered into with a large pharmaceutical company to support their clinical development of oncology therapeutics. During the three months ended September 30, 2005, Discovery Services sales to this customer totaled $0.60 million and represented 9% of net sales within the BioSystems operating segment and 7% of total consolidated net sales. We have no long-term agreement with this customer, therefore, sales will fluctuate and may be zero. Future revenues from our BioSystems operating segment would be substantially reduced if this customer’s need for our products declined.

Nucleic Acids operating segment sales decreased by $0.65 million or 24% during the quarter ended September 30, 2005 compared to the same period of 2004 as a result of fewer chemical building block sales to Geron Corporation (“Geron”) and the sale of our specialty oligonucleotides facility in Boulder, Colorado. Sales to Geron during the third quarter of 2005 totaled $1.62 million compared to $1.73 million during the third quarter of 2004. Net sales to Geron during the quarter ended September 30, 2005 represented 80% of net sales in our Nucleic Acids operating segment and 19% of total consolidated net sales. Net sales to Geron during the quarter ended September 30, 2004 represented 63% of net sales within our Nucleic Acids operating segment and 21% of total consolidated net sales. We have no long-term agreement with Geron, therefore, sales will fluctuate and may be zero. Future revenue from our Nucleic Acids operating segment would be substantially reduced if Geron’s need for our products declined. As a result of the sale of our facility in Boulder, Colorado, net sales of specialty oligonucleotides decreased by $0.41 million. We no longer manufacture or sell oligonucleotides.

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

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

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

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

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

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

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

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

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

Interest expense consisted of the following (in thousands):

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

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

Due to the Company’s cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company did not provided for an income tax benefit during the three months ended September 30, 2005 or 2004 based on management’s determination that it was more likely than not that such benefits would not be realized. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate taxable income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. As of September 30, 2005, the Company’s deferred tax assets were offset by a valuation allowance of approximately $41.2 million.

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

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

The increase in net sales in our BioSystems operating segment resulted from an increase of $0.58 million or 5% from bioinstruments, $0.69 million or 11% from bioconsumables, and $0.76 million or 54% from discovery services. WAVE Systems sold totaled 76 during the nine months ended September 30, 2005 compared to 85 during the same period of 2004. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of approximately 1,269 units at September 30, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in discovery services revenue during 2005 was primarily attributable to the discovery services agreements that we entered into with a large pharmaceutical company to support their clinical development of oncology therapeutics. During the nine months ended September 30, 2005, discovery services sales to this customer totaled $2.01 million and represented 10% of net sales within the BioSystems operating segment and 9% of total consolidated net sales. We have no long-term agreement with customer, therefore, sales will fluctuate and may be zero. Future revenues from our BioSystems operating segment would be substantially reduced if this customer’s need for our products declined.

Nucleic Acids operating segment sales decreased by $4.15 million or 56% during the nine months ended September 30, 2005 compared to the same period of 2004 as a result of fewer chemical building block sales to Geron and the sale of our specialty oligonucleotides facility in Boulder, Colorado. Net sales to Geron during the nine month ended September 30, 2005 totaled $1.73 million compared to $3.59 million during the same period of 2004. Net sales to Geron during the nine months ended September 30, 2005 represented 54% of net sales in our Nucleic Acids operating segment and 7% of total consolidated net sales. Net sales to Geron during the nine months ended September 30, 2004, represented 49% of net sales within our Nucleic Acids operating segment and 14% of total consolidated net sales. We have no long-term agreement with Geron, therefore, sales will fluctuate and may be zero. Future revenue from our Nucleic Acids operating segment would be substantially reduced if Geron’s need for our products declined. As a result of the sale of our facility in Boulder, Colorado, net sales of specialty oligonucleotides decreased by $1.80 million. We no longer manufacture or sell oligonucleotides.

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

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

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