UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 20002002

OR

For the transition period from                            to                            

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)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
(Title of Class)

        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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/    No / /

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K / /

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of February 16, 2001 (basedbased on the last reported closing price per share of Common Stock as reported on The Nasdaq National Market on such date)the last business day of the registrant's most recently completed second fiscal quarter was approximately $62,854,300.$34,400,000.

        As of February 16, 2001,March 24, 2003, the registrant had 21,230,16623,532,049 shares of Common Stock outstanding that consist of 21,492,07024,026,653 shares issued less 261,904494,604 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the 20012002 Proxy Statement relating to the RegistrantsRegistrant's May 23, 2001,21, 2003 Annual Stockholders Meeting are incorporated by reference into Part III.

TRANSGENOMIC, INC.
Index to Form 10-K for the Fiscal Year Ended December 31, 20002002

        This Form 10-K references the following trademarks which are the property of Transgenomic: DNASEP®, GUARD-DISC®, WAVE®, WAVEMAKER®, TRANSFORMING THE WORLD®, TRANSGENOMIC®, TRANSGENOMIC and DESIGN® and TRANSGENOMIC GLOBE LOGO®; OLIGOSEP™, OPTIMASE™, RNASEP™, WAVE OPTIMIZED™, WAVE-MD™, WAVE NAVIGATOR™, THE POWER OF DISCOVERY™, and MutuationDiscovery.com™. All other trademarks or trade names referred to in this Form 10-K are the property of their respective owners.

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PART I

FORWARD-LOOKING STATEMENTS

        We have made forward-looking statements in this annual report on Form 10-K that are subject to risks and uncertainties. Many of these forward-looking statements refer to our plans, objectives, expectations and intentions, as well as our future financial results. You can identify these forward-looking statements by forward-looking words such as "expects," "anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates" and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed under "Risks Related to Our Business" and other factors identified by cautionary language used elsewhere in this annual report on Form 10-K.

Item 1.    Business.

Overview

        We provide innovative toolsproducts and services for the separation and analysis of nucleic acids to researchers seeking to discover and understand variations in the human genetic code and the relationship of these variations to disease. In addition, our tools are versatile and can be used for size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. Prior to the formation of Transgenomic, Inc., we conducted our business operations through an Iowa corporation known as CETAC Holding Company, Inc. and its various subsidiaries. CETAC Holding Company, Inc. designed, manufactured and sold several different types of non-life sciences instruments that prepare samples of material so that they may be more easily analyzed by, and efficiently introduced into testing apparatus. We also manufactured and sold chromatography products that are used in a variety of testing applications, such as food analysis and environmental testing. On July 1, 1997, we consolidated these companies into a new Delaware corporation known as Transgenomic, Inc., that was formed to develop, manufacture and market our new DNA separation and analysis products in addition to continuing the non-life sciences business of CETAC Holding Company, Inc. and its subsidiaries. In 1999, we acquired, through our subsidiary in the United Kingdom, substantially all of the assets of Kramel Biotech International, Limited, a manufacturer of laboratory consumables used in the field of molecular biology.

    Our business plan is to focus on the genomics segment of the life sciences industry and the development, marketing and support of our proprietary technology for the automated separationsynthesis, purification and analysis of nucleic acids. Therefore, effective April 1, 2000 we soldOur products include automated instrument systems, associated consumables, chemical building blocks for nucleic acid synthesis and synthesized nucleic acids. Our service offerings include genetic variation discovery services, novel chemistry development services and custom synthesis of nucleic acids. Our business strategy is to align our product and service offerings with the assetsevolution of genetic advancements and to become a major supplier of products and services to researchers, medical institutions, diagnostic and pharmaceutical companies. Specifically, our strategy is to

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Establish the WAVE system as the industry standard in the genetic research market thereby expanding the installed base of systems and related consumable sales, and



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Position ourselves as a unique partner to our non-life sciences instrument product line forbiopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics thereby allowing us to participate in future successes of products derived from the expanding knowledge of genomics.

        Our technologies center around three core competencies: separation chemistries, enzymology, and nucleic acid chemistries.

Separations Chemistries

        Our separation chemistries competency consists of expertise in developing novel chemical compounds tailored to interact with samples of interest. Specifically, this interaction involves binding of the total sample to the compound followed by a total adjusted purchase priceselective release of $5.65 million plus reimbursementindividual components of the sample. This release is induced by the buyerintroduction of approximately $0.4 millionother factors, such as chemical reagents, temperature changes, and pressure changes. The separation compound is coated on the surface of expenses paid by us since March 31, 2000microscopic polymer beads and packed in connection with this product line.

Industry Background

DNAa column. The interaction and Genomics-Based Researchseparation occurs within the tube as the sample is pumped through it. We currently have novel chemistries for separating nucleic acids, proteins, peptides, amino acids and carbohydrates.

        The human bodyOne of our significant separation technologies is composed of billions of cells each containing deoxyribonucleic acid, or DNA, which encodes the basic instructions for cellular function. The complete set of DNA is called the genome, or genetic code. The human genome is composed of 23 pairs of chromosomes that are further divided into approximately 30,000 smaller regions called genes. Genes are usedcurrently embodied in the cell as the template for the production of proteins, and it is these proteins that direct cell function that are ultimately reflected in the individual traits of the person. Researchers theorize that the human genome may provide cells instructions on how to make up to 300,000 different proteins. Each gene is made up of four different chemicals known as nucleotide bases which are commonly designated by the first letter of their chemical names, or G, C, A

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and T.WAVE System. The entire human genome contains approximately 3 billion of these nucleotides arranged in order along the two complimentary strands of the DNA molecule. The order of the nucleotides along these strands is known as the DNA sequence, and it is this sequence that determines the function of the genes. Therefore, any variation in the DNA sequence of a particular gene may result in a change in the cell function controlled by that gene. These changes, known as genetic variations or polymorphisms, are often the cause of disease or make an individual more susceptible to disease.

    Genomics is the systematic and comprehensive analysis of the sequence, structure and function of the genes that comprise the genome. The objective of which is identifying and understanding the role of genes in human physiology and disease. During the last ten years, an intense effort has been underway to determine the sequence of genes in the entire human genome. This basic research yielded a rough draft of the genome in the year 2000. Both the U.S.-government sponsored Human Genome Project and private researchers have been involved in this effort that has provided an immense amount of sequencing information for human DNA. While these efforts will provide a basic blueprint of the human genome, they have necessarily been centered on determining the DNA sequence of a limited number of individuals. Therefore, this fundamental sequencing data will not, by itself, provide much information about the function of genes and their relationship to disease. This information will only be developed through the intense study of genetic variation. Accordingly, genomics researchers are now attempting to understand variations in this DNA sequence information and how it correlates to disease in order to develop new drugs, treatments and diagnostic methods.

Importance of the Discovery of Genetic Variation

    There are a variety of variations known to occur in DNA sequences. The most common form of genetic variation involves a change in a single nucleotide and is called a single nucleotide polymorphism, or SNP. Other types of genetic variation include the insertion or deletion of several nucleotides and translocation or repetition of nucleotides. The identification and understanding of these variations, including SNPs, are important because they may indicate predisposition to a variety of diseases. Since even a single variation of a nucleotide can have a major role in human disease, efforts to understand and analyze genetic variations have recently intensified.

    After SNPs or other variations are discovered, their potential relevance to disease must be validated by determining the frequency of variation in different segments of the population. Some diseases, such as muscular dystrophy, are caused by DNA variations in a single gene. Many common diseases, such as diabetes, cancer and obesity, are caused by variations in more than one gene. Since a single variation or multiple variations may be required for a particular disease or trait to manifest itself, it is necessary to measure a sizable population of these variations in order to be able to predict with confidence the association of a variation with a particular disease or trait.

    Therefore, the need to discover new genetic variations will be ongoing as the variety of human diseases are studied and their correlation with different populations or groups of individuals is analyzed. In order to do this on the scale that likely will be required, researchers will need technologies that provide faster sample analysis, greater accuracy and reliability and lower costs than technologies that they have historically used. It will be especially important that the technology used by these researchers be able to detect all types of variations, including SNPs, insertions and deletions, translocations and repetitions, and whether the existence of the variation is known or unknown. It is this need that we believe creates a market opportunity for our WAVE® System and its ability to detect genetic variations quickly, accurately and inexpensively.

Importance of Purification

    A number of companies produce short single-strand DNA fragments, known as oligonucleotides, with a known sequence and sell them to genetic researchers who use them in research and other applications.

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When synthesizing oligonucleotides, it is important that the single-stranded DNA fragments do not contain fragments with unwanted DNA sequences. In commercial scale production of oligonucleotides, it is difficult to remove unwanted DNA sequences in a cost effective manner. As the usage of oligonucleotides in research and other applications continues to expand so to will the need to produce high quality, very pure oligonucleotides in an automated, scalable and cost-effective means. It is this need, we believe, that creates a market opportunity for the WAVE system. The ability of the WAVE to purify these fragments quickly and inexpensively provides an effect solution for commercial scale production.

Our Technology and Products

    Our WAVE System is a versatile systeminstrument that can be used for variation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. Because of this versatility, the WAVE System can essentially replace the use of traditional gel electrophoresis in the molecular biology laboratory. Our patented technology uses a process known as high performance liquid chromatography to separate DNA material so that genetic variation may be identified and analyzed. In this process, DNA is injected into a special tube or column containing microscopic polymer beads. These

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micro-beads have special surface chemistries that cause the DNA molecules to attach to the surface of the beads. A chemical reagent is then pumped through the column under carefully controlled pressure and temperature conditions causing the DNA molecules to be selectively released from the beads so that they can be separated and measured. Our proprietary software controls the entire process and produces the results of the operation in an easy-to-read chart format. Once the DNA sample is loaded into the instrument and necessary data is entered into the software, the process requires virtually no additional input from the researcher. By using our patented DNASep®, OLIGOSep® and RNASep™RNASep® columns and specifically formulated reagents that we have developed for various applications, the researcher is able to achieve a consistent high-quality result. Our WAVE System includessystem may be designed in the following components.

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an autosampler (automatically introducesfuture to meet the DNA sample into our WAVE instrument)



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a pump (pumps sample and reagents through the DNASep, OLIGOSep or RNASep column and instrument)



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a DNASep, OLIGOSep or RNASep column (separates DNA fragments)



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a column oven (controls the temperatureneeds of the column)



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a detector (detects and measures DNA coming off the column)



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a fragment collector (collects high purity DNA fragments of interest)



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a personal computer and WAVEMaker Software (used for instrument control, experiment design, data collection, data analysis, and reporting)

    The basic operation of WAVE System is described below:

    DNA Sample Preparation.  A sample of the DNA fragment of interest is first extracted from a biological sample such as tissue or blood. Extraneous proteins are removed from the DNA sample and the sample is placed into a multi-well plate along with chemicals or reagents. A targeted DNA sequence is then copied by repeated cycles of heating and cooling in order to produce enough of the targeted sequence so that it can be detected. This replication process is known as polymerase chain reaction, or PCR, amplification.emerging molecular diagnostics market.

        AfterAdditionally, the sample has been amplified, the sample DNA fragment may be mixed with "normal" DNA fragments that have a known sequence of nucleotides. The sample is then heated to cause the two strands of the DNA molecules in both the sample DNA and the normal DNA to separate from each other. The mixture is then cooled so that the strands reattach to each other. Because they are mixed together, the single-strand DNA from the sample DNA and the normal DNA will, in some cases, recombine with each

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other. If the sample DNA has a sequence of nucleotides that differs from the normal DNA, some of the recombined strands will not completely match and, therefore, will not bind completely. As a result, both the mismatched, or heteroduplex, DNA fragments and the correctly matched, or homoduplex, DNA fragments will be present. On the other hand, if the sample DNA has the same sequence of nucleotides as the normal DNA, all of the recombined strands will match and bind completely and only homoduplex DNA fragments will be present.

    WAVE System Sample Introduction and Separation Process.  A sample plate containing DNA is inserted directly into the WAVE System's autosampler. The autosampler takes a small volume of the sample and injects it into the column containing the micro-beads. Due to the chemical affinity of the DNA to the surface chemistry on the micro-beads in the column, the DNA attaches itself to the micro-beads. After the sample is injected into the instrument, a mixture of reagent fluids is pumped into the column at specified reagent concentrations and temperature conditions.

    As the reagents are pumped through the column, DNA fragments are released and separated from each other. The DNA fragments flow from the column and through an ultraviolet or a fluorescence detector, which then measures and reports the passage of the DNA fragments of interest. Depending on the mode of operation, DNA fragments can be identified and measured to determine whether they are mutant or normal, or a specific DNA size or type. The separation and detection process continues until the entire DNA sample mixture is separated into individual fragments. Any fragment of interest can be collected for further study.

    Modes of Operation.  DNA can be separated using three different modes by controlling the oven temperature. These modes include the following:

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Non-denaturing Mode. This mode uses relatively low temperature so that no melting, or denaturing, of the double-strand DNA occurs. This allows double-stranded DNA fragments to be separated by the number of nucleotides making up the fragment, with the shorter DNA fragments being first released from the column and increasingly longer fragments of DNA being released in ascending size order until the entire sample is separated. The high-resolution separation and purification of fragments can be used for high-purity cloning, sequencing or PCR amplification. Tests that are based on fragment length also use this mode.



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Partial-denaturing Mode. The partial-denaturing mode is used for detecting genetic variation. In this mode, the WAVE System uses temperatures ranging from 50°C to 65°C to partially melt, or denature, the double-strand DNA. Because mismatched, or heteroduplex, DNA fragments will melt at a slightly lower temperature than homoduplex DNA fragments, they will be released first from the DNASep column, followed by the release of the homoduplex DNA fragments. If there was no sequence variation in the sample DNA, only homoduplex fragments will be present, all of which will be released from the DNASep column at the same time. As the release of the DNA fragments is detected, it will be depicted by the WAVEMaker software as a single peak on a graph. However, if there was a sequence variation in the sample DNA, both homoduplex and heteroduplex DNA fragments will be present. Because homoduplex and heteroduplex DNA fragments will release from the DNASep column at different times, these distinct release times will result in a second peak on the graph.



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Full-denaturing Mode. The full-denaturing mode is used for the analysis of single-strand DNA and RNA (special molecules that transmit genetic information inside of a cell) where it is necessary to reduce the interaction of the two complementary strands of DNA with each other. In this mode, temperatures in excess of 70°C are used to separate single-strand DNA or RNA molecules according to sequence and size.

    Detection.  The standard WAVE System uses ultraviolet, or UV, detection. UV detection is highly sensitive and can be used for all applications with standard PCR amplification. By adding fluorescence

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detection to our system, we can further decrease the amount of DNA needed for analysis. In this process, special fluorescent molecules, or tags, are attached to specific points in the DNA being analyzed. This makes it possible to detect fluorescently labeled DNA fragments from extremely low sample concentrations or from samples with low PCR amplification.

    Fragment Collection.  Purified DNA fragments can be collected for PCR amplification, sequencing or for cloning. Cloning is a process where bacteria are used to grow a large amount of specified DNA fragments. It is important that the DNA material used for cloning is very pure so that only the specified DNA material is found in the bacteria colonies. Amplification and sequencing also benefit from highly purified DNA fragments.

    WAVEMaker Software.  Our WAVEMaker Software integrates the instrumentation control and data acquisition functions of the WAVE System. The software performs several functions including the formatting and presentation of data. Our WAVEMaker Software provides logical input and output of instrument data that is easily understood by researchers familiar with conventional gel-based technology. WAVEMaker Software enables the user to choose a specific application. The clear display allows the user to set up the procedure in a matter of minutes. Customized protocols can easily be created and saved to facilitate future analyses. Point variation detection can be performed by importing the sequence or size of the DNA fragment of interest into WAVEMaker Software.

    Pricing.  This integrated WAVE System is priced from $60,000 to $100,000 depending on features and accessories. The price is dependent upon user selected options, which include fragment collection, various detector configurations and software versions.

    WAVE Optimized Molecular Biology Consumables.  The WAVE System requires the use of various consumable products that we manufacture and sell separately. As more WAVE Systems are sold, we expect that these consumable products will become an increasingly significant source of revenue for us.

The principal consumable products used with the WAVE System are the DNASep, OLIGOSep and RNASep columns and the chemical reagents that are used to carry the DNA samples through the WAVE System. Other consumables include filters and other replacement parts of the WAVE System.

Enzymology

        The DNASep, OLIGOSep and RNASep columnsOur second core competency is expertise in developing novel enzymes. Enzymes are essentially small metal tubesproteins that are packed with microscopic polymer beads, each of whichact as catalysts for biochemical reactions. One such reaction useful in genomics is approximately two microns in diameter. A micron is one millionth of a meter. The surface of these micro-beads has a special chemical makeup that causes DNA molecules to adhere to them. The columns come in two sizes that are used depending on the amountcleavage of DNA being analyzedinto defined fragments at specific points, accomplished by the use of restriction enzymes. Another example is the formation of DNA or purified.RNA from precursor substances in the presence of pre-existing DNA or RNA acting as a template. Enzymes that catalyze this reaction are called polymerases. The smaller standard column sellsability to develop enzymes useful in the experimental manipulation of genes provides powerful tools for approximately $1,200producing genetic material in the form needed for further analysis or incorporation into diagnostics and therapeutics. One of our current enzymology offerings is called Optimase. Optimase polymerase is a novel enzyme unique to Transgenomic that was developed specifically to meet the larger column sells for approximately $2,200. The WAVE System comesneeds of customers with one standard DNASep column which has a warranted life of 4,000 test cycles when used for variation detection. Our experience to date indicates that the average customer uses between two and six columns per instrument per year.

    We also sell the chemical reagents used withpost polymerase chain reaction (PCR) applications such as the WAVE System. In general, these reagents are special fluids that are pumped through the columns in order to cause DNA molecules to release their chemical bonds to the micro-beads under the correct conditions.system. Although most of these reagents are similar to those that can be obtained from various suppliers, we have developed formulas for these reagents that have been specially optimized for use in the WAVE System. By using these WAVE Optimized reagents, we believe that researchers are more likely to achieve consistent high quality results with their WAVE Systems.

    Some consumables are contained and packaged in convenient kits to increase ease of use and minimize possibility of user error. These kits may be used in sample preparation or automated instrument operations for particular applications. By adding different application kits, the WAVE System can perform various applications.

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Strategy

    We intend to be the leading provider of technology platforms that enable life science researchers to discover and understand variations in the human genetic code, or genome, in order to accelerate and improve drug development and diagnostics. Additionally, our WAVE Systemthis product may be used for purposesany PCR application it was specifically developed to be used with a WAVE system. Optimase, used in conjunction with our WAVE optimized consumables, provides superior testing results and extends the life of our DNASep, OligoSep or RNASep columns. This product is expected to further expand our sales of consumable products to WAVE system users and may also be sold for other thanPCR applications.

Nucleic Acid Chemistries

        Our third core competency, nucleic acid chemistries, stems in part from our 2001 acquisition of Annovis, Inc. Our Synthetic Nucleic Acid products consist of chemical building blocks ("phosphoramidites"), fluorescent markers and dyes, associated reagents, oligonucleotides and oligomimetics. These products are currently being sold to research organizations, diagnostic companies and pharmaceutical companies. The majority of our synthetic nucleic acid revenues are currently generated through the sale of phosphoramidite products that are produced in our Glasgow, Scotland facility. We are in the process of completing a new production facility in Boulder, Colorado that will be able to further process phosphoramidite products into synthesized oligonucleotides in large quantities. This facility will also provide process development, enhancement and unique chemistry development services. We expect demand for phosphoramidites and synthesized oligonucleotides to increase over the next several years as biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics experience product successes. Finally, our nucleic acid chemistry capabilities also include expertise in the ability to produce related specialty chemicals, such as molecular tags, dyes, quenchers, linkers, and solvents used to modify nucleic acids for subsequent detection, or manipulation.

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        The Company's internet address iswww.transgenomic.com. The Company makes available free of charge through its website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with the Securities and Exchange Commission.

Industry Background

Genomics-Based Research, Diagnostics and Therapeutics

        The human body is composed of billions of cells each containing deoxyribonucleic acid, or DNA, which encodes the basic instructions for cellular function. The complete set of DNA is called the genome, or genetic code. The human genome is composed of 23 pairs of chromosomes that are further divided into approximately 30,000, or more, smaller regions called genes. Genes are used in the cell as the template for the production of proteins, and it is these proteins that direct cell function that are ultimately reflected in the individual traits of the person. Any variation in the DNA sequence of a particular gene may result in a change in the cell function controlled by that gene. These changes, known as genetic variations, are often the cause of disease or make an individual more susceptible to disease.

        Genomics is the systematic and comprehensive analysis of the sequence, structure and function of the genes that comprise the genome, the objective of which is identifying and understanding the role of genes in human physiology and disease. This information will only be developed through the intense study of genetic variation. Accordingly, genomics researchers are now attempting to understand variations in this DNA sequence information and how it correlates to disease in order to develop new therapeutics and diagnostic tools.

Synthetic Nucleic Acids

        Synthetic nucleic acid molecules—commonly referred to as oligonucleotides—are necessary consumable reagents for numerous DNA-based analytical methods, diagnostic methods, and therapeutic products.

Genomics-based Diagnostics

        Once a relationship is established between a particular genetic variation(s) and a disease it becomes possible to look for the specific genetic variation(s) or other biomarkers as a way of diagnosing a person's susceptibility to the disease or the actual presence of the disease.

Genomics-based Therapeutics

Target Identification—It has been estimated that the human genome sequence could provide 5,000-10,000 new potential target molecules on which to base drug discovery efforts, representing a 10 to 20-fold increase over the approximately 500 targets identified during the entire history of drug development to date.

Target Validation—Target validation is the process of establishing proof that a particular drug target is involved in a disease or biological process of interest and, furthermore, that experimental modulation of the target (which would ultimately be accomplished by a drug) has an impact on that process.

Clinical Trials—After a lead drug candidate has been identified, and its safety and efficacy has been demonstrated in animal models, testing must be performed on human subjects. Genetic variation among patients can impact drug efficacy as well as the likelihood of adverse drug reactions. It has been suggested that study of these effects should be incorporated into the clinical trial process. The relatively new segment of genomics called pharmacogenetics studies the impact genetic variation has on the safety and efficacy of drugs.

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Business Strategy

        Our business strategy is to align our product and service offerings with the evolution of genetic advancements and to become a major supplier of products and services to researchers, medical institutions, diagnostic and pharmaceutical companies. Genetic advancements have been and continue to develop over time. The movement along the genomics continuum and related market opportunities has shifted from gene discovery research. These additional applications represent new market opportunities. During 2000 we began to adaptanalysis of variations in gene sequences. From these variations researchers are beginning to link the WAVE System specifically for these new market opportunities.impacts to associated disorders and diseases that further lead to the creation of diagnostic tests and appropriate therapeutic treatments and drugs.

        Key elements of our strategy are as follows:

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Focus on the Genetic Variation Discovery Market. Our current focus is to promote the use of our WAVE System by researchers involved in the discovery and analysis of genetic variation. The investment in genomics research is large and growing, and the corresponding need to analyze genetic variations has led to increased demand for new technologies such as the WAVE System. We believe the WAVE System significantly increases research productivity and may accelerate drug development and diagnostics.



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Establish the WAVE System as the Industry Standard.    We are focusinghave focused our initial marketing efforts on large well-known government, academic and commercial research institutions to establish the WAVE System as the industry standard for variation analysis. We believe we are the first to bring high performance DNASep micro-bead technology to the market and have sold instruments to key genomics researchers to gain validation of our technology, which has resulted in the publication of over 150500 articles in numerous scientific journals discussing the WAVE System. A key componenttechnology. Our current installed base includes several hundred customers with a total of our strategy isnearly 1,000 installed systems. We intend to maintain a worldwide sales organization that provides technical support on a local level. We plan to increaseleverage the number of our sales teams composed of sales personnel, application scientists and technical support persons. In addition, because we believe that a major factor in ensuring thedocumented success of our products iscustomers to provide qualified technical support on a local level, we expectcontinue to increase the number of technical support representativesintroduce our technology to new users and application scientists.



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Increase Sales Penetration into Commercial Applications. Our WAVE system may be used for a number of different applications. One initial focus has been on the purification of oligonucleotides A number of companies produce short single-strand DNA fragments, known as oligonucleotides, with a known sequence and sell them to genetic researchers who use them in research and other applications. When synthesizing oligonucleotides, it is important that the single-stranded DNA fragments do not contain fragments with unwanted DNA sequences. The WAVE System's ability to separate and purify DNA fragments is currently used by the synthesizers of oligonucleotides to produce a more consistently pure product. This has become an important new market for the WAVE System over the past six to twelve months. New and existing applications sold for commercial and industrial uses accounted for approximately 25% of the WAVE systems placements during the year.



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Increase Consumable Sales. We expect that our expanding base of installed WAVE Systems will result in recurring sales of our associated consumable products which include our proprietary columns and reagents. Additionally, WAVE system enhancements have increased the system throughput and extended the time a system can run samples unattended. We expect these enhancements to drive expanded consumable demand. As a result, sales of our consumable products over the next five years should increase as a proportion of our net sales. In order to support the expected increase in consumable sales, we have dedicated manufacturing facilities in California, Nebraska and the U.K.markets.



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Penetrate New Markets.    Our WAVE System may be used for purposes other than genetic variation discovery research. These other potential uses represent additional market opportunities that we intend to pursue. For example, a potential new market for the WAVE System will be the genetic screening market. This market consists primarily of researchers that could use the WAVE System to screen DNA samples for variations known to be related to genetic disease. We believe that the

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ability of the WAVE System to screen genetic variations quickly, accurately and economically can make it a useful tool for thisdiagnostics market. It will allow researchers to use the validated technology used for the original variation discovery work to screen for variations in a larger population. Additional market opportunities exist in the fields of bacterial, viralpathogen identification, bioterrorism and plant genetics. During 2000 we began the process of designing specific software and hardware improvements to adapt the WAVE System for new market opportunities. We continue to develop new applications and further improvements for the WAVE and expect further improvementsother complementary technologies.



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Position ourselves as a unique partner to be availablebiopharmaceutical and pharmaceutical companies in the future.early stages of their efforts to develop genomic-based diagnostics and therapeutics.    Our partnering strategy is to seek out those companies who show the potential to have consistent success in the relatively new area of developing commercially viable genomic-based diagnostic and therapeutic products. We have begun to seek out partners with whom we will develop and manufacture novel chemistries. In positioning ourselves to partner with such companies we have attracted world-class nucleic acid chemistry expertise and are in the process of completing and qualifying a cGMP (Good Manufacturing Process) oligonucleotide manufacturing facility in Boulder, Colorado. This partnering strategy may result in varying demand for the products and services we seek to provide depending largely on the success of the biopharmaceutical and pharmaceutical companies involved in developing such products.


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Become the Principal Supplier of Specialty Synthetic Nucleic Acids.    Our Synthetic Nucleic Acid products are used in large quantities by a variety of commercial entities. In conjunction with aligning our new products and solutions with the genomics continuum our strategy also includes vertical expansion of our synthetic nucleic acid solution components whereby we intend to produce more of the components of the phosphoramidite chain starting from the raw material (nucleosides), to intermediates (trityls), to phosphoramidites, to the end oligonucleotide product.

        In support of our business strategy the following key milestones were achieved during 2002:

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BioSystems



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Launched WAVE MD platform,



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Launched Mutationdiscovery.com™,

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Launched Optimase polymerase,




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Nucleic Acids



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Expanded production capacity at two sites,



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Initiated cGMP oligonucleotide/oligomimetic manufacturing project,




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Corporate



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Developed and implemented a corporate restructuring to better align the Company's expense structure with current business prospects.


Research and Development


        During fiscal years 2000, 1999 and 1998, we spent $7.7 million, $6.3 million and $3.2 million, respectively, on research and development activities. We continue to maintain an active program of research and development and expect to increase our spending over 2000 by approximately 15%continue to 20%spend significant amounts on research and development in 2001.2003. Our research and development activities include the improvement of the DNA separation media used in our columns, and the refinement of the hardware and software components of the WAVE System. Our researchSystem, the creation of unique enzymes and development work is focused on developing additional functionality inWAVE optimized enzymes for PCR and the WAVE System that will allow us to sell additional applications other than those addressing genetic variation discovery.

    We are also developing improved methodsimprovement of chemical and procedures to enable researchers to use the WAVE System to screen DNA samplesbiochemical reaction techniques for variations known to be related to genetic disease. We believe the WAVE System will be an attractive tool for this group of users because it will allow them to use the same validated methodology used to discover a variation and its link to disease to screen for that variation in a large population. We are working to make the screening process faster and more automated through the development of new software and improved separation media and instrumentation.


Scientific Advisors


synthetic nucleic acids. We consult with several leading scientists from around the world as part of our ongoing research and development efforts. These advisors assist us in formulating our research, development, and commercialization strategies. Some

        Our WAVE system related research and development work is focused on developing additional functionality in the WAVE System that will enable us to expand the number of these advisors include:

•

Dennis R. Burton, Ph.D., Professorapplications thereby making the system an essential tool in genetic research. We are also developing improved methods and procedures to enable researchers to use the WAVE System to screen biological samples for genetic markers known to be disease related. We are working to make the screening process faster and more automated through the development of Immunology, The Scripps Research Institute, La Jolla, California.



•

R. Alan North, Ph.D., Professornew software and Directorimproved separation media and instrumentation.

        Our Synthetic Nucleic Acid related research is focused on process and chemistry improvements in order to achieve greater quality and yields in the manufacture of chemical building blocks and the Institutesynthesis of Molecular Physiology,oligonucleotides. We are also involved in the Universitydevelopment of Sheffield, Sheffield, U.K.



•

Eric Hoffman, Ph.D., Director, Research Centernew synthetic nucleic acid chemistries for Genetic Medicine, The Children's National Medical Center, Washington, D.C.



•

Leon Yengoyan, Ph.D., Professor of Chemistry, San Jose State University, San Jose, California.

We do not pay cash remuneration to our scientific advisors, but may reimburse them for reasonable expenses they incur on our behalf. We may also award stock options to them under our stock option plan.various applications in research, diagnostic and therapeutic markets.


Sales and Marketing


        We currently sell our WAVE Systems and related consumablesproducts in major geographical markets. We targetmarkets, specifically the U.S., the U.K. and most countries in Western Europe, with a direct sales and support staff. For the rest of the world, we sell our products through dealers and distributors located in those local markets. As of December 31, 2002, we had over 25 dealers and distributors. We also maintain regionally-based technical support staffs and applications scientists to support our sales and marketing activities throughout the U.S., Europe and Japan. See Note O, "SalesL, "Operating Segment and ProductGeographical Information," to our consolidated financial statements for a summary of our net sales by geographic area and product group.

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        Our marketing efforts utilize a variety of promotional channels including print advertisements, scientific conferences, trade shows and Internet browser ads. The primary targets of our marketing efforts are life sciences researchers and medical geneticists in academic and commercial research institutions.institutions, biopharma and pharmaceutical companies.


Customers


        We hadhave sold WAVE Systemsour products to several hundred customers in over 2030 countries. Customers that have purchased at least one WAVE System include numerous core laboratory facilities and a number of other leading academic and medical institutions in the U.S. and abroad, including Harvard University, Stanford University, Baylor College of Medicine, University of Chicago, Fred Hutchison Cancer Research Facility, Mayo Clinic, National Cancer Institute, National Institutes of Health, Institut Curie, University of Cambridge, Welcome Trust-Oxford University and Institut Gustave Roussy. Customers abroad. In addition, our customers

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also include a number of large, established U.S. and foreign pharmaceutical, biotech and biotech companies including SmithKline Beecham, Bristol-Meyers Squibb, Millennium Pharmaceuticals, Merck & Company, Novartis and Eli Lilly and Company.commercial companies.

        No single customer accounted for more than 10% of our sales in 2000, 1999 or 1998.2002. During 2001, one customer, Applied Biosystems, accounted for approximately 14% of our total revenues. Sales to Applied Biosystems included WAVE systems, WAVE optimized consumable products and Synthetic Nucleic Acid products. No single customer accounted for more than 10% of our sales in 2000.


Manufacturing


        We manufacture consumablebioconsumable products including our proprietary DNASep, OLIGOSep and RNASep separation columns, liquid reagents, polymerase and liquid reagents.nucleic acid products. The major components of our WAVE systems are manufactured for us by a third party. We also incorporateintegrate our own modifications into the basic liquid chromatography instrument that we use in our WAVE System.hardware and software with these third party manufactured components. Our manufacturing facilities for our WAVE systems and bioconsumables are located in Omaha, Nebraska, San Jose, California, Omaha, Nebraska, and Cramlington, England.

        We obtainOur Synthetic Nucleic Acid products are manufactured in Glasgow, Scotland and Boulder, Colorado. In 2002 we began a project to upgrade and expand our production capabilities in Glasgow. This project included the basic liquid chromatography instrument for our WAVE System from Hitachi Instruments, Inc.upgrading of equipment and processes at the current production facility and the purchase of a new facility that will permit significant capacity expansion, equipment upgrades and process improvements in the future. Also in 2002, we leased a production facility in Boulder, Colorado. This relationship allows us to use Hitachi's significant manufacturing capability to meet potential future increases in demandfacility is currently being developed and qualified as a cGMP (Good Manufacturing Practices) facility mainly for the WAVE System without investingsynthesis of oligonucleotides. Such qualification is required for facilities that will produce Active Pharmaceutical Ingredients (API's). The Boulder facility began non-GMP production operations in expanding our own manufacturing capacity.

    Our relationship with Hitachi has existed since 1997. Under our agreement, we have the exclusive rightfirst quarter of 2003 and is expected to market any co-developed products for DNA analysis and purification using our DNASep technologies. In addition,begin cGMP production in the agreement provides for fixed pricingsecond quarter of the liquid chromatography instruments for our WAVE System. Our agreement with Hitachi has no fixed term and we have retained the right to work with other vendors for liquid chromatography instruments. Under the agreement, there will be no transfer of intellectual property rights without a specific agreement to do so.2003.


Backlog


        We manufacture our consumable products and assemble our system units based upon forecasts of near-term demand and receipts of firm orders from customers. Systems are configured to customer specifications and are generally shipped shortly after receipt of the order. Customers may reschedule orders with little or no penalty. For these reasons, our systems backlog at any given time is not particularly meaningful because it is not necessarily indicative of future sales levels. We had order backlogs at December 31, 2002, totaling approximately $3.0 million. In addition to our order backlog, we have deferred revenue recorded on our balance sheet totaling approximately $1.2 million. This amount is made up mainly of deferred revenue associated with service contracts on our WAVE instruments that cover a certain period of time. Such deferred revenue is recognized over the service contract period.


Intellectual Property


        To establish and protect our proprietary technologies and products, we rely on a combination of patent, copyright, trademark and trade-secret laws, as well as confidentiality provisions in our contracts.

We have implemented an aggressive patent strategy designedsuccessfully prosecuted or licensed in numerous patents protecting our core technologies, and as a result we presently own rights to provide us with freedom to operate and facilitate commercialization of our current and future products. As of December 31, 2000 we own 24 issued patents in the United States and have 32 pending applications, of which we have received notices of allowances for four. We also own 18 foreignmore than 80 issued patents and have 55 foreign patentover 60 pending applications pending.

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    Generally, U.S. patents have a term of either 17 years fromin both the date of issue or 20 years from the application filing date or earlier claimed priority date while patents in most other countries have a term of 20 years from the date of filing the patent application. Our issued United States patentsUS and abroad. We will expire between 2009 and 2017. Our success depends to a significant degree upon our ability to develop proprietary products and technologies. We intend to continue to file patent applications and seek new licenses as we develop new products and technologies.

    Patents provide some degree We presently have no indication that our products infringe on the intellectual property rights of protections for our intellectual property. However, the assertion of patent protection involves complex legal and factual determinations andothers, but it is therefore uncertain.possible we may be required to defend ourselves against such claims, whether or not these have merit. We also rely in part on trade-secret protection of our intellectual property. We attempt to protect our trade secrets by entering into confidentiality agreements with third parties employees and consultants. Ourrequire employees and consultants also sign confidentiality agreements, requiring that they assign to us their interests inincluding assignment of patents and copyrights arising from their work for us. All employees sign an agreement not to compete unfairly with us during their employment and after terminationmade in the course of their employment, through the misuse of confidential information, soliciting employees, soliciting customers and the like. However,employment. Despite such efforts it is possible that we will have to sue to enforce these agreements may be breachedand the outcome of any such lawsuit is uncertain.

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Competition

        Competitors for our Biosystems segment include several companies including Varian, Waters, Agilent, Applied Biosystems, Beckman Coulter, Amersham Biosciences and Invitrogen. These companies provide various products and services that compete either directly with our systems, bioconsumables and services, or invalidated and if so, there may not be an adequate corrective remedy available. Despite the measures we have taken to protectindirectly through alternative technologies and/or methods. Competitors for our intellectual property, we cannot assure you that third parties will not independently discover or invent competing technologies, or reverse engineer our trade secrets or other technologies. Therefore the measures we are taking to protect our proprietary rights may not be adequate.

    We do not believe that our products infringenucleic acid segment vary depending on the intellectual property rights of any third party. However, third parties may file claims asserting that our technologies or products infringe on their intellectual property. We cannot predict whether third parties will assert claims against us or againstproduct. In the licensors of technology licensed to us, or whether those claims will be found to have merit. Ifstandard chemical building blocks market, we are forced to defend against such claims, whether they arecompete with or without any merit, whether they are resolved in favor of or against us or our licensors, we may face costly litigationApplied Biosystems, Proligo and diversion of management's attention and resources. As a result of such disputes, we have to develop costly non-infringing technology or enter into licensing agreements. These agreements, if necessary, may be unavailable on terms acceptable to us, or at all, which could seriously harm our business or financial condition.


Competition


Pierce Nucleic Acid Technologies. The marketcompetitors for our pharmaceutical grade oligonucleotide synthesis products is highly competitive. Our principal competitorsand services include those entities that provide alternative technologiesprimarily Proligo and products for the separation and analysis of DNA in the areas of sample amplification, analysis process, sample separation and variation detection and correlation. They include Affymetrix, Inc., Agilent Technologies, Amersham Pharmacia Biotech AB, Applera Corporation, Bio-Rad Laboratories, Inc., Caliper Technologies Corp., GeneTrace Systems, Inc., Invitrogen Corporation, Sequenom, Inc. and Varian Associates Inc. Moreover, competitors have greater name recognition than we do and provide more conventional technologies and products with which some of our customers and potential customers may have more familiarity or experience. In many cases, in order to compete against existing and alternative technologies, we will need to demonstrate the superior performance, speed and capabilities of our WAVE System, including our proprietary DNASep column and micro-bead technology. We cannot assure you that we will be able to make the necessary enhancements to our technology or products to compete successfully with newly emerging technologies.Avecia.

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Employees


        As of December 31, 2000,2002, we had 188326 full-time employees. The following sets forth the number of persons employed in the principal areas of our operation:

Manufacturing		32108
Sales, Marketing and MarketingAdministration		67158
Research and Development		59
Administration		3060

    Our future success depends on our continuing ability to attract, train and retain highly qualified technical, sales and managerial personnel. Competition for these personnel is intense. Due to the limited number of people available with the necessary technical skills, we can give no assurance that we can retain or attract key personnel in the future. None of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

        We supplement our workforce through the use of independent contractors and consultants. As of December 31, 2000,2002, we have engaged independent contractors or consultants who provide services to us approximately equivalent to 5 full time employees.

        The Company began a restructuring process during the fourth quarter of 2002 that resulted in the elimination of a significant number of job positions. A large number of employees that had been notified of termination had not yet reached their termination date and thus are included in the 12/31/02 employee counts shown above. Additionally, further job eliminations were to occur during the first quarter of 2003. The total employee count following these further reductions is expected to be approximately 270 to 280.


Risks Related to Our Business


Our limited operating history as a company focused on life sciences technologies and applications subjects us to risks inherent in the development of a new business enterprise and to the risk that weWe may not achieve profitability.have adequate financial resources available to execute our business plan.

        We have a limited operating history as a company focused on life sciences technologies and applications and are at a relatively early stage of development in this business. Our future financial performance will depend on the growth in demand for automated DNA separation and analysis enabling technologies. The genomics market is new and emerging, is rapidly evolving, is characterized by an increasing number of market entrants, and will be subject to frequent and continuing changes in standards, customers' preferences and technology. As a result, our business is subject to all of the risks inherent in the development of a new business enterprise, such as the need:

•

to develop a market for our products;



•

to obtain enough capital to support the expenses of developing and commercializing our products; and



•

to attract and retain qualified management, sales, technical and scientific staffs.

    Our future operating results will depend on a number of factors, including the market acceptance of our products, the introduction of new products by our competitors, our ability to adapt our technology to the commercial needs of our customers and to developments in the genomics industry, and the timing and extent of our research and development efforts. Our limited operating history in the life sciences industry makes accurate prediction of future operations difficult.

We have a history of operating losses and expect to incur losses in the future.

    Wehistorically experienced losses from operations of $8.7 million during the year ended December 31, 2000, $6.9 million in fiscal 1999 and $2.0 million in fiscal 1998.negative cash flows. These lossesresults were mostly due to research and development expenses and sales and marketing expenses related to the development and marketing of our WAVE System. In order to continue to enhance our WAVE System and related products, develop new products, increase the pace of installations and expand our marketing, sales and customer support service staffs, we expect to incur increases in our expenses over the next several years. As a result, weproducts. We could continue to incur losses for the foreseeable future and may never be profitable.

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Our technology and products are relatively new and may not gain market acceptance among genomics researchers.

    Our WAVE System and other automated DNA separation and analysis products are relatively new products. Market acceptance of our products is dependent upon factors, some of which are not in our control, such as continued growth in the genomics industry, the availability and price of competing products and technologies, the success of our sales efforts, and the acceptance of our product by the academic and research community, such as biologists, geneticists and biochemists, who are more familiar with the existing, traditional methods of DNA separation and analysis. Our products must compete against well-established techniques, such as gel and capillary electrophoresis and sequencing-based technologies. We cannot be certain that our products will replace or compete successfully against existing products or that our products will achieve market acceptance. If our products do not achieve market acceptance, we may not achieve profitability.

We will need to refine our WAVE System to allow it to meet the requirements of commercial users.

    Our WAVE System is relatively new and has been developed primarily for basic genomics research applications. The WAVE System will require significant enhancements to its capacity and software in order for it to be adapted to commercial applications such as diagnostic research and drug development. The adaptation of the current WAVE System for these commercial applications will require additional research and development work that may be expensive and time-consuming. We cannot assure you that we will be able to make the necessary improvements to the WAVE System for use in commercial applications. If we are unable to complete the further development of the WAVE System we may not be able to successfully market it for commercial applications and this will limit our future revenues.

If ethical and other concerns surrounding the use of genetic information become widespread, we may have less demand for our products.

    Genetic testing has raised ethical issues regarding confidentiality and the appropriate uses of the resulting information. For these reasons, governmental authorities may call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to disease, particularly for those that have no known cure. Any of these scenarios could reduce the potential markets for our products, which could limit our future revenues.

We have a limited sales force and limited experience with direct marketing of our products that could limit our ability to effectively penetrate new markets.

    Our direct sales force may not be sufficiently large or knowledgeable to successfully penetrate the market. We may not be able to expand our direct sales force to meet our commercial objectives. In addition, our sales force may not be able to address complex scientific and technical issues raised by our customers. Our customer support personnel may also lack the broad range of technical expertise required to adequately service and support our products in the field.

The sale of our products involves a lengthy sales cycle that makes our revenues difficult to forecast.

    Our ability to obtain customers for our WAVE System and related accessories depends in large part on the perception that our products can help accelerate basic genomics research, diagnostic testing and related applications such as drug discovery and development efforts. A WAVE System sells for between $60,000 to $100,000 depending on its features and accessories. For many potential customers, who are often constrained by limited research budgets, this will be a large capital outlay. Additionally, the sales cycle is often three to six months long due to the need to educate potential customers as to the benefits and use of our WAVE System. We also need to effectively communicate the benefits of our WAVE System to a variety of constituencies within potential customer groups, including research and development personnel

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and key management. We may expend substantial funds and sales effort with no assurance that a sale will result. Due to the lengthy sales cycle required, our revenues could be difficult to forecast.

We may need to raise additional funding which may not be available.

To date, we have financed our operations and capital expenditures primarily from the proceeds of a $77,280,000$77.3 million public offering of common stock,stock. In March 2003, we entered into a $10,000,000 private offering of common stock,loan commitment agreement with a $12,000,000 issuance of convertible notes and borrowings under our former $5financial institution for up to a $5.0 million banksecured line of credit. We will continue to need substantial amounts of cash for research and development and to expand our sales and marketingmanufacturing infrastructure. We expect our capital and operating expenses to increase over the next several years as we expand this infrastructure and our research and development activities. The amount of additional capital that we may need to raise will depend on many factors, including:

•

the level of our research and development activities;



•

market acceptance of our products and technologies;



•

the level of our sales and marketing expenses;



•

expenditures in connection with alliances and license agreements and in acquiring new businesses and technologies;



•

costs incurred in enforcing and defending our patent claims and other intellectual property rights; and



•

the cost of financing the purchase of additional capital equipment and development tools.

We may need to raise the additional capital in the future through bank financing or strategic investments. Additional financing may not be available to us when we need it, or, if available, we cannot assure that we will be able to obtain such financing on terms favorable to our stockholders or us. If we raise additional capital by issuing equity securities, the issuance of such securities would result in ownership dilution to our stockholders.

Our WAVE System includes hardware components and instruments manufactured by a single supplier and if we were no longer able to obtain these components and instruments our ability to manufacture our products could be impaired.

We currently rely on a single supplier, Hitachi Instruments, Inc., to provide the basic instrument used in our WAVE System. While other suppliers of instrumentation and computer hardware are available, we believe that our arrangement with Hitachi offers strategic advantages. If we were required to seek alternative sources of supply, it could be time consuming or expensive or require significant and costly modification of our WAVE System. Also, if we were unable to obtain instruments from Hitachi in sufficient quantities or in a timely manner, our ability to manufacture our products could be impaired, which could limit our future revenues.

Our chromatographic columns, a core component of the WAVE System, are manufactured at a single facility that is located in an earthquake-prone area.

    All of our proprietary DNASep, OLIGOSep and RNASep columns are manufactured at our manufacturing facility in San Jose, California, which is located in an earthquake-prone area. In the event our manufacturing facility or equipment was affected by man-made or natural disasters, we would be unable to manufacture our products for sale or meet customer demand or sales projections. If our manufacturing operations were curtailed or ceased for any significant period of time, it could limit our future revenues.

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We face, and will continue to face, intense competition, both in the U.S. and abroad, from companies that are engaged in the development of products that analyze DNA and provide genetic information.

    The nucleic acid analysis and separations markets are highly competitive. Our principal competitors include other biotechnology companies that provide alternative technologies and products for the separation and analysis of DNA. Many of our competitors have greater financial, operational, sales and marketing resources and more experience in research and development and commercialization than we have. Moreover, some of our competitors have greater name recognition than we do and provide more conventional technologies and products with which some of our customers and potential customers may have more familiarity or experience. In order to effectively compete against alternative technologies we will need to demonstrate the superior performance, speed, capabilities and cost effectiveness of our WAVE System.

    Extensive research efforts and rapid technological progress characterize the genomics industry. To remain competitive, we will be required to continue to expand and enhance the functionality of our DNA separation and analysis equipment and to offer comprehensive DNA analysis, and complimentary applications and solutions, with greater ease of use. This will include the need to increase the WAVE System's capacity and to develop new instrumentation, software and application kits to allow the system to provide a broader range of DNA and RNA separation and analysis applications. New products may require additional development work, enhancement, testing, or further refinement before they can be made commercially available and, therefore, we could experience significant delays in the development and manufacture of our products. Even after new products are made commercially available, unforeseen technical difficulties could arise, requiring additional expenditures by us to correct such difficulties and possibly resulting in further delays. We cannot be certain that new products will be successfully developed at all.

Our patents may not protect us from others using our technology which could harm our business and competitive position.

    Our business and competitive position are dependent upon our ability to protect our proprietary technology. While we currently hold a number of domestic and foreign patents and licenses, the issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without infringing the patent rights of others. Our patents or licenses could be challenged by litigation and, if the outcome of such litigation were adverse to us, our competitors could be free to use our technology. As a result, the invalidation of key patents owned by or licensed to us or non-approval of pending patent applications could increase competition for our products. We may not be able to obtain additional patents for our technology, or if we are able to do so, patents may not provide us with substantial protection or be commercially beneficial. Our patent applications may not protect our products because of the following reasons:

•

we cannot be certain that any of our pending patent applications will result in additional issued patents;



•

we may develop additional proprietary technologies that are not patentable;



•

we cannot be certain that any patents issued or licensed to us will provide a basis for commercially viable products;



•

we cannot be certain that any patents issued or licensed to us will not be challenged or circumvented or invalidated by third parties; and



•

we cannot be certain that any patents issued to others will not have an adverse effect on our ability to do business.

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    Patent law relating to the scope of claims in the technology fields in which we operate is still evolving. The degree of future protection for our proprietary rights is uncertain. Furthermore, we cannot be certain that others will not independently develop similar or alternative products or technology, duplicate any of our products, or, if patents are issued to us, design around the patented products developed by us. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.

We cannot be certain that other measures taken to protect our intellectual property will be effective.

    We rely upon trade secret protection, copyright and trademark laws, non-disclosure agreements and other contractual provisions for some of our confidential and proprietary information that is not subject matter for which patent protection is being sought. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. If they do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced. While we require employees, academic collaborators and consultants to enter into confidentiality and/or intellectual property assignments where appropriate, any of the following could still occur:

•

proprietary information could be disclosed or others may gain access to such information;



•

others may independently develop substantially equivalent proprietary information and techniques;



•

we may not have adequate remedies for any breach; or



•

organizational resources available to execute our business plan.

        During the fourth quarter of 2002 and the first quarter of 2003, we mayrestructured the Company, which resulted in a net reduction in staff and facilities, and the abandonment of certain intellectual property. While we feel we have retained and redeployed existing resources and secured additional resources necessary to successfully conduct our business, we cannot assure you that the net reduction will not be ableimpair our ability to meaningfully protectachieve our trade secrets.

planned revenue levels.

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We are dependent upon our licensed technologiesOur business strategy includes positioning ourselves as a unique partner to biopharmaceutical and may need to obtain additional licensespharmaceutical companies in the futureearly stages of their efforts to offer our productsdevelop genomic-based diagnostics and remain competitive.therapeutics.

        We have acquired or licensed key components of our technologies from third parties. If these agreements were to terminate prematurely or if we breach the terms of any licenses or otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell our products. In addition, we may need to obtain licenses to additional technologies in the future in order to keep our products competitive. If we fail to license or otherwise acquire necessary technologies, we may not be able to develop new products that we need to remain competitive.

The protection of intellectual property in foreign countries is uncertain.

    We have sold approximately 50% of our WAVE Systems to customers located outside the U.S. The patent and other intellectual property laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may need to bring proceedings to defend our patent rights or to determine the validity of our competitors' foreign patents. These proceedings could result in substantial cost and diversion of our efforts. Finally, some of our patent protection in the U.S. is not available to us in foreign countries due to the laws of those countries.

Our products could infringe on the intellectual property rights of others which could require us to pay substantial royalties.

    There are a significant number of U.S. and foreign patents and patent applications submitted for technologies in, or related to, our area of business. As a result, any application or exploitation of our technology could infringe patents or proprietary rights of others and any licenses that we might need as a result of such infringement might not be available to us on commercially reasonable terms, if at all. This may lead others to assert patent infringement or other intellectual property claims against us. We may have to pay substantial damages, including treble damages, for past infringement if it is ultimately determined that our products infringe on another party's intellectual property rights. We could also be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial

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royalties. Even if a claim is without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns.

We depend on attracting and retaining key employees.

    We are highly dependent on the principal members of our management staff and research and development group, including Collin J. D'Silva, our Chief Executive Officer. We have entered into employment agreements with Mr. D'Silva and some, but not all, of our other key employees. The loss of services of any of these individuals could seriously harm our product development and commercialization efforts for our new life sciences products. Our future success will also depend on our ability to attract, hire and retain additional personnel, including sales and marketing personnel, technical support and customer service staff and application scientists. There is intense competition for qualified personnel in our industry, especially for experienced personnel in the areas of chemistry and molecular biology, software and electric engineering, manufacturing and marketing, and there can be no assurancecannot assure you that we will be able to continuesuccessfully execute this strategy. Additionally, we cannot assure you that the companies we seek to attractpartner with will not decide to develop novel chemistries and manufacturing capabilities for themselves. Lastly, we cannot assure that these companies will have consistent success in this relatively new area of developing commercially viable genomic-based diagnostic and therapeutic products. In fact, the biopharmaceutical and pharmaceutical companies involved have encountered difficulty in accomplishing this and we have seen varying demand for the products and services we seek to provide to them.

        In positioning ourselves to partner with such companies we must:

•

Attract and retain such personnel. Failure to attractworld-class nucleic acid chemistry expertise,



•

Develop and retain key personnel could reduce our ability to continuemaintain world-class research and development of our DNA separationfacilities,



•

Qualify and analysis technologymaintain cGMP manufacturing facilities,



•

Obtain numerous permits associated with the chemicals used in various manufacturing processes, and to successfully market our products.





•

Establish long-term partner relationships with various companies.

We will need to effectively manage our growth if we are to successfully implement our strategy.

        The number of employees and scope of our business operations are expectedhas and will continue to grow as we continuechange and evolve. Such changes in our business and the commercialization of our WAVE System. This growth that may accompany them may place a strain on our management and operations. Our ability to manage our growth will depend on the ability of our officers and key employees to continue to implement and improve our operational, management information and financial control systems and to expand, train and manage our work force both in the U.S. and abroad. We may be required to open non-U.S. offices in addition to our current U.K., Japan and satellite European offices, which could result in additional burdens on our systems and resources. Our inability to manage our growth effectively could affect our ability to pursue business opportunities and expand our business.

Our failure to comply with any applicable government regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals which we use may adversely affect our results of operations.

    Our research and development and manufacturing activities involve the controlled use of hazardous materials and chemicals, including acetonitrile. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of hazardous materials and waste products. If we fail to comply with applicable laws or regulations, we could be required to pay penalties or be held liable for any damages that result and this liability could exceed our financial resources. We cannot assure you that accidental contamination or injury will not occur. Any such accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs.

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Item 2.    Properties.


        Our four principal manufacturing facilities are located in Omaha, Nebraska, San Jose, California, Boulder, Colorado and Glasgow, Scotland. Additionally, corporate administration offices are located in Omaha, Nebraska. The following table summarizes information related to property occupied in these locations.

Location		Square Footage		Annual Rent			Lease Term Expires
Omaha, Nebraska		55,243		$	422,260		2007
San Jose, California		14,360		$	246,000		2005
Boulder, Colorado		33,673		$	336,732		2007
Glasgow, Scotland		14,500		£	95,000		2007
Glasgow, Scotland		45,000			N/A		Owned Property

We do not own any real property. We currently lease additional facilities for manufacturing, sales, customer support and research and development in Crewe, England, Cramlington, England, Tokyo, Japan, Paris, France, Berlin, Germany, Cambridge, Massachusetts, Gaithersburg, Maryland, Atlanta, Georgia, San Diego, California, Wayne, Pennsylvania and Denver, Colorado.

        As a part of our restructuring plans developed in the fourth quarter of 2002 our office and manufacturingspace requirements have been reduced. As a result, some of our locations will be closed or the amount of space

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leased will be reduced. Our restructuring plans included the closing or reduction of leased office space in the following locations:Omaha, Nebraska, Crewe, England, San Diego, California and Wayne, Pennsylvania.

Location		Square Footage		Annual Rent			Lease Term Expires
Omaha, Nebraska		16,734		$	172,000		2007
San Jose, California		27,860		$	468,000		2005
Crewe, England		10,250		£	97,500		2006
Cramlington, England		8,200		£	26,000		2001
Tokyo, Japan		1,000			¥7,293,000		2001
Cambridge, Massachusetts		2,500		$	54,000		2002
Gaithersburg, Maryland		2,294		$	35,000		2004
Houston, Texas		2,760		$	24,000		2003
San Diego, California		4,995		$	135,000		2003


Item 3.    Legal Proceedings.


        We are not a party, nor are any of our assets or properties subject, to any material legal proceedings.


Item 4.    Submission of Matters to a Vote of Security Holders.


        We did not submit any matters to our stockholders for a vote or other approval during the fourth quarter of the fiscal year covered by this report.


Item 4a.    Executive Officers.


        Our executive officers are elected annually by the Board of Directors at the first meeting following the annual stockholder's meeting. Other officers are elected by the Board of Directors from time to time. Each officer holds office until a successor has been duly elected or appointed and qualified or until the death, resignation or removal of such officer.

        Our current officers and their ages as of December 31, 20002002 are listed below followed by a brief biography.

Name		Age		Position
Collin J. D'Silva		4344		Chairman of the Board, Chief Executive Officer and Director
William P. Rasmussen		4850		Chief Financial Officer
Douglas T. Gjerde, Ph.DJohn L. Allbery		47		Chief Scientific Officer and Director
John E. Doyle		5643		Executive Vice President of Emerging Markets
William WalkerKeith A. Johnson		6443		Vice President, of Intellectual PropertyGeneral Counsel
Mitchell L. Murphy		4445		Vice President, Secretary and Treasurer

        Collin J. D'Silva.    Mr. D'Silva has served as our Chairman of the Board and Chief Executive Officer since 1997 and is also a Director. Mr. D'Silva, a co-founder of Transgenomic, has worked for Transgenomic and its predecessors since 1988. Prior to that time, Mr. D'Silva was employed by AT&T from 1980. At AT&T, he held various positions in engineering, materials management, sales support and business development. His last position at AT&T was Business Unit Manager and Engineering Manager for a network distribution products division. Mr. D'Silva holds a B.S. degree and a M.Eng. degree in industrial engineering from Iowa State University and an M.B.A. from Creighton University.

        William P. Rasmussen.    Mr. Rasmussen joined us on October 1, 1998 and currently serves as our Chief Financial Officer. Prior to joining us, Mr. Rasmussen was Chief Financial Officer at I-Mark Systems

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from 1996 until it was purchased in 1997. I-Mark Systems designed integrated computer voting solutions and was a successor corporation of ADD Consulting Inc., which provided computer staffing professionals to numerous industries. Mr. Rasmussen served as Chief Financial Officer of ADD Consulting Inc. from 1994 until joining I-Mark Systems in 1996. Mr. Rasmussen owned a travel management company from 1986 untilto 1998, and he provided consulting services to numerous software and telecommunication companies from 1984 throughto 1994. Mr. Rasmussen's previous experience also includes serving as Controller and PrinciplePrincipal Accounting Officer for Applied Communications, Inc. from 1979 untilto 1984. Applied Communications, Inc., now known as Transaction Systems Architects, Inc., is a software provider for transaction processing systems.

    Douglas T. Gjerde, Ph.D.  Dr. Gjerde joined us Mr. Rasmussen holds a B.S. degree in 1996 as Chief Scientific Officer. Dr. Gjerde has held positions as senior scientist for Exxon Research and Engineering, DirectorBusiness Administration from the University of Research for Wescan Instruments, and President and Director of Research & Development for Sarasep, Inc. Sarasep, which Dr. Gjerde co-founded, was acquired by us in 1996. Dr. Gjerde has authored 12 patents and has more than 40 journal publications, primarily focused on separation technology. Dr. Gjerde received his B.S. in chemistry in 1976 from Minnesota State University, Mankato, Minnesota, and his Ph.D. in analytical chemistry in 1980 from Iowa State University, Ames, Iowa.Nebraska.

        John E. Doyle.L. Allbery.    Mr. Doyle has been with our company since September 1997, initially focusing on operationsAllbery joined us in June 2001, and process improvement. In 1999, Mr. Doyle assumed responsibility for sales, again focusing on processcurrently serves as well as improvements in staffing.an Executive Vice President. Prior to joining Transgenomic, heus, Mr. Allbery was with Supelco Inc. fora private business consultant based in Budapest, Hungary from 2000 to 2001. From 1999 to 2000 Mr. Allbery served as the Chief Financial Officer of The Virtus Group, a private business venture in Budapest, Hungary. Mr. Allbery also spent approximately 20 years serving as Chief Executive Officer when itin public accounting. Prior to leaving public accounting, Mr. Allbery was a Sigma-Aldrich company; Business Unit Vice President when it wasPartner with Deloitte & Touche

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LLP. Mr. Allbery holds a subsidiary of RohmB.A. degree in Accounting from Doane College and Haas Corporation; and International Vice President when it was privately held. Mr. Doyle received his engineering degreea MBA in Taxation from Pennsylvania StateGolden Gate University.

        William Walker.Keith A. Johnson.    Mr. WalkerJohnson joined us in 19982001 as Vice President, of Intellectual Property.General Counsel. Mr. Walker isJohnson has a corporate attorney withB.A. in Biochemistry from Kalamazoo College, an emphasisM.B.A. in intellectual property law. Mr. Walker served as Director of PatentsInternational Business and Licensing for Syntex Corporation (1970 - 1981)Marketing from Michigan State, and subsequently provided intellectual property counseling to new and emerging companies. Mr. Walker has a law degree from Georgetown University Law Center, a B.S. degree in chemical engineering from the University of TennesseeSan Diego. Before joining Transgenomic Mr. Johnson was Director of Intellectual Property, Technology Development and a MFCC degreeLicensing at Integra LifeSciences in psychologyPlainsboro, NJ, from Santa Clara University. He1999 to 2001. Mr. Johnson's previous experience also includes Senior Licensing Manager, Rutgers University, from 1998 to 1999 and Technology Licensing Officer, Washington State University, from 1995 to 1998. Mr. Johnson is a member of the state bars of California, BarWashington and New Jersey and is active in numerous professional organizations.admitted to practice before the USPTO.

        Mitchell L. Murphy.    Mr. Murphy joined us in 1992. His current duties include the overall corporate administration and shareholder relations. Prior to joining Transgenomic, he held accounting and financial management positions for companies involved in manufacturing, steel distribution and rebar fabrication for 15 years. He spent over two years as an auditor for the Omaha, Nebraska office of Deloitte, Haskins & Sells (now Deloitte & Touche LLP) working in a broad range of industries. Mr. Murphy graduated with honors from Creighton University in 1978 with a B.S. degree in business administration with an accounting major.

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Part II


Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters.


        Our common stock is listed for trading on the NASDAQ National Market under the symbol TBIO. The following table sets forth the high and low prices for our common stock during each of the third and fourth quarters of 2000 beginning on July 17, 2000, the date of our initial public offering of common stock.2001 and 2002.

Year Ended December 31, 2000		High			Low
Third Quarter (July 17 - September 30, 2000)		$	30.016		$	15.75
Fourth Quarter		$	23.00		$	5.75

Year Ended December 31, 2001		High			Low
First Quarter		$	10.98		$	5.19
Second Quarter		$	15.00		$	5.50
Third Quarter		$	12.85		$	6.01
Fourth Quarter		$	12.60		$	5.45
Year Ended December 31, 2002
First Quarter		$	10.77		$	7.00
Second Quarter		$	9.00		$	2.10
Third Quarter		$	4.52		$	2.39
Fourth Quarter		$	3.80		$	2.15

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    Prior to July 17, 2000 there was no public market for our common stock.        At February 16, 2001,March 24, 2003, there were 21,230,16623,532,049 shares of our common stock outstanding and approximately 2,2003,300 holders of record. The outstanding shares consist of 21,492,07024,026,653 shares issued less 261,904494,604 shares of treasury stock.

        We have never declared or paid any cash dividends on our capital stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently expect to retain all earnings, if any, for investment in our business. Dividends on our common stock will be paid only if and when declared by our board of directors. The board's ability to declare a dividend is subject to limits imposed by Delaware corporate law. In determining whether to declare dividends, the board may consider our financial condition, results of operations, working capital requirements, future prospects and other relevant factors.


Item 6.    Selected Financial Data.


        The statement of operations data for the years ended December 31, 2000, 19992002, 2001 and 19982000 and the balance sheet data as of December 31, 20002002 and 19992001 are derived from our historical consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K, which have been audited by Deloitte & Touche LLP, our independent auditors. The statement of operations data for the years ended December 31, 19971999 and 19961998 and the balance sheet data as of December 31, 1998, 19972000, 1999 and 19961998 are derived from our audited historical consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical consolidatedIn May 2001, we acquired Annovis, Inc., a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid-based products and services for the life science industry, for a total purchase price of approximately $16.9 million. Annovis's results of operations have been included in the accompanying financial statements beginning on May 1, 2001. Additionally, our financial statements include the results from our non-life sciences product line which was sold effective April 1, 2000. Financial information prior to July 1, 1997 is that of our predecessor corporation, CETAC Holding Company, Inc. and its subsidiaries or predecessors.

        The following selected financial data should be read in conjunction with our consolidated financial statements and the related notes thereto and the information under "Management Discussion and

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Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K.

		Year Ended December 31,
		2000			1999			1998			1997			1996
		In thousands, expect per share data
Statement of Operations Data:
Net sales		$	25,883		$	23,035		$	18,935		$	11,577		$	12,535
Cost of good sold			12,800			12,090			9,590			6,336			6,760
Gross profit			13,083			10,945			9,345			5,241			5,775
Selling, general and administrative			14,047			11,532			8,160			6,412			4,751
Research and development			7,652			6,297			3,159			2,047			1,385
Stock based compensation expense			861			—			—			—			—
Gain on sale of product line			(784	)		—			—			—			—
Operating expenses			21,776			17,829			11,319			8,459			6,136
Loss before income taxes			(8,481	)		(8,082	)		(2,506	)		(3,646	)		(644	)
Net loss			(8,661	)	$	(9,827	)	$	(1,576	)	$	(2,410	)	$	(415	)
Basic and diluted net loss per share		$	(0.52	)	$	(0.76	)	$	(0.13	)	$	(0.22	)	$	(0.04	)
Basic and diluted weighted average shares outstanding			16,630			13,000			12,279			11,145			11,000

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		As of December 31,
		2000			1999			1998			1997			1996
		In thousands
Balance Sheet Data:
Total assets		$	77,863		$	19,964		$	14,736		$	10,010		$	9,527
Long-term debt, less current portion			—			12,538			695			1,128			1,597
Total stockholders' equity (deficit)			73,966			(2,099	)		6,649			991			2,114

		Year Ended December 31,
		2002			2001			2000			1999			1998
		In thousands, except per share data
Statement of Operations Data:
Net sales		$	37,554		$	38,467		$	25,883		$	23,035		$	18,935
Cost of good sold			19,569			17,198			12,800			12,090			9,590
Gross profit			17,985			21,269			13,083			10,945			9,345
Selling, general and administrative			24,068			21,497			14,047			11,532			8,160
Research and development			12,201			9,372			7,652			6,297			3,159
Stock based compensation expense			131			139			861			—			—
Restructuring Charges			3,282			—			—			—			—
Gain on sale of product line			—			—			(784	)		—			—
Operating expenses			39,682			31,008			21,776			17,829			11,319
Loss before income taxes			(21,260	)		(7,377	)		(8,481	)		(8,082	)		(2,506	)
Net loss		$	(21,365	)	$	(7,401	)	$	(8,661	)	$	(9,827	)	$	(1,576	)
Basic and diluted net loss per share		$	(0.91	)	$	(0.33	)	$	(0.52	)	$	(0.76	)	$	(0.13	)
Basic and diluted weighted average shares outstanding			23,583			22,560			16,630			13,000			12,279

		As of December 31,
		2002			2001			2000			1999			1998
		In thousands
Balance Sheet Data:
Total assets		$	74,035		$	89,286		$	77,863		$	19,964		$	14,736
Long-term debt, less current portion			1,499			—			—			12,538			695
Total stockholders' equity (deficit)		$	61,515		$	82,104		$	73,966		$	(2,099	)	$	6,649


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.


Overview


        We provide innovative toolsproducts and services for the synthesis, purification and analysis of nucleic acids. Our products and services include automated instrument systems, associated consumables, nucleic acid chemical building blocks, nucleic acid synthesis products, novel chemistry development for nucleic acids, process development services and genetic variation discovery services. Our technologies center around three core competencies: separation chemistries, enzymology, and analysis. Our WAVE® System is a versatile system that can be used for variation detection, size-based double-strand DNA separationnucleic acid chemistries. We develop, assemble, manufacture and analysis, single-strand DNA separationmarket our products and analysis and DNA purification. Our business plan isservices to focus on the genomics segment of the life sciences industry to be used in research focused on molecular genetics of humans and other organisms. Such research could lead to development of new diagnostics and therapeutics. Our products can be used to analyze DNA or RNA at the development, marketingmolecular level, amplify, separate, and supportisolate nucleic acid fragments of our proprietary technology for the automated separationparticular interest and analysis of DNA. Our initial focus has been on marketingsynthesize conventional or chemically-modified nucleic acid molecules. These capabilities are central to researchersresearch seeking to discover and understand variations in the human genetic code, and the relationship of these variations to disease.disease and, ultimately, to develop diagnostics and therapeutics based on this understanding. Our business plan is to participate in the value chain associated with these activities by providing key technology, tools, consumables, and biochemical reagents to those entities engaged in basic biomedical research and the development of diagnostics and therapeutic agents.

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        Prior to 2002 the Company was managed and operated on a fully integrated basis in one operating segment. During 2002, management determined it was appropriate to evaluate the Company's operations based upon the nature of the products and services provided. Accordingly, the Company has determined that it operates in two reportable segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. 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.

        Revenues for our life sciences products are generatedThe BioSystems operating segment generates revenue from the sale of our principal product, the WAVE® System,automated instrument systems and associated consumable products and reagents.services. This segments products are based upon two of the Company's three core competencies, separations chemistries and enzymology. Specifically, this segment's main products are the WAVE system, related bioconsumables and research services.

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

        During the fiscal year ended December 31, 2000,2002, we sold 245 WAVE®over 185 WAVE Systems to major academic and government research centers and commercial and biopharmaceutical companiescompanies. Since the WAVE System product introduction in 1997 we have sold over 900 instruments to customers in over 2030 countries. Revenues from the sale of consumable and nucleic acid products increased during the same period have2002 and represented approximately 21%50% of our net sales derived from our life sciences business.as compared to approximately 40% in 2001. We expect that over the next five years, sales from consumable and nucleic acid products will increase both in amount and as a percentage of our net sales.

    Before July 1, 1997, we manufactured and sold instruments and other products used in the non-life sciences instrumentation industry through our predecessor company, CETAC Holding Company, Inc. and its subsidiaries. On July 1, 1997, we merged these companies into Transgenomic, Inc., a new Delaware corporation, for the purpose of developing, manufacturing and selling our new life sciences product line in addition to continuing to manufacture and market our existing non-life sciences products. In 1999, we decided to focus our resources on our life sciences product line. Accordingly, during the second quarter of 2000 we sold the assets related to our non-life sciences instrument products. These assets consisted of inventory, property, plant and equipment, patents, other intellectual property rights and a lease deposit, with an aggregate book value, net of $125,000 of accrued liabilities, of approximately $4.9 million. Financial information for periods ending before the effective date of the sale, April 1, 2000, includes the results of our non-life sciences instrument product line. On July 21, 2000, we completed our initial public offering, selling 5,152,000 shares of common stock at $15.00 per share for net proceeds of approximately $69.9 million.

        We have incurred significant losses resulting principally from costs incurred in research and development and selling, general and administrative costs associated with our operations. At December 31, 2000,2002, we had an accumulated deficit of $21.0$49.8 million. Although weWe expect to continue to incur substantial research and development and selling, general and administrative costs.

Critical Accounting Policies

        Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of the Company's accounting policies are considered critical as they are both important to the portrayal of the Company's financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgment or estimates may vary under different assumptions or circumstances. The following are certain critical accounting policies that may involve the use of judgment or estimates.

        Allowance for Doubtful Accounts    Accounts receivable are shown net of an allowance for doubtful accounts. In determining an allowance for doubtful accounts, we consider the following.

•

The age of the accounts receivable,



•

Customer credit history,



•

Customer financial information,



•

Reasons for non-payment, and



•

Our knowledge of the customer.

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        If our customers' financial condition were to deteriorate, resulting in a change in their ability to make payment, additional allowances may be required.

        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.

        Depreciation and Amortization of Long-Lived Assets.    The Company's long-lived assets consist primarily of property, plant and equipment, goodwill, patents, intellectual property and capitalized software development costs. We believe the useful lives we assigned to these assets are reasonable. If our assumptions about these assets change as a result of events or circumstances and we continuebelieve the assets may have declined in value we may record impairment charges resulting in lower profits. Property and equipment are carried at cost. Depreciation and amortization are computed using straight-line and accelerated methods over the estimated useful lives of the related assets ranging from 3 to expand our operations we also expect15 years. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful life.

        Impairment of Long-Lived Assets.    The Company evaluates goodwill for impairment on an annual basis. The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. These computations utilize judgments and assumptions inherent in management's estimate of future undiscounted and discounted cash flows to determine recoverability of these assets. If management's assumptions about these assets were to change as a percentageresult of salesevents or circumstances, the Company may be required to decline.record an impairment loss.


        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.

Results of Operations


Years Ended December 31, 20002002 and 1999
2001

        Net Sales.    Net sales increased 12%, from $23.0decreased 2% to $37.6 million in 1999 to $25.92002 from $38.5 million in 2000.2001. Sales ofin our life sciences products increased 67%, from $14.2BioSystems operating segment decreased 14% to $24.2 million in 1999 to $23.72002 from $28.0 million in 2000.2001. Total revenues

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from sales of WAVE®WAVE Systems increased 68%, from $11.2 million in 1999decreased 19% to $18.8 million in 2000. Life sciences consumable sales increased 61%,2002 from $3.0$23.1 million in 19992001. Bioconsumable product sales included in this operating segment increased 10% to $5.4 million in 2002 from $4.9 million in 2000. Most of the increase2001. Sales in consumable sales came from our WAVE related consumables thatNucleic Acid operating segment increased 130% from $0.928% to $13.3 million in 19992002 from $10.4 million in 2001. Sales of WAVE systems declined mainly due to $2.1 million.lower sales volumes to our commercial and industrial customer base and our North American customer base. Systems sold to our commercial and industrial customers accounted for approximately 6% of unit sales in 2002 as compared to approximately 34% in 2001. Systems sold in North America accounted for approximately 25% of unit sales in 2002 as compared to approximately 40% in 2001. Sales of WAVE related consumable products increased as the installed base of WAVE®WAVE Systems has increased and as researchers begin to use them more extensively in place of other methods of DNA analysis. SalesThe increase in nucleic acid product sales is attributable to the timing of our non-life sciences instrumentacquisition of Annovis, Inc. in May 2001. Part of our business strategy for

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2003 is to position ourselves as a unique partner to biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics. As part of this strategy we are focusing our sales efforts on large consumers of our Synthetic Nucleic Acid products decreased 75%, from $8.8 million in 1999who are willing to $2.2 in 2000 duecommit to the fact thatlong-term supply agreements. While we sold this product line effective April 1, 2000, therefore, noexpect to see increased sales of these products were recorded after March 31, 2000.based upon this strategy, we also may see varying demand depending largely on the success of the biopharmaceutical and pharmaceutical companies on which we are targeting our sales efforts and thus we may see large variations in revenue flows for these products.

        Cost of Goods Sold.    Cost of goods sold increased 6% from $12.114% to $19.6 million in 1999 to $12.82002 from $17.2 million in 2000,2001, representing 52% of net sales in 19992002 and 49%45% of net sales in 2000. Cost2001. Both total cost of goods sold and cost of goods sold as a percent of sales improvedincreased year over year due to the mix of products sold. BioSystems sales margins improved year over year mainly due to higher average selling prices per system resulting from greater sales of our higher margin high throughput WAVE system. The average sales price per instrument increased approximately 10% in 2002. The higher margins on our BioSystems products were offset by lower combined materialmargins in our nucleic acid operating segment. Currently our nucleic acid products, which have become a larger percentage of our total revenues, are sold at lower margins compared to our WAVE systems. The margins in our Nucleic Acids operating segment are lower due to bulk sales of nucleic acid building block products and higher manufacturing costs due largely to our plant expansion efforts in Glasgow, Scotland and Boulder, Colorado. In 2003 we anticipate that our cost of goods sold for our life science instruments as compared to the non-life sciences instruments. WeBioSystems products will remain within historical averages or improve slightly. Overall we anticipate that thisour cost of goods sold will be consistent with 2002 or slightly higher. This is the result of the under utilization of our new oligonucleotide production facility in Boulder, Colorado. After 2003, we anticipate that the overall cost of goods sold percentage will improve in the future as we refine our systems configurations potentially reducing material costs, improve upon production methods in our Nucleic Acid operating segment which currently result in higher overall manufacturing costs and as consumables becomeproduct revenues increase thereby spreading our fixed production costs over a greater percentage of our revenues.larger revenue base.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased 22%, from $11.512% to $24.1 million in 1999 to $14.02002 from $21.5 million in 2000.2001. This increase is the result of additional personnel and personnel-related expenses, bad debt expense and depreciation. The average selling, generalthe write-off of a portion of notes receivable. These increases were offset by a reduction in goodwill amortization and administrative personnel counts increased 10% from 90 in 1999 to 99 in 2000. The average count for 1999 included approximately 32 employees whose positions were associated with the non-life sciences product line which we sold effective April 1, 2000. Direct personnel expenses and increased travel and travel related expenses associated with the activities of our expanded staffforeign currency exchange rate gains. Combined these items accounted for approximately 77%over 90% of the total increase. Increased depreciation expense associated with investments in offices and equipment supportingDirect personnel expenses increased due to our expanded staff accountedemployee base during 2002. Bad debt expense increased as we felt it was appropriate to increase the allowance for approximately 10%bad debt given our increased levels of accounts receivable. The decrease in goodwill amortization is the total increase. We anticipateresult of our adoption of Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets. Total selling, general and administrative expenses to increase overrepresented 64% of net sales in 2002 versus 56% of net sales in 2001. During the next several years to support our growing marketing, salesfourth quarter of 2002 management formulated a restructuring plan for the Company and business activitiesexecuted a significant portion of the plan. The plan included employee terminations, office closures, the termination of collaborations and costs associated with operatingwrite-offs of intellectual property. It is expected that, as a public company.result of the restructuring, our total operating expenses will be initially decreased by 20% to 25% from 2002 levels.

        Research and Development Expenses.    Research and development expenses increased 22%, from $6.330% to $12.2 million in 1999 to $7.72002 from $9.4 million in 2000. These expenses represented 27% of net sales in 1999 versus 30% of net sales in 2000.2001. Research and development expenses consist of salaries and related personnel costs of researchers and software developers, material costs for prototypes and test units, legal expenses relating to intellectual property research and application development activities, testing and enhancement of our products, and amortization of intellectual property. We expense our research and development costs in the year in which they are incurred.incurred with the exception of certain capitalized software development costs. The increase in these expenses is attributable to increased personnel and personnel related expenses resulting from an expanded employee base during 2002, depreciation, amortization and supplies offset by increased amounts of capitalized software expenses related to the costs associated with the expanded activities of the staff and depreciation. The average research and development personnel count increased 4% from 55 in 1999 to 57 in 2000. The average count for 1999 included approximately 7 employees whose positions were associated with the non-life sciences product line which we sold effective April 1, 2000. Salaries, payroll taxes and benefitsWAVE system operating software. Combined these items accounted for approximately 46%over 90% of the total increase. This percentage increase is greater thanTotal research and

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development expenses represented 32% of net sales in 2002 versus 24% of net sales in 2001. During the percentage increase in average personnel counts due tofourth quarter of 2002 management formulated a restructuring plan for the timing of personnel hiring in 1999. The majority of personnel additions in 1999 occurred in the second halfCompany and executed a significant portion of the year while personnel counts in 2000 were consistent. We supplementplan. The plan included employee terminations, office closures, the expanded activitiestermination of our staff through the engagementcollaborations and write-offs of external consultants. Increased professional services fees accounted for approximately 18%intellectual property. It is expected that, as a result of the restructuring, our total increase in research and development expenses. The increase in depreciation is the result of investments in equipment during the year. The increase in depreciation accounted for approximatelyoperating expenses will be initially decreased by 20% of the total increase. We expect research and development spending to increase over the next several years as we expand our development efforts.25% from 2002 levels.

        Stock Based Compensation.    Stock based compensation expense was $0.9 million$131,000 in 2000. In connection with2002 as compared to $139,000 in 2001. This expense represents the sale of our non-life sciences instrument product line, we accelerated the vesting of 71,700 options, which would have otherwise been forfeited. Former employees who were associated with our

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non-life sciences product line held these options. The acceleration resulted in the recording of $0.6 million of stock based compensation expense in the first quarter of 2000. The remaining expense is due to amortization of deferred compensation related to stock options issued.

        Gain on Sale of Product Line.Restructuring Charges.    Effective April 1, 2000 we soldDuring the assets relatedfourth quarter of 2002 management formulated and executed a significant portion of a restructuring plan. The plan was developed to reduce expenses thereby better aligning the Company's expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. Specifically, in the fourth quarter of 2002 the Company notified approximately 60 employees of their termination, notified landlords of our non-life sciences instrument product lineintent to enable us to focusclose four facilities and reduce our business plan on the genomics segmentspace commitment under lease at two other facilities, terminated certain consulting and collaboration agreements and abandoned certain patents. As a result of the life sciences industry. The assetsplan $3.3 million in restructuring charges were sold for a total adjusted purchase price of $5.65 million plus reimbursement by the buyerrecorded and are included in operating expenses. These charges consisted of approximately $0.4$800,000 of employee severance costs, $1.2 million in office closure related costs, $400,000 of expenses paid by us since March 31, 2000collaboration and other agreement termination charges and $900,000 in connection with this product line. At the datewrite-offs of abandoned intellectual property. Approximately 45% of the transaction the gain to be recognized on the saletotal charges were for non-cash items. We expect that, as a result of the assets was deferred until we received all proceedsrestructuring, our total operating expenses will be initially decreased by 20% to 25% from 2002 levels. Additional restructuring charges totaling between $500,000 and $700,000 are expected in the buyer. All such proceeds were received on December 29, 2000 and a gain on the salefirst half of $0.8 million, before taxes, was recognized.2003.

        Other Income (Expense).    Other income and expense, which consists mainly of net interest income and expense, improved from an expense of $1.2 million in 1999decreased to income of $0.2$437,000 in 2002 from income of $2.4 million in 2000.2001. Interest income for the year was $626,000 as compared to $2.5 million in 2001. Interest expense for the year was $1.8 million$62,000 as compared to $1.3 million$58,000 in 1999.2001. The increase in interest expense was the result of interest expense on our $12 million convertible notes that were issued in March 1999, additional interest expense on our working capital lending facility and accelerated interest charges on our convertible notes. On the effective date of our initial public offering interest payable on the notes was accelerated through the maturity date of the notes at an annual interest rate of 3.6%. As a result, the Company recorded additional interest expense of approximately $0.8 million in the third quarter of 2000. Interest income for the year was $2.0 million as compared to $0.1 million in 1999. The increasedecrease in interest income is a result of declining interest rates on investments and reductions in our short-term investment balances. We expect interest income to decline in 2003 as short-term interest rates are expected to continue to be low and as we continue to use cash in our operating and investing activities. Additionally, interest expense will increase in 2003 due to the investmentlong-term debt obtained by the Company during 2002 and the recently committed line of the net proceeds from our initial public offering.credit.

        Income Taxes.    Income tax expense in 1999 was $1.7 million while in 2000No income tax expensebenefit was $0.2 million. The expense recorded in 1999 relates to the establishment of a valuation allowance against previously recorded deferred tax assets. The expense recorded in 2000 relates to the recognized gain on the sale of the assets related to our non-life sciences product line.2002 or 2001. No further tax benefit isbenefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. Income tax expense in 2002 was $105,000 while in 2001 income tax expense was $24,000. During 2002 the Company recorded current tax expense related to its Japan branch operations and certain state taxes. Our deferred tax assets as of December 31, 2002 were $23.2 million and were offset by a valuation allowance of $23.2 million. Our deferred tax assets as of December 31, 2001 were $14.9 million and were offset by a valuation allowance of $14.9 million. As of December 31, 2000,2002, we had federal net operating loss carryforwards of approximately $19.9$60.3 million. We also had federal research and development tax credit carryforwards of approximately $0.2$0.9 million. The net operating loss and credit carryforwards will expire at various dates from 20122008 through 2020,2022, if not utilized. We also had state income tax loss carryforwards of $4.2 million.$22.2 million at December 31, 2002. These carryforwards will also expire at various dates beginning in 2008 if not utilized.

    As of December 31, 1999, we had deferred tax assets of approximately $0.2 million. The deferred tax asset at December 31, 1999 has been offset by a valuation allowance of $4.5 million due to our cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. The deferred tax assets as of December 31, 2000 were $7.6 million and were offset by a valuation allowance of $7.6 million. Deferred tax assets relate primarily to net operating loss carryforwards.18

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Years Ended December 31, 19992001 and 1998
2000

        Net Sales.    Net sales increased 22%, from $18.9 million for the year ended 199849% to $23.0 million for the year ended 1999. Sales from our life sciences products increased 91%, from $7.4$38.5 million in 1998 to $14.22001 from $25.9 million in 1999.2000. Total revenues from sales of WAVEWAVE® Systems increased 107%, from $5.425% to $23.5 million in 1998 to $11.22001 from $18.8 million in 1999. Life science consumables2000. Consumable product sales and other revenue increased 50%, from $2.0to $15.0 million in 1998 to $3.02001 from $4.9 million in 1999. In 1999, we acquired another manufacturer2000. Most of life science consumables and began including sales of these products in our revenues. These sales, along with an increase of $0.7 million in

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sales of our WAVE Systems consumables, account for the increase in total life science consumables sales.consumable sales and other revenue came from our Synthetic Nucleic Acid products, obtained through our acquisition of Annovis, Inc. in May 2001, which accounted for approximately 64% of our consumable product sales and other revenue. Additionally, WAVE related consumable products revenue increased approximately 32% to $3.1 million in 2001 from $2.1 million in 2000. Sales of WAVE related consumable products increased as the installed base of WAVE® Systems has increased and as researchers begin to use them more extensively in place of other methods of DNA analysis. Sales of our non-life sciences instruments decreased 24%, from $11.5instrument products were $2.2 million in 1998 to $8.8 million2000. There were no sales in 1999. This decrease was2001 as a result of reduced demand for these products related to an industry-wide consolidation among customers for these products and the negative effectour divestiture of a reorganization of our dealer and distributor network.this product line effective April 1, 2000.

        Cost of Goods Sold.    Cost of goods sold increased from $9.634% to $17.2 million in 1998 to $12.12001 from $12.8 million in 1999 due to increased sales.2000, representing 45% of net sales in 2001 and 49% of net sales in 2000. Cost of goods sold as a percentagepercent of sales remained relatively constant from 1998improved year over year due to 1999, increasing from 51%improved margins on our WAVE systems sales offset by the lower margin bulk sales of our Synthetic Nucleic Acid products. Systems sales margins improved due to lower combined material and manufacturing costs for our life science instruments, higher average selling prices per systems and the sale of our lower margin non-life sciences instrument product line in 19982000. The average sales price per instrument increased approximately 5% in 2001. The improved margins in systems sales were offset by a lower margin on consumable sales. The consumable sales margin was lower due mainly to 52% in 1999.bulk sale pricing discounts.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased 41%, from $8.253% to $21.5 million in 1998 to $11.52001 from $14.0 million in 1999.2000. This increase is the result of additional personnel and personnel-related expenses and consulting fees. Averagedepreciation. The average selling, general and administrative personnel counts increased 30%32% to 131 in 2001 from 6999 in 19982000. This personnel increase was due largely to 90 in 1999. This increase is mainly the resultacquisition of continuing to build our direct sales and marketing staff in the United States for our entry into the life sciences market. We also opened an office in Japan and expanded our life sciences sales efforts in Europe.Annovis. Direct personnel expenses and increased travel and travel related expenses associated with the activities of our expanded staff accounted for approximately 47%37% of the total increase. Increased consulting fees are the result of a one-time advisory services fee of $550,000, or 17%rent and depreciation expense associated with investments in offices and equipment supporting our expanded staff accounted for approximately 34% of the total increase,increase. Total selling, general and administrative expenses represented 56% of net sales in 19992001 versus 54% of net sales in connection with consulting and financial advisory services associated with the development of our strategic business plan and related intermediate and long-term financial strategies.2000.

        Research and Development Expenses.    Research and development expenses increased 99%, from $3.223% to $9.4 million in 1998 to $6.32001 from $7.7 million in 1999. These expenses represented 17% of net sales in 1998, versus 27% of net sales in 1999.2000. Research and development expenses consist of salaries and related personnel costs of researchers and software developers, material costs for prototypes and test units, legal expenses relating to intellectual property research and application development activities, testing and enhancement of our products, and amortization of intellectual property. We expense our research and development costs in the year in which they are incurred.incurred with the exception of certain capitalized software development costs. The increase in these expenses was attributable to a 77% increase in the average research and development personnel count, from 31 in 1998 to 55 in 1999. Compensation, benefits, hiring expenses and other direct personnel costs accounted for 62% of the total increase. The remaining increase is attributable to the costsincreased personnel and personnel related expenses and professional services fees associated with the expanded activities of the staff. The average research and development staff.personnel count increased 27% to 73 in 2001 from 57 in 2000. This increase in personnel was due largely to the acquisition of Annovis. Salaries, payroll taxes and benefits accounted for approximately 49% of the total increase. We supplement the expanded activities of our staff through the engagement of external consultants. Increased professional services fees accounted for approximately 51% of the total increase in research and development expenses. Total research and development expenses represented 30% of net sales in 2000 versus 24% of net sales in 2001.

        Stock Based Compensation.    Stock based compensation expense was $139,000 in 2001 as compared to $861,000 in 2000. Stock based compensation expense was higher in 2000 as we accelerated the vesting of 71,700 options in connection with the sale of our non-life sciences instrument product line. Former

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employees who were associated with our non-life sciences product line held these options. The acceleration resulted in the recording of $600,000 of stock based compensation expense in the first quarter of 2000.

        Gain on Sale of Product Line.    Effective April 1, 2000 we sold the assets related to our non-life sciences instrument product line to enable us to focus our business plan on the genomics segment of the life sciences industry. The assets were sold for a total adjusted purchase price of $5.65 million plus reimbursement by the buyer of approximately $400,000 of expenses paid by us since March 31, 2000 in connection with this product line. At the date of the transaction the gain to be recognized on the sale of the assets was deferred until we received all proceeds from the buyer. All such proceeds were received on December 29, 2000 and a gain on the sale of $784,000, before taxes, was recognized.

        Other Expenses.Income (Expense).    Other expenses,income and expense, which consistedconsists mainly of net interest income and expense, increased 125%, from $0.5to income of $2.4 million in 19982001 from income of $212,000 in 2000. Interest expense for the year was $58,000 as compared to $1.2$1.8 million in 1999. This increase2000. During 2000 we carried a large amount of debt that was relatedeither paid or converted into common stock subsequent to our initial public offering in July 2000. As a result of the elimination of debt from our balance sheet we incurred little interest expense in 2001. Interest income for the year was $2.5 million as compared to $2.0 million in 2000. The increase in interest income is a result of the investment of the net proceeds from our initial public offering. Interest income on our placement of $12.0 million of convertible notesinvestments during 2001 was negatively impacted by the significant decline in March 1999.short-term interest rates

        Income Taxes.    Income tax expense in 2001 was $24,000 as compared to $180,000 in 2000. The incomeexpense recorded in 2000 relates to the recognized gain on the sale of the assets related to our non-life sciences product line. Income tax expense in 2001 is related to our sales branch in Japan. Our deferred tax assets as of December 31, 2001 were $14.9 million and were offset by a valuation allowance of $14.9 million. Our deferred tax assets as of December 31, 2000 were $7.6 million and were offset by a valuation allowance of $7.6 million. No tax benefit in 1998 was $0.9 million, while in 1999 income tax expense was $1.7 million. A valuation reserve of $4.5 million wasrelated to our net operating losses is being recorded in 1999 due to our cumulative losses in recent years, expected losses in the future years and an inabilitythe uncertainty as to whether we will be able to utilize any additional losses as carrybacks.carryforwards. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide a valuation reserveallowances against deferred tax assets. To the extent we begin to generate income in the future years and determineit is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. As of December 31, 1999,2001, we had federal net operating loss carryforwards of approximately $11.6$38.0 million. We also had federal research and development tax credit carryforwards of approximately $131,000.$0.7 million. The net operating loss and credit carryforwards will expire at various dates from 20122008 through 2019,2021, if not utilized. We also had state income tax loss carryforwards of $3.0 million.$15.4 million at December 31, 2001. These carryforwards will also expire at various dates beginning in 2008 if not utilized.

    As of December 31, 1998 and 1999, we had deferred tax assets of approximately $2.0 million and $4.7 million, respectively. The deferred tax asset at December 31, 1999 has been offset by a valuation allowance of $4.5 million due to our cumulative losses in recent years, expected losses in future years and

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an inability to utilize any additional losses as carrybacks. The deferred tax assets were $2.0 million and $180,000 as of December 31, 1998 and 1999, respectively. Deferred tax assets relate primarily to net operating loss carryforwards.


Liquidity and Capital Resources


        We have experienced net losses and negative cash flows from operations during the past three years. As a result, we had an accumulated deficit of $21.0$49.8 million as of December 31, 2000. On July 21, 2000, we issued 5,152,000 shares of common stock in our initial public offering at $15.00 per share. After payment of the underwriters' discounts and commissions and other expenses, we received net proceeds of approximately $69.9 million from this offering. In addition, holders of warrants and options to purchase shares of common stock exercised at various times since our initial public offering thus providing us with an additional $2.7 million in cash.2002. As of December 31, 19992002 and 2000,2001, we had approximately $0.2$9.7 million and $38.2$19.6 million, respectively, in cash and cash equivalents. In addition, as of December 31, 2000,2002 and 2001, we had $23.7approximately $3.6 million and $23.9 million in short-term investments for total cash and short-term investments of $61.9 million.approximately $13.3 million and $43.5 million, respectively.

        On May 19, 2000, we soldDuring 2002 our major cash expenditures were the assets related tofunding of our non-life sciences instrument product line to a company controlled by Stephen F. Dwyer, a directoroperations that resulted in an operating loss and a principal stockholder of ours, for acapital projects. A total adjusted purchase price of $5.65 million plus reimbursement by the buyer of approximately $0.4$30.2 million of expenses paid by us since March 31, 2000cash and investments was used with approximately $17.9 million used to fund our operations and $11.5 million for capital projects. Operating activities were funded through existing cash while capital projects were funded through existing cash, a long-term mortgage loan and an operating lease line of credit. Major capital projects during the

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year included facility build-out, expansion and improvement at our two nucleic acid production facilities in connection with this product line. Approximately $3.65 million was paidBoulder, Colorado and Glasgow, Scotland. The Boulder facility project is designed to bring on line a cGMP (Good Manufacturing Practices) facility for the synthesis of oligonucleotides. This facility began non-GMP production operations during the first quarter of 2003 and is expected to begin cGMP production in cashthe second quarter of 2003. The Glasgow facility project, which produces nucleic acid building blocks, included 2 main objectives, the upgrading of equipment and processes at the closing of the sale and $2.0 million was paid with an interest-bearing promissory note due on December 30, 2000.

    The purchaser financed the cash portion of the purchase price for these assets plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. We acquired the notes evidencing these loans from the bank upon closing of our initial public offering by paying to the bank an amount equal to the entire principal balance of the notes plus accrued and unpaid interest. These acquired notes were consolidated with the original $2.0 million note. All of the principal and accrued interest on this consolidated note was repaid prior to maturity. On December 29, 2000, we repurchased 261,904 shares of our common stock from Mr. Dwyer for $10.50 per share, which was the closing price for our common stock on that day, for an aggregate purchase price of $2.7 million. Mr. Dwyer used these proceeds and additional resources to pay the principal and interest on the consolidated note.

    Our $12 million convertible notes, due 2002, contained features that were impacted by our initial public offering. On the effective date of our initial public offering interest payable on the notes was accelerated through the maturity date of the notes at an annual interest rate of 3.6%. As a result, we recorded additional interest expense of approximately $0.8 million. These notes contained a conversion feature that allowed us, upon satisfaction of certain conditions, to cause conversion of the principal plus accrued interest into shares of our common stock at a conversion price of $5.00 per share. On August 14, 2000, our Board of Directors authorized us to convert the notes into common stock upon meeting the required conditions. On August 15, 2000, such conditions were metcurrent production facility and the notesopening of a new facility that will include significant capacity expansion along with further equipment and process improvements. The current production facility improvements were converted into 2,750,906 sharescompleted during the year and the first production line, or pilot line, in the new facility is expected to be completed in the first half of common stock. All principal and accrued interest at the conversion date of approximately $13.9 million was recorded to stockholders equity.2003.

        Our operating activities resulted in net outflows of $3.4$17.9 million in 1998 and $8.72002, $11.1 million in 1999 as compared to2001 and $4.7 million in 2000. The operating cash outflows for these periods resulted mainly from significantour operating losses. Significant investments in research and development and sales and marketing which resulted incontributed to the operating losses. The operating cash outflows for 20002002 are significantly lowerhigher than those in the prior year. This improvement in operating cash flows was attainedyear due in large part throughto increased operating losses and increased inventory balances offset by a reduction in accounts receivable collection. During 1999 the average daysand an increase in accounts payable. Inventory balances increased as raw materials, work in process and finished goods inventory related to collect accounts receivable was over 90 days. This decreasedour specialty chemicals consumable products were increased as we continue to approximately 60 daysexpand production capabilities and plan for 2000.production needs.

        Net cash used inprovided by investing activities was $1.5$5.9 million in 1998 and $3.52002 as compared to cash used of $9.4 million for 1999 compared to2001 and $22.2 million in 2000. The change in investing cash flow in 20002002 is the result of our investment of a portion

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ofdue primarily to the net proceeds from our initial public offeringtransfer of short-term investment funds to cash offset by investment in short term investments. Such investments resultedproperty, plant and equipment. Cash used in investing cash outflows of $23.7 million. This outflowactivities in 2001 was offset by the net cash inflow from the sale proceeds relateddue primarily to the sale of our non-life sciences product line assets net of investments in property, plant and equipment and cash used in the acquisition of Annovis, Inc. Cash used in investing activities in 2000 was due primarily to the net transfer of cash to short-term investments and investment in property, plant and equipment. During 2003 we expect to continue to make significant investments in property, plant and equipment. Our capital expenditures budget for 2003 is approximately $8.4 million and includes expenditures for the completion of our facility expansion projects in Glasgow, Scotland, and Boulder, Colorado and for general facility and equipment improvements. Additional expansion projects for the Glasgow and Boulder production facilities may be incurred over the next 2 to 3 years as business demand dictates.

        Net cash provided by financing activities was $4.6$1.7 million in 1998 and $12.22002, $1.9 million for 1999 compared to2001 and $64.9 million in 2000. The financing cash inflows in 2002 were the result of proceeds from long-term debt and the sale of common stock through the exercise of warrant and options offset by the purchase of treasury stock. The financing cash inflows in 2001 were the result of proceeds from the sale of common stock through the exercise of warrant and options offset by the repayment of acquired company debt. The financing cash inflows in 2000 arewere the result of our initial public offering offset by the repayment of bank debt and our purchase of treasury stock. Our IPOinitial public offering and subsequent sales of common stock for the exercise of warrants and options resulted in cash inflow, net of expenses, of approximately $72.7 million. The repayment of debt resulted in cash outflow of approximately $5.2 million and the purchase of treasury stock resulted in cash outflow of approximately $2.7 million.

        As of December 31, 2002, we did not have any significant contractual purchase obligations. We are party to a number of lease agreements mainly for office, research and development and production facilities. Such lease agreements expire at various dates through 2007. At December 31, 2002, the future minimum lease payments required under noncancellable lease provisions are approximately $2.9 million in 2003; $2.6 million in 2004; $2.2 million in 2005; $1.4 million in 2006; and a total of approximately $700,000 in rental payments for the year 2007.

        In March 2003 the Company entered into a loan commitment agreement with a financial institution for up to a $5.0 million secured line of credit. Collateral for the line consists of qualified accounts receivable balances. Funds available under the line are equal to 80% of eligible accounts receivable

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balances. Management expects to finalize the line of credit agreement in the second quarter of 2003. The funds used came from the proceedsproposed term of the saleagreement is 1 year carrying a variable interest rate of our non-life sciences instrument product line and our initial public offering. The financing cash inflows in 1999 were due to the issuance of convertible notes that provided net proceeds of $11.4 million in March 1999, and net other borrowings.2.25% over prime.

    Our capital expenditures budget for 2001 is approximately $5.0 million. Capital expenditures for the current year are expected to relate to facility and equipment improvements. Research and development expenses are budgeted at approximately $8.9 million for 2001.        We expect to devote substantial capital resources to continue our research and development efforts, to expand our marketing and sales and customer support activities, and for other general corporate activities. Our capital requirements for operations depend on a number of factors, including the level of our research and development activities, market acceptance of our products and services, the resources we devote to developing and supporting our products and services, normal capital expenditures and other factors.

    We believe that The restructuring plan developed in 2002 is expected to reduce our currentoperating expenses and thereby reduce the cash balances will be sufficientneeded to fund our operations through at leastuntil such time as we become cash flow positive. Capital expenditures for production expansion projects have been planned in phases. It is our intention to initiate the phased expansions when we have identified specific business opportunities that would require such expansion. We may elect to advance these phases ahead of the business opportunities if we can obtain additional financing on favorable terms. We are currently investigating various financing vehicles for these projects.

        In fiscal year 2003, current financial and cash flow projections indicate that we expect to use approximately $14.0 million in cash to fund further operating losses and our capital expenditures budget of approximately $8.4 million. The current capital expenditures budget mainly relates to the completion of the current projects in Boulder and Glasgow during the first half of 2003. DuringWe expect to meet this total cash need from existing cash as of December 31, 2002 of $13.3 million, additional cash generated from operations during 2003 and funds available to us under our new $5.0 million credit facility expected to be available during the second quarter of 2003. Current financial and cash flow projections indicate that operating cash is expected to turn positive during the fourth quarter of 2003. These projections may or may not be realized based upon actual operating results and project requirements, thus, during or after this period, if our existing cash and short-term investments, cash generated by operations and available borrowings under credit agreements is insufficient to satisfy our liquidity requirement, we may need to sell additional equity or debt securities, or obtain additional credit arrangements. We are currently pursuing additional financing of up to $5.0 million beyond the committed line of credit. We feel that such additional financing will be secured in 2003. However, we cannot assure you that any financing arrangement will be available in amounts or on terms acceptable to us.


Impact of Inflation


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


Recent Account Pronouncements


        Effective January 1, 2002, we adopted Statement of Financial Accounting StandardsStandard (SFAS) No. 133,142,Goodwill and Other Intangible Assets. SFAS No. 142 establishes new guidelines for accounting for goodwill and other intangible assets and provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be evaluated for impairment annually. The provisions of SFAS No. 142 require the completion of a transitional impairment test within six months of adoption, with any impairment treated as a cumulative effect of a change in accounting principle. The Company has performed the transitional goodwill impairment test during the second quarter of 2002 and determined that no impairment exists at the time of adoption of SFAS No. 142. The Company also completed its annual impairment test during the fourth quarter of 2002 and determined that no impairment existed at the time of the annual test.

        In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143,Accounting For Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of a liability for Derivative Instrumentsan asset retirement obligation in the period in which it is incurred and Hedging Activities, is effective for all the Company's

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fiscal yearsyear beginning after June 15, 2000.January 1, 2003. Management is in the process of evaluating the impact, if any, this standard will have on the Company's consolidated financial statements.

        In July 2002, the FASB issued SFAS 133, as amended, establishesNo. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses the accounting and reporting standardsrelated to exit or disposal activities and is effective for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative.Company beginning January 1, 2003. The Company will adopt SFAS 133 effective January 1, 2001. Management does not expectbelieves the adoption of SFAS 133 tothis standard will not have a significant impact on the financial position, results of operations, or cash flowsstatements of the Company.


        In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN No. 45 also expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. The recognition provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Management believes that FIN No. 45 will not have a significant impact on the Company's Consolidated Financial Statements.

Foreign Currency Rate Fluctuations


        ApproximatelyHistorically, approximately 50% of our net sales have been to customers in the United States. While we do sell products in many foreign countries, most of these sales are completed by our wholly-owned subsidiary,subsidiaries, Transgenomic, LTD., or Cruachem, LTD., and are made in itstheir operating currency British pounds sterling, or the Euro. Results of operations for the Company's foreign subsidiary are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. TooTo further limit our exposure to exchange rate risk all sales quotes issued by Transgenomic, Ltd., starting in 2001, will be are based upon the United States dollar pricing converted at prevailing exchange rates at the time of the quote. Additionally, such quotes will have short expiration dates. As a result, although we are

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subject to exchange rate risk, management feels we do not have a material exposure to foreign currency rate fluctuations at this time.


Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.


        The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments in 20002002 was less than one year. Due to the short termshort-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is presented. We recently committed to a secured line of credit that carries a variable interest rate. This line of credit will expose us to interest rate risk in 2003.

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Item 8.    Financial Statements and Supplementary Data.



INDEPENDENT AUDITORS' REPORT


Board of Directors
Transgenomic, Inc.
Omaha, Nebraska

        We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and subsidiaries (the Company) as of December 31, 20002002 and 19992001 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2000.2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Transgenomic, Inc. and subsidiaries as of December 31, 20002002 and 1999,2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20002002 in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note A, in 2002 the Company changed its method of accounting for goodwill and other intangible assets in connection with the adoption of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets. Also, as discussed in Note Q, on March 31, 2003, the Company received a commitment letter for a new revolving credit agreement.

/s/ DELOITTE & TOUCHE LLP


Deloitte & Touche LLP
Omaha, Nebraska
JanuaryFebruary 4, 2003 (March 31, 20012003 as to the second paragraph of Note Q)

2824

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TRANSGENOMIC, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



As of December 31, 20002002 and 19992001

(In thousands except share and per share data)


				2002			2001
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	9,735		$	19,613
	Short term investments				3,612			23,913
	Accounts receivable, net				11,058			11,248
	Inventories				12,448			5,829
	Prepaid expenses and other current assets				2,274			2,273
		Total current assets			39,127			62,876
PROPERTY AND EQUIPMENT:
	Land and Buildings				2,020			—
	Equipment				16,852			10,459
	Furniture and fixtures				5,849			3,004
					24,721			13,463
	Less—accumulated depreciation				9,069			5,278
					15,652			8,185
DEMONSTRATION INVENTORY					181			250
GOODWILL					15,275			14,274
OTHER ASSETS					3,800			3,701
				$	74,035		$	89,286
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
	Accounts payable			$	4,917		$	2,664
	Accrued compensation				1,113			1,212
	Current portion of long-term debt				63			—
	Other accrued expenses				4,928			3,306
		Total current liabilities			11,021			7,182
	Long-term debt				1,499			—
		Total liabilities			12,520			7,182
COMMITMENTS AND CONTINGENCIES (Note F)
STOCKHOLDERS' EQUITY:
	Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding				—			—
	Common stock, $.01 par value, 60,000,000 shares authorized, 24,006,649 and 23,867,907 shares issued in 2002 and 2001, respectively				240			239
	Additional paid-in capital				113,934			113,260
	Unearned compensation				(78	)		(158	)
	Accumulated other comprehensive income (loss)				378			(81	)
	Accumulated deficit				(49,771	)		(28,406	)
					64,703			84,854
	Less: Treasury Stock, at cost, 494,604 and 261,904 shares in 2002 and 2001, respectively				(3,188	)		(2,750	)
		Total stockholders' equity			61,515			82,104
				$	74,035		$	89,286

See notes to consolidated financial statements.

25

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TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2002, 2001 and 2000

(in thousands except share and per share data)


				2000			1999
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents			$	38,193		$	153
	Short term investments				23,728			—
	Accounts receivable, net				4,733			6,199
	Inventories				2,567			3,919
	Prepaid expenses and other current assets				948			623
		Total current assets			70,169			10,894
PROPERTY AND EQUIPMENT:
	Equipment				6,359			5,200
	Furniture and fixtures				1,068			1,567
					7,427			6,767
	Less—accumulated depreciation				2,836			3,909
					4,591			2,858
DEMONSTRATION INVENTORY					196			2,124
OTHER ASSETS					2,907			4,087
				$	77,863		$	19,963
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
	Note payable—bank			$	—		$	4,340
	Current portion of notes payable—other				—			580
	Accounts payable				1,961			2,827
	Accrued compensation				569			666
	Other accrued expenses				1,367			1,112
		Total current liabilities			3,897			9,525
NOTES PAYABLE—other, less current maturities					—			116
CONVERTIBLE NOTES PAYABLE					—			12,421
COMMITMENTS AND CONTINGENCIES (Notes H, J, L and N)
STOCKHOLDERS' EQUITY (DEFICIT):
	Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding				—			—
	Common stock, $.01 par value, 60,000,000 shares authorized, 21,472,816 and 13,000,000 shares issued in 2000 and 1999, respectively				215			130
	Additional paid-in capital				97,965			10,232
	Unearned compensation				(463	)		(113	)
	Accumulated deficit				(21,005	)		(12,344	)
	Accumulated other comprehensive income (loss)				4			(4	)
					76,716			(2,099	)
	Less: Treasury Stock, at cost, 261,904 shares				(2,750	)		—
		Total stockholders' equity (deficit)			73,966			(2,099	)
				$	77,863		$	19,963

			2002			2001			2000
NET SALES			$	37,554		$	38,467		$	25,883
COST OF GOODS SOLD				19,569			17,198			12,800
	Gross profit			17,985			21,269			13,083
OPERATING EXPENSES:
	Selling, General and administrative			24,068			21,497			14,047
	Research and development			12,201			9,372			7,652
	Stock based compensation expense			131			139			861
	Restructuring Charges (Note Q)			3,282			—			—
	Gain on sale of product line			—			—			(784	)
				39,682			31,008			21,776
LOSS FROM OPERATIONS				(21,697	)		(9,739	)		(8,693	)
OTHER INCOME (EXPENSE):
	Interest income			626			2,450			2,005
	Interest expense			(62	)		(58	)		(1,779	)
	Other—net			(127	)		(30	)		(14	)
				437			2,362			212
LOSS BEFORE INCOME TAXES				(21,260	)		(7,377	)		(8,481	)
INCOME TAX EXPENSE (BENEFIT):
	Current			105			24			—
	Deferred			—			—			180
				105			24			180
NET LOSS			$	(21,365	)	$	(7,401	)	$	(8,661	)
BASIC AND DILUTED LOSS PER SHARE			$	(0.91	)	$	(0.33	)	$	(0.52	)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING				23,582,687			22,560,057			16,629,555

See notes to consolidated financial statements.

2926

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TRANSGENOMIC, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

STOCKHOLDERS' EQUITY (DEFICIT)

Years Ended December 31, 2000, 19992002, 2001 and 19982000

(in thousands except share data)


			Common Stock
			Outstanding Shares		Par Value			Additional Paid in Capital			Unearned Compensation			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, January 1, 2000			13,000,000		$	130		$	10,232		$	(113	)	$	(12,344	)	$	(4	)	$	—		$	(2,099	)
	Net loss														(8,661	)		(8,661	)					(8,661	)
	Other comprehensive (loss):
	Foreign currency translation adjustment																	(5	)					(5	)
	Unrealized gain on available for sale securities																	13						13
	Comprehensive loss																	(8,653	)
	Sale of common shares		25,000						250															250
	Initial public offering (net of expenses)		5,152,000			52			69,644															69,696
	Conversion of Notes Payable and accrued interest		2,750,906			28			13,909															13,937
	Issuance and exercise of stock options or warrants		544,910			5			3,930			(508	)											3,427
	Amortization of unearned compensation											158												158
	Purchase of treasury stock		(261,904	)																	(2,750	)		(2,750	)
Balance, December 31, 2000			21,210,912			215			97,965			(463	)		(21,005	)		4			(2,750	)		73,966
	Net loss														(7,401	)		(7,401	)					(7,401	)
	Other comprehensive income (loss):
	Foreign currency translation adjustment																	(107	)					(107	)
	Unrealized gain on available for sale securities																	22						22
	Comprehensive loss																	(7,486	)
	Issuance of shares for acquisition		1,889,523			19			13,065															13,084
	Issuance and exercise of stock options or warrants		505,568			5			2,396															2,401
	Deferred compensation								(166	)		204												38
	Amortization of unearned compensation											101												101
Balance, December 31, 2001			23,606,003			239			113,260			(158	)		(28,406	)		(81	)		(2,750	)		82,104
	Net loss														(21,365	)		(21,365	)					(21,365	)
	Other comprehensive income (loss):
	Foreign currency translation adjustment																	493						493
	Unrealized gain on available for sale securities																	(34	)					(34	)
	Comprehensive loss																	(20,906	)
	Issuance and exercise of stock options or warrants		81,900			1			460			(51	)											410
	Issuance of shares for employee stock purchase plan		56,842						214															214
	Amortization of unearned compensation											131												131
	Purchase of treasury stock		(232,700	)																	(438	)		(438	)
Balance, December 31, 2002			23,512,045		$	240		$	113,934		$	(78	)	$	(49,771	)	$	378		$	(3,188	)	$	61,515

See notes to consolidated financial statements.

27

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TRANSGENOMIC INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2002, 2001 and 2000

(In thousands)


				2002			2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(21,365	)	$	(7,401	)	$	(8,661	)
	Adjustments to reconcile net loss to net cash flows from operating activities:
		Depreciation and amortization			3,993			3,680			1,807
		Non-cash restructuring charges			1,698			—			—
		Gain on sale of product line			—			—			(784	)
		Accrued interest and redemption premium			—			—			1,415
		Other			131			130			1,146
	Changes in operating assets and liabilities, net of acquisitions:
		Accounts receivable			794			(4,677	)		1,444
		Inventories			(5,767	)		(1,910	)		(223	)
		Prepaid expenses and other current assets			527			(1,169	)		(357	)
		Accounts payable			2,249			(378	)		(796	)
		Accrued expenses			(204	)		608			261
		Net cash flows from operating activities			(17,944	)		(11,117	)		(4,748	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment				(11,468	)		(5,706	)		(3,109	)
	Proceeds from asset sales				—			15			5,657
	Increase in other assets				(2,871	)		(1,351	)		(980	)
	Proceeds from the maturities and sale of available for sale securities				39,355			52,739			—
	Purchases of available for sale securities				(19,088	)		(52,902	)		(23,728	)
	Purchase of business, net of cash acquired				—			(2,189	)		—
		Net cash flows from investing activities			5,928			(9,394	)		(22,160	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Issuance of common stock, net of expenses				624			2,401			72,670
	Purchase of treasury stock				(438	)		—			(2,750	)
	Proceeds from long-term debt				1,559			—			204
	Net change in note payable—bank				—			—			(4,340	)
	Payments on long-term debt				—			—			(901	)
	Repayment of acquired business debt				—			(458	)		—
		Net cash flows from financing activities			1,745			1,943			64,883
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH					393			(12	)		65
NET CHANGE IN CASH AND CASH EQUIVALENTS					(9,878	)		(18,580	)		38,040
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR					19,613			38,193			153
CASH AND CASH EQUIVALENTS AT END OF YEAR				$	9,735		$	19,613		$	38,193

See notes to consolidated financial statements.

28

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2002, 2001 and 2000

(Tabular amounts in thousands except share and per share data)

			2000			1999			1998
NET SALES			$	25,883		$	23,035		$	18,935
COST OF GOODS SOLD				12,800			12,090			9,591
	Gross profit			13,083			10,945			9,344
OPERATING EXPENSES:
	Selling, General and administrative			14,047			11,532			8,160
	Research and development			7,652			6,297			3,159
	Stock based compensation expense			861			—			—
	Gain on sale of product line			(784	)		—			—
				21,776			17,829			11,319
LOSS FROM OPERATIONS				(8,693	)		(6,884	)		(1,975	)
OTHER INCOME (EXPENSE):
	Interest income			2,005			126			59
	Interest expense			(1,779	)		(1,324	)		(575	)
	Other—net			(14	)		—			(15	)
				212			(1,198	)		(531	)
LOSS BEFORE INCOME TAXES				(8,481	)		(8,082	)		(2,506	)
INCOME TAX EXPENSE (BENEFIT):
	Current			—			(28	)		20
	Deferred			180			1,773			(950	)
				180			1,745			(930	)
NET LOSS			$	(8,661	)	$	(9,827	)	$	(1,576	)
BASIC AND DILUTED LOSS PER SHARE			$	(0.52	)	$	(0.76	)	$	(0.13	)
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
OUTSTANDING				16,629,555			13,000,000			12,279,042

See notes to consolidated financial statements.

30

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TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (Continued)

Years Ended December 31, 2000, 1999 and 1998

(in thousands except share data)

				Common Stock
				Outstanding Shares		Par Value			Additional Paid in Capital			Notes Receivable			Unearned Compensation			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance, January 1, 1998				11,351,500		$	114		$	2,835		$	(1,020	)	$	—		$	(941	)	$	2		$	—		$	990
	Net loss																		(1,576	)		(1,576	)					(1,576	)
	Other comprehensive income (loss):
		Foreign currency translation adjustment																				1						1
			Comprehensive income (loss)																			(1,575	)
	Net receivable from related party												(66	)														(66	)
	Sale of common shares			1,648,500			16			7,284																		7,300
Balance, December 31, 1998				13,000,000			130			10,119			(1,086	)		—			(2,517	)		3			—			6,649
	Net loss																		(9,827	)		(9,827	)					(9,827	)
	Other comprehensive income (loss):
		Foreign currency translation adjustment																				(7	)					(7	)
			Comprehensive income (loss)																			(9,834	)
	Net receivable from related party												1,086															1,086
	Issuance of stock options									113						(113	)											—
Balance, December 31, 1999				13,000,000			130			10,232			—			(113	)		(12,344	)		(4	)		—			(2,099	)
	Net loss																		(8,661	)		(8,661	)					(8,661	)
	Other comprehensive income (loss):
		Foreign currency translation adjustment																				(5	)					(5	)
		Unrealized gain on available for sale securities																				13						13
			Comprehensive income (loss)																			(8,653	)
	Sale of common shares			25,000						250																		250
	Initial public offering (net of expenses)			5,152,000			52			69,644																		69,696
	Conversion of Notes Payable and accrued interest			2,750,906			28			13,909																		13,937
	Issuance and exercise of stock options or warrants			544,910			5			3,930						(508	)											3,427
	Amortization of unearned compensation															158												158
	Purchase of treasury stock			(261,904	)																				(2,750	)		(2,750	)
Balance, December 31, 2000				21,210,912		$	215		$	97,965		$	—		$	(463	)	$	(21,005	)	$	4		$	(2,750	)	$	73,966

31

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TRANSGENOMIC INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2000, 1999 and 1998

(in thousands)

				2000			1999			1998
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(8,661	)	$	(9,827	)	$	(1,576	)
	Adjustments to reconcile net loss to net cash flows from operating activities:
		Depreciation and amortization			1,807			1,364			798
		Deferred income taxes			180			1,773			(950	)
		Loss (gain) on sale of assets			4			(16	)		(8	)
		Gain on sale of product line			(784	)		—			—
		Accrued interest and redemption premium			1,415			859			—
		Amortization of deferred financing costs			101			150			—
		Stock based compensation expense			861			—			—
	Changes in operating assets and liabilities, net of acquisitions:
		Accounts receivable			1,444			(1,635	)		(2,029	)
		Inventories			(223	)		(1,775	)		(1,718	)
		Prepaid expenses and other current assets			(357	)		(296	)		307
		Accounts payable			(796	)		481			1,392
		Accrued expenses			261			179			340
		Net cash flows from operating activities			(4,748	)		(8,743	)		(3,444	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of property and equipment				(3,109	)		(1,828	)		(683	)
	Proceeds from asset sales				5,657			21			10
	Increase in other assets				(980	)		(1,461	)		(790	)
	Purchase of short term investments				(23,728	)		—			—
	Purchase of business, net of cash acquired				—			(187	)		—
		Net cash flows from investing activities			(22,160	)		(3,455	)		(1,463	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Issuance of common stock, net of expenses				72,670			—			7,300
	Net change in note payable—bank				(4,340	)		1,190			(800	)
	Proceeds from notes payable—other				204			—			100
	Payments on notes payable—other				(901	)		(430	)		(1,965	)
	Purchase of treasury stock				(2,750	)		—			—
	Proceeds from convertible notes payable				—			12,000			—
	Deferred financing costs				—			(588	)		—
	Increase in related party receivables				—			—			(66	)
		Net cash flows from financing activities			64,883			12,172			4,569
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH					65			(8	)		1
NET CHANGE IN CASH AND CASH EQUIVALENTS					38,040			(34	)		(337	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR					153			187			524
CASH AND CASH EQUIVALENTS AT END OF YEAR				$	38,193		$	153		$	187

See notes to consolidated financial statements.

32

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2000, 1999 and 1998

(in thousands except share and per share data)


A.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description.

        Transgenomic, Inc., a Delaware corporation, and its subsidiaries (the "Company") provide innovative research toolsproducts and services for the synthesis, purification and analysis of nucleic acids. The Company's products and services include automated instrument systems, associated consumables, nucleic acid chemical building blocks, nucleic acid synthesis products, novel chemistry development for nucleic acids, process development services and genetic variation discovery services. The Company develops, assembles, manufactures and markets it's products and services to the life sciences industry. These tools enable researchersindustry to discoverbe used in research focused on molecular genetics of humans and understand variationother organisms. Such research could lead to development of new diagnostics and therapeutics. The Company's business plan is to participate in the human genetic code, or genome,value chain associated with these activities by providing key technology, tools, consumables, biochemical reagents and services to those entities engaged in orderbasic biomedical research and the development of diagnostics and therapeutic agents.

        Prior to accelerate2002 the Company was managed and improve drug developmentoperated on a fully integrated basis in one operating segment. During 2002, management determined it was appropriate to evaluate the Company's operations based upon the nature of the products and diagnostics.services provided. Accordingly, the Company has determined that it operates in two reportable segments, BioSystems and Nucleic Acids. The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. The Nucleic Acids operating segment generates revenue from the sale of nucleic acid-based products and services.

        The Company markets and sells these platformsproducts primarily throughoutthrough a direct sales and support group in North America and Europe and through a network of distributors in the Pacific Rim. Through March 31, 2000,Rim and other international markets. These sales efforts are directed from the Company also manufacturedheadquarters in Omaha, Nebraska and designed sample preparationthrough a series of sales and monitoring instruments, which were primarily used with various types of opticalsupport offices strategically located throughout the United States, Europe and mass spectrometers to analyze the chemical makeup of samples. The assets related to this non-life sciences product line were sold effective April 1, 2000.Japan.

Principles of Consolidation.

        The consolidated financial statements include the accounts of Transgenomic, Inc. and its wholly-owned subsidiaries Transgenomic, Ltd., which provides sales and customer support in Europe, Transgenomic Japan, Inc., which sponsors a sales and support branch office in Japan and Transgenomic St. Thomas, Inc., which is organized as a foreign sales corporation.subsidiaries. All intercompany balances and transactions have been eliminated.

Sales and Distribution Strategy.

    The Company sells its productseliminated in two major ways:

1)

Direct—The Company serves the United States and European markets through direct sales efforts from the Company headquarters in Omaha and Transgenomic, Ltd. headquarters in Crewe, United Kingdom. The Company has direct salespeople strategically located to cover all sections of the United States and Europe.



2)

Distributors—The Company also sells its products to distributors in its major European, Pacific Rim and other markets.

    The Company has sales offices in the United States, United Kingdom and Japan. These offices function mainly as service and support centers and also as sales resources for OEM and distributor customers in Europe and Japan.consolidation.

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.

Short Term Investments.

        The Company classifies all of its short termshort-term investments with maturities at acquisition of greater than three months as available for sale securities. Such short term investments consist primarily of United States government and federal agency securities, corporate commercial paper and mutual fundscorporate debt which are stated at market value, with unrealized gains and losses on such securities reflected, net of tax, as other

33

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comprehensive income in shareholders'stockholders' equity. Realized gains and losses on short term investments are

29

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included in earnings and are derived using the specific identification method for determining the cost of securities. It is the Company's intent to maintain a liquid portfolio to take advantage of investment opportunities; therefore, all securities are considered to be available for sale and are classified as current assets.

Accounts Receivable.

        Accounts receivable are shown net of allowance for doubtful accounts of $180$450,000 and $161$213,000 in 20002002 and 1999,2001, respectively. Payment terms generally are 30 or 60 days. The Company has also provided extended payment terms of up to 90 days to some of its customers. Accounts receivable balances subject to extended terms were approximately $105 as of December 31, 2000 and $216 as of December 31, 1999. Balances due more than one year from the balance sheet date were approximately $0 and $77, respectively.

Inventories.

        Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company has certainCost is computed using standard costs for finished goods inventory it provides as demonstration units to potential customersand average or latest actual cost for evaluation, as well as to certain universitiesraw materials and original equipment manufacturers for testing and demonstration. All demonstration units are held for resale and includedwork in inventory at the lower of cost or market. Demonstration inventory that is greater than one year old and remains held for resale is reclassified from current assets to long-term assets and carried at the lower of cost or market. If the customer or institution does not purchase the instrument, it is retrieved, and, if necessary, reconditioned for sale. Demonstration inventory is evaluated for impairment based on its physical condition and technological status. No impairment loss has been recognized to date. At the time these instruments no longer are held for resale and will be used for in-house testing and analysis, they are transferred from inventory to property at the lower of cost or market and depreciated. Demonstration equipment included in property and equipment is used for research and development and training.process.

Property and Equipment.

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

Buildings		15 years
Furniture and fixtures		5 to 7 years
Production equipment		5 to 7 years
Computer equipment		3 to 5 years
Research and development equipment		3 to 5 years
Demonstration equipment		3 to 5 years

Goodwill.

        Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 142,Goodwill arising fromand Other Intangible Assets. SFAS No. 142 establishes new guidelines for accounting for goodwill and other intangible assets and provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be evaluated for impairment annually. The provisions of SFAS No. 142 require the excesscompletion of cost overa transitional impairment test within six months of adoption, with any impairment treated as a cumulative effect of a change in accounting principle. The Company has performed the fair valuetransitional goodwill impairment test during the second quarter of net assets2002 and determined that no impairment exists at datesthe time of acquisition is being amortized usingadoption of SFAS No. 142. The Company also completed its annual impairment test during the straight-line method over 15 years.fourth quarter of 2002 and determined that no impairment existed at the time of the annual test.

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Impairment of Long-Lived Assets.

        The Company assesses the recoverability of long-lived assets held for use, including certain intangible assets and goodwill, whenever events or changes in circumstances indicate that the carrying amount of an

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asset may not be recoverable. In such cases, if the sum of the expected cash flows (undiscounted and without interest) resulting from the use of the asset is less than the carrying amount, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the assets. No impairment loss has been recognized to date.

Other Assets.

        Other assets include patents, intellectual property, goodwill and intellectual property.capitalized software development costs. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful life of between 5 and 10 years.

Deferred FinancingSoftware Development Costs.

    Deferred financing        The Company capitalizes software development costs for products offered for sale in accordance with Statement of Financial Accounting Standard No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. This Standard allows for the capitalization of certain development costs once a software product has reached technological feasibility. Capitalized costs are included in Other Assets, net of amortization. Such capitalized costs are amortized over the termestimated useful life of the related financing usingsoftware product, generally 3 to 5 years, beginning when a product is released for sale.

        The Company capitalizes internal use software development costs in accordance with Statement of Position No. 98-1,Accounting for the effective interest method.Costs of Computer Software Developed or Obtained for Internal Use. Capitalized internal use software development costs are amortized on an accelerated basis over three years. For the years ended December 31, 2002 and 2001, capitalized internal software costs included in property, plant and equipment, net of accumulated amortization, totaled $461,000 and $1,000,000, respectively.

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 deemed fair market value of the Company's common stock at the date of grant over the stock option exercise price. Stock option grants to nonemployees are accounted for using the fair value method of accounting in accordance with Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation using the Black-Scholes model.

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        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,Accounting for Stock-Based Compensation, to stock based employee compensation.

			2002			2001			2000
Net Loss:
	As reported		$	(21,365	)	$	(7,401	)	$	(8,661	)
	Pro forma			(23,274	)		(10,110	)		(10,205	)
Basic and diluted loss per share:
	As reported			(0.91	)		(0.33	)		(0.52	)
	Pro forma			(0.99	)		(0.45	)		(0.61	)

Unearned Compensation.

        Unearned compensation represents the unamortized difference between the option exercise price and the deemed fair market value of the Company's common stock at the option grant date, for options issued under the Company's Stock Option Plan (Note L)I). The unearned compensation is charged to operations over the vesting period of the respective options.

Income Taxes.

        Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basesbasis 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 unlikely they will be realized.

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Revenue Recognition.

        SalesRevenue on the sales of products are recordedis 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. The Company'sOur sales terms do not provide for the right of return unless the product is damaged or defective. Installation and training revenues areRevenues from certain services associated with our analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when earned.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 December 31, 2002 and 2001 deferred revenue, mainly associated with our service contracts, included on the Company's balance sheet was approximately $1.2 million.

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Research and Development.

        Research and development costs are charged to expense when incurred.incurred with the exception of certain software development costs that are capitalized.

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. For the periods presented, foreignForeign currency transaction adjustments decreased net loss approximately $1.0 million in 2002. Foreign currency transaction adjustments in 2001 and 2000 were not significant.

Comprehensive Income.

        Comprehensive income for all periods presented consists of net income, foreign currency translation adjustments and unrealized gains or losses on available for sale investments. The Company deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting its investments in a foreign currency to U.S. dollars. There were no reclassification adjustments to be reported in the periods presented.

Fair Value of Financial Instruments.

        The carrying amount of the Company's cash and cash equivalents, receivables, accounts payable and accrued expenses approximatesapproximate fair value because of the short maturity of those instruments. The Company derives the fair value of its short termshort-term investments based on quoted market prices. The carrying value of long-term debt approximates fair value based upon existing interest rates available to the Company for similar debt.

Earnings Per Share.

        Basic earnings per share are 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 and warrants or conversion of convertible notes, where dilutive. Potentially dilutive securities have been excluded from the computation of diluted earnings per share as they have an antidilutive effect due to the Company's net loss.

Recently Issued Accounting Pronouncements.

    Statement of        In August 2001, the Financial Accounting Standards (SFAS)Board (FASB) issued SFAS No. 133, 143,Accounting For Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of a liability for Derivative Instrumentsan asset retirement obligation in the period in which it is incurred and Hedging Activities, is effective for allthe Company's fiscal yearsyear beginning after June 15, 2000.January 1, 2003. Management is in the process of evaluating the impact, if any, this standard will have on the Company's consolidated financial statements.

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        In July 2002, the FASB issued SFAS 133, as amended, establishesNo. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses the accounting and reporting standardsrelated to exit or disposal activities and is effective for derivative instruments, including certain

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derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative.Company beginning January 1, 2003. The Company will adopt SFAS 133 effective January 1, 2001. Management does not expectbelieves the adoption of SFAS 133 tothis standard will not have a significant impact on the financial position, results of operations, or cash flowsstatements of the Company.

        In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN No. 45 also expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. The recognition provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Management believes that FIN No. 45 will not have a significant impact on the Company's Consolidated Financial Statements.

Use of Estimates.

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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. Actual results could differ from those estimates.

Reclassifications.

        Certain reclassifications may have been made to the 19982000 and 19992001 financial statements to conform to the 20002002 presentation.

B.    SHORT TERM INVESTMENTS

        The amortizationamortized cost of available-for-sale securities and their approximate fair values at December 31, 2000 were as follows:

		Amortized			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value			Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
December 31, 2002
Corporate Debt														$	3,611		$	1		$	—		$	3,612
Total securities available-for-sale														$	3,611		$	1		$	—		$	3,612
December 31, 2001
Commercial Paper		$	14,697		$	—		$	—		$	14,697		$	8,782		$	10		$	—		$	8,792
U.S. Government Agencies			2,949						1			2,948			5,774			—			—			5,774
Corporate Debt			6,069			14						6,083			9,322			25			—			9,347
Total securities available-for-sale		$	23,715		$	14		$	1		$	23,728		$	23,878		$	35		$	—		$	23,913

        Maturities of short termshort-term investments are due within one year.

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C.    INVENTORIES

        At December 31, 20002002 and 1999,2001, inventories consist of the following:

		2000			1999
Finished goods		$	703		$	157
Raw materials and work in process			1,557			2,787
Demonstration inventory			503			3,099
			2,763			6,043
Less long-term demonstration inventory			(196	)		(2,124	)
		$	2,567		$	3,919

    During 2000 and 1999, the Company reclassified demonstration inventory of approximately $1.0 million and $41, respectively, to property and equipment.

		2002			2001
Finished goods		$	6,400		$	2,335
Raw materials and work in process			5,904			3,248
Demonstration inventory			325			496
			12,629			6,079
Less long-term demonstration inventory			(181	)		(250	)
		$	12,448		$	5,829

D.    OTHER ASSETS

        At December 31, 20002002 and 1999,2001, finite lived intangible assets and other assets consist of the following:

		2000									1999									2002									2001
		Cost			Accumulated Reserve			Net Book Value			Cost			Accumulated Reserve			Net Book Value			Cost			Accumulated Reserve			Net Book Value			Cost			Accumulated Reserve			Net Book Value
Deferred income taxes		$	—		$	—		$	—		$	180		$	—		$	180
Goodwill			903			382			521			909			306			603
Capitalized software																				$	2,132		$	24		$	2,108		$	728		$	—		$	728
Intellectual property			535			267			268			2,535			447			2,088			545			90			455			275			38			237
Patents			1,368			36			1,332			1,076			21			1,055			883			150			733			1,514			78			1,436
Other			786			—			786			161			—			161			504			—			504			1,545			245			1,300
Total		$	3,592		$	685		$	2,907		$	4,861		$	774		$	4,087		$	4,064		$	264		$	3,800		$	4,062		$	361		$	3,701

        Amortization expense for intangible assets was $150,000 during 2002. The Company expects amortization expense for intangible assets to be approximately $900,000 in fiscal 2003, $900,000 in fiscal 2004, $850,000 in fiscal 2005, and $200,000 in fiscal 2006 and 2007.

E.    NOTE PAYABLE—BANKGOODWILL

        At December 31, 1999, note payable—bank2002 and 2001, goodwill by operating segment consisted of borrowings in the amount of $4.3 million against a revolving line of credit of $5.0 million. The line matured on July 31, 2000 and was not renewed. The note carried an interest rate equal to the national prime. The interest was payable monthly. The interest rate at December 31, 1999, was 8.50%.

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F.  NOTES PAYABLE—OTHER

    Notes payable—other at December 31, 2000 and 1999 consists of the following:

		2000			1999
Installment note payable to a bank, repaid in 2000		$	—		$	180
Installment note payable to a bank, repaid in 2000			—			280
Note payable—other, repaid in 2000			—			236
Total notes payable—other			—			696
Less current portion			—			580
Notes payable—other excluding current portion		$	—		$	116

G.  CONVERTIBLE NOTES PAYABLE

		Biosystems operating segment			Nucleic Acids operating segment			Total
Net balance December 31, 2001		$	638		$	13,636		$	14,274
Finalization of purchase price allocations			—			1,001			1,001
Net balance December 31, 2002		$	638		$	14,637		$	15,275

        On March 23, 1999,Annual testing of goodwill for impairment was completed in the fourth quarter, after the annual forecasting process. The Company received approximately $11.4 million of net proceeds fromhas determined that no impairment existed at the placement of $12 million aggregate principal amount 6% convertible notes due March 25, 2002. Interest on the notes compounded at 6% per annum until the completiontime of the Company's initial public offering.annual test. The Company's initial public offering impacted the notes as follows:

•

on the effective datefair value of the Company's initial public offering interest payable on the notesoperating segments was accelerated through the maturity date of the notes at an annual interest rate of 3.6%. Asestimated using a result, the Company recorded additional interest expense of approximately $0.8 million.



•

The Company was provided a conversion feature that would allow the Company, upon the satisfaction of certain conditions, to cause a conversion of the principal plus accrued interest into common stock of the Company at a conversion price of $5.00 per share. The conversion feature was formula driven and based partially upon the average trading price of the Company stock over 20 consecutive trading days.



•

On August 14, 2000, the Company's Board of Directors authorized the Company to convert the notes into common stock upon meeting the required conditions. On August 15, 2000, such conditions were met, and the notes were converted into 2,750,906 shares of common stock. All principal and accrued interest at the conversion date of approximately $13.9 million was converted to stockholders equity.

discounted cash flow model.

The effective interest rate, including a redemption premium, was 9.3% at December 31, 1999. At December 1999, the convertible notes payable balance was comprised of the following:

Principal		$	12,000
Accrued interest and redemption premium			859
			12,859
Deferred financing costs (net of accumulated amortization of $150)			(438	)
		$	12,421

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        A reconciliation of previously reported net loss and loss per share to the amounts adjusted for the exclusion of goodwill amortization follows:

		Fiscal Years Ended December 31,
		2002			2001			2000
Reported Net Loss		$	(21,365	)	$	(7,401	)	$	(8,661	)
ADD: Goodwill Amortization			—			889			127
Adjusted Net Loss		$	(21,365	)	$	(6,512	)	$	(8,534	)
Loss Per Share:
As Reported		$	(0.91	)	$	(0.33	)	$	(0.52	)
Adjusted		$	(0.91	)	$	(0.29	)	$	(0.51	)

H.  LEASEF.    COMMITMENTS AND CONTINGENCIES

        The Company leases certain equipment, vehicles and operating facilities. The Company's leases related to its operating facilities currently expire on various dates ranging from 2000 through 2007. However, one lease allows for cancellation at either 36 or 48 months upon 60 days advanced written notice. At December 31, 2000,2002, the future minimum lease payments required under noncancellablenon-cancellable lease provisions are approximately $901 in 2001; $948 in 2002; $945$2.9 million in 2003; $730$2.6 million in 2004; $598$2.2 million in 2005; $1.4 million in 2006; $700,000 in 2007; and a total of approximately $335 inno rental payments for the years 2006 through 2007.year 2008. Rent expense related to all operating leases for the years ended December 31, 2000, 19992002, 2001 and 19982000 was approximately $966, $984$2.3 million, $1.7 million and $655,$1.0 million, respectively.

        During 2002, Cruachem Ltd., wholly owned subsidiary of the Company, entered into a long-term mortgage loan with The Royal Bank of Scotland. The principal amount of the loan was £1.0 million, or approximately $1.5 million. Principal and interest are payable in quarterly installments. The loan carries a 15 year term and a fixed annual interest rate of 6.77%. Security for this loan is the Company's 45,000 square foot manufacturing facility located in Glasgow, Scotland. The loan carries certain financial and non-financial covenants that must be met by Cruachem Ltd. that includes a minimum net cash flow requirement. The net book value of the facility was approximately $1.9 million at December 31, 2002.

        The Company is not a party to any material legal proceedings.

I.G.    INCOME TAXES

        Loss before income taxes consists of the following:

		Years ended December 31,										Years ended December 31,
		2000			1999			1998				2002			2001			2000
United States		$	(8,231	)	$	(7,671	)	$	(2,617	)		$	(19,640	)	$	(7,448	)	$	(8,231	)
International			(250	)		(411	)		111				(1,620	)		71			(250	)
		$	(8,481	)	$	(8,082	)	$	(2,506	)		$	(21,260	)	$	(7,377	)	$	(8,481	)

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        The income tax provision consists of the following:

			Years ended December 31,
			2000			1999			1998
CURRENT TAX EXPENSE (BENEFIT)
	United States Federal		$	—		$	(28	)	$	20
DEFERRED TAX EXPENSE (BENEFIT)
	United States Federal			180			1,773			(950	)
Total Income Tax Provision			$	180		$	1,745		$	(930	)

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			Years ended December 31,
			2002			2001			2000
CURRENT TAX EXPENSE (BENEFIT)
	United States Federal		$	105		$	24		$	—
DEFERRED TAX EXPENSE (BENEFIT)
	United States Federal			—			—			180
Total Income Tax Provision			$	105		$	24		$	180

        The Company's provision for income taxes for the years ended December 31, 2000, 19992002, 2001 and 19982000 differs from the amounts determined by applying the statutory Federal income tax rate to incomeloss before income taxes for the following reasons:

		2000			1999			1998				2002			2001			2000
Benefit at Federal Rate		$	(2,884	)	$	(2,748	)	$	(852	)		$	(7,228	)	$	(2,508	)	$	(2,884	)
Increase (decrease) resulting from:
State income taxes—net of federal benefit			(119	)		(63	)		(86	)			(518	)		(154	)		(119	)
Intangible amortization			39			43			39
Foreign subsidiary tax rate difference													224			(17	)		30
Research and development tax credit			(69	)		(54	)		(24	)			(188	)		(98	)		(69	)
Meals and entertainment			43			39			27
Other—net			33			37			(34	)			137			345			85
Valuation allowance			3,137			4,491			—				7,678			2,456			3,137
Total income tax expense (benefit)		$	180		$	1,745		$	(930	)		$	105		$	24		$	180

        The Company's deferred income tax asset at December 31, 20002002 and 19992001 is comprised of the following temporary differences:

		2000			1999				2002			2001
Net operating loss carryforward		$	7,359		$	4,289			$	23,099		$	14,634
Allowance for doubtful accounts			61			60				58			45
Fixed asset depreciation			48			124				104			98
Accrued vacation			97			137				116			107
Other			(2	)		61				(194	)		(16	)
			7,563			4,671				23,183			14,868
Less valuation allowance			(7,563	)		(4,491	)			(23,183	)		(14,868	)
		$	—		$	180			$	—		$	—

        At December 31, 2000,2002, the Company has unused federal tax net operating loss carryforwards of approximately $2.1$1.8 million which expire in 2008, $3.7 million which expire in 2009, $3.0 million which expire in 2010, $0.9 million which expire in 2011, $3.4 million which expire in 2012, $1.8 million which expire in 2018, $7.7$8.2 million which expire in 2019, $9.7 million which expire in 2020, $8.2 million which

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expire in 2021 and $19.6 million which will expire in 20192022. Approximately $11.8 million of the Company's total federal net operating loss carryforwards were obtained in the acquisition of Annovis, Inc. and $8.3 million which will expire in 2020.may be subject to certain restrictions. Additionally, at December 31, 2000,2002, the Company has unused state tax net operating loss carryforwards of approximately $22.2 million and unused general business credits earned primarily through increased research expenditures of approximately $0.2$0.9 million. These credits expire at various times between 20102008 and 2020. The deferred tax asset of $180 as of December 31, 1999 was realized through the sale of the product line assets discussed in Note M.2021. A valuation allowance has been provided in 2001 and 2000 for the remaining deferred tax assets, due to the Company's cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. 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 income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

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J.H.    EMPLOYEE BENEFIT PLAN

        The Company maintains an employee 401(k) retirement savings plan whichthat allows for voluntary contributions into designated investment funds by eligible employees. The Company matches the employees' contributions at the rate of 50% on the first 6% of contributions. The Company may at the discretion of its Board of Directors, make additional contributions on behalf of the Plan's participants. Company contributions were $220, $175$507,000, $357,000 and $118$220,000 for the years ended December 31, 2000, 19992002, 2001 and 1998,2000, respectively.

K.I.    STOCKHOLDERS' EQUITY

Common Stock Warrants.

        The Company issued 2,000,000 shares of the Company's common stock, mainly through Placement Agents,placement agents, in a private placement during 1997 and 1998. The Company also issued warrants to the Placement Agents with an exercise price of $5.00 per share (subject to certain cashless exercise rights) that have terms of five years expiring in 2003. Total shares eligible to be purchased through these warrants were 106,75449,613 and 152,45049,613 at December 31, 2000,2002, and 1999,2001, respectively. During 2002 the Company entered into an operating lease agreement with GE Capital. The agreement included the issuance of 13,762 warrants with an exercise price of $3.27 per share and a term of five years expiring in 2007. All warrants issued to GE Capital remain outstanding at December 31, 2002.

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 with 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

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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 may be issued with a preference over the common stock as to the payment of dividends. The Company has no current plans to issue any series of preferred stock. Classes of stock such 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 merger or otherwise to gain control of the Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.

Common Stock.

        In MarchMay 2001, the Company issued 1,889,523 shares of common stock in connection with the acquisition of Annovis, Inc. See Footnote O for further discussion of this acquisition.

        In May 2001, Company shareholders approved the adoption of the Transgenomic, Inc. 2001 Employee Stock Purchase Plan that was subsequently implemented in November 2001. Substantially all of the Company's U.S. employees are eligible to participate in the Plan. Eligible employees authorize payroll deductions to be made for the purchase of shares. Such deductions are accumulated during a defined participation period at the end of which each participant is deemed to have been granted an option to purchase shares of stock from the Company at 85% of the fair market value of the Company stock as measured by the closing price of the stock on either the first or last business day of the participation period, whichever is lower. The number of shares purchased under the option is based upon the participants elected withholding amount. At the end of the participation period such option is automatically exercised. This plan is structured to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. During 2002 there were 56,842 shares issued under this plan. During 2001 there were no shares issued under this plan.

        In August 2000, the Company's Board of Directors approved an increase in the number of authorized common shares to 60,000,000, subject to the approvalconversion of the Company's stockholders.

    In$12 million aggregate principal amount 6% convertible notes due March 25, 2002 into common stock upon meeting the required conversion conditions. On August 15, 2000, such conditions were met, and the Company issued 25,000notes were converted into 2,750,906 shares of common sharesstock. All principal and accrued interest at $10.00 per sharethe conversion date of approximately $13.9 million was converted to an individual who was subsequently elected to the Company's Board of Directors.stockholders equity.

        On July 21, 2000, the Company issued 5,152,000 shares of common stock in its initial public offering at $15.00 per share. After payment of the underwriters' discounts and commissions and other expenses, the

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Company received net proceeds of approximately $69.9 million from this offering. In addition, since the date of the initial public offering, holders of warrants and options to purchase shares of common stock have exercised at various times. The

        In March 2000, the Company has receivedissued 25,000 common shares at $10.00 per share to an additional $2.7 million in net proceeds from these exercises.individual who was subsequently elected to the Company's Board of Directors.

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L.J.    STOCK OPTIONS

        The Company's 1997 Stock Option Plan, as amended (the "Stock Option Plan"), allows the Company to grant both incentive stock options and nonqualified stock options to acquire shares of the Company's common stock to employees and directors of the Company and to nonemployee advisors. Either incentive or non-qualified stock options may be granted to employees of the Company, but only nonqualified stock options may be granted to nonemployee directors and advisors. The maximum number of shares for which options may be granted under the Stock Option Plan is 6,000,000.7,000,000. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors (the "Committee") which has the authority to set the number, exercise price, term and vesting provisions of the options granted under the Stock Option Plan, subject to the terms thereof. The options must be granted at exercise prices not less than the fair market value of the common stock on the date of the grant. Generally, the stock options vest at a rate of either 20% per year over a fivefive-year period or 33¹/3% per year over a three-year period and expire 10 years after the date the option was granted. If the option holder ceases to be employed by the Company, the Company will have the right to terminate any outstanding but unexercised options.

        The following table summarizes activity under the Stock Option Plan during the three years ended December 31, 2000:2002:

			Number of Options		Weighted Average Exercise Price
Balance at January 1, 1998:			1,515,000		5.00
	Granted		1,690,250		5.00
	Exercised		—		—
	Canceled		—		—
Balance at December 31, 1998:			3,205,250		5.00
	Granted		590,250		5.00
	Exercised		—		—
	Canceled		(257,750	)	5.00
Balance at December 31, 1999			3,537,750		5.00
	Granted		1,137,000		10.57
	Exercised		(200,969	)	5.28
	Canceled		(438,900	)	6.45
Balance at December 31, 2000			4,034,881		6.43
Exercisable at December 31, 2000			2,321,471		5.33

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			Number of Options			Weighted Average Exercise Price
Balance at January 1, 2000:				3,537,750		$	5.00
	Granted			1,137,000			10.57
	Exercised			(200,969	)		5.28
	Canceled			(438,900	)		6.45
Balance at December 31, 2000				4,034,881			6.43
	Granted			1,865,950			7.88
	Exercised			(470,900	)		5.00
	Canceled			(296,100	)		9.75
Balance at December 31, 2001:				5,133,831			6.90
	Granted			632,000			5.09
	Exercised			(81,900	)		5.01
	Canceled			(539,021	)		7.69
Balance at December 31, 2002:				5,144,910		$	6.62
Exercisable at December 31, 2002				3,295,683		$	6.38

        The weighted average fair value per share of options granted in 2002, 2001 and 2000 1999was $2.92, $2.32 and 1998 was $5.43, $1.00 and $1.02, respectively.

        The Company has elected to follow the measurement provisions of Accounting Principles Board OpinionAPB No. 25, under which no recognition of expense is required in accounting for stock options granted to employees for which the exercise price equals or exceeds the deemed fair market value of the stock at the grant date. In those cases where options have been granted with an exercise price below the deemed fair market value, the Company recognizes compensation expense using the straight-line method over the vesting periods of the individual stock options. During December 1999,

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        Stock-based compensation expense recorded by the Company recordedrepresents amortization of unearned compensation of $113 forrelated to options granted to employees with an exercise pricesprice less than the deemed fair market value at the date of grant. In the first quarter ofgrant and options granted to non-employees. During 2002, 2001 and 2000, the Company recorded unearned compensation of $298 for options granted with exercise prices less than the deemed fair market value at the date of grant. These amounts are being amortized by charges to operations over the vesting periods of the individual stock options using the straight-line method. Such amortization expense amounted to approximately $73 in 2000.

    During 2000, the Company recorded unearned compensation of $271 and compensation expense of $133 for options granted to non-employees. The unearned compensation associated with these grants is being amortized by charges to operations over the vesting periods of the individual stock options using the straight-line method. Such amortization expense amounted to approximately $81 in 2000.$131,000, $139,000 and $861,000, respectively. The expense amounts were calculated using the Black-Scholes option pricing model with the following assumptions: no common stock dividends, risk-free interest rates ranging from 5.11%3.10% to 6.57%6.53%; volatility ofranging from 35% to 85%; and an expected option life of 1 to 57.5 years.

    In Additionally, in connection with the 2000 sale of the Company's non-life sciences instrument product line, the Company accelerated the vesting of 71,700 options, which would have otherwise been forfeited. Compensation expense of approximately $574$574,000 was recorded for these options during the first quarter of 2000, representing the difference between the exercise price of the options and the deemed fair value of the common stock at the date the vesting was accelerated. In addition, 218,700 options were forfeited as a result of the sale.

        The following table summarizes information about options outstanding as of December 31, 2000:2002:

		Options Outstanding							Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price			Number Exercisable		Weighted-Average Exercise Price
				(in years)
$2.51—$5.00		3,040,650		7.1		$	5.00		2,196,740		$	5.00
$5.01—$7.50		250,000		10.0		$	6.37		27,500		$	6.37
$7.51—$10.00		130,500		8.9		$	10.00		18,000		$	10.00
$10.01—$12.50		116,000		9.8		$	11.93		5,000		$	11.93
$12.51—$15.00		497,731		9.2		$	13.00		74,231		$	13.00
		4,034,881		7.7		$	6.43		2,321,471		$	5.33

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		Options Outstanding							Options Exercisable
Range of Exercise Prices		Number Outstanding		Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price			Number Exercisable		Weighted-Average Exercise Price
				(in years)
$  2.51—$  5.00		2,628,550		5.5		$	4.72		2,115,150		$	5.00
$  5.01—$  7.50		1,217,787		7.2		$	6.17		533,457		$	6.15
$  7.51—$10.00		821,942		6.6		$	9.84		367,845		$	9.79
$10.01—$12.50		105,000		7.3		$	11.94		48,600		$	11.93
$12.51—$15.00		371,631		6.5		$	13.00		230,631		$	13.00
		5,144,910		6.2		$	6.62		3,295,683		$	6.38

    Pro forma information regarding net income and income per share is required by Statement of Financial Accounting Standard No. 123,Accounting for Stock-based Compensation, (SFAS No. 123) assuming the Company accounted for its employee stock options using the fair value method. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in 2000, 1999 and 1998, respectively: no common stock dividends, risk-free interest rates ranging from 5.11% to 6.53% and 5.51% to 6.13% and 5.74% to 6.33%; 35% volatility and no volatility (prior to becoming a public company); and an expected option life of 1 to 10 years. Pro forma net income and income per share assuming compensation expense for the Stock Option Plan had been determined under SFAS No. 123, are as follows:

			2000			1999			1998
Net Loss:
	As reported		$	(8,661	)	$	(9,827	)	$	(1,576	)
	Pro forma			(10,205	)		(9,974	)		(1,663	)
Basic and diluted loss per share:
	As reported			(0.52	)		(0.76	)		(0.13	)
	Pro forma			(0.61	)		(0.77	)		(0.14	)

M.  RELATED PARTY TRANSACTIONS

Sale of Product Line.K.    SALE OF BUSINESS LINE

        OnIn May 19, 2000, the Company sold the assets related to its non-life sciences instrument product line to a company controlled by Stephen F. Dwyer, a director and principal stockholder of the Company, for a total adjusted purchase price of $5.65 million plus reimbursement by the purchaser of approximately $400$400,000 of expenses paid by the Company in connection with this product line since March 31, 2000. The effective date of the transaction was April 1, 2000. Approximately $3.65 million of the purchase price was paid in cash and $2.0 million was paid with an 8.75% interest-bearing promissory note due on December 30, 2000. The purchaser financed the cash portion of the purchase price for these assets plus initial working capital needs with borrowings of approximately $4.6 million obtained from a bank. The Company acquired the notes evidencing these loans from the bank upon closing of its initial public offering on July 21, 2000 by paying to the bank an amount equal to the entire principal balance of the notes plus accrued and unpaid interest. The acquired notes were due on December 30, 2000, and had an interest rate of 8.75% per annum. These acquired notes were consolidated with the original $2.0 million note. All of the principal and accrued interest on this consolidated note was repaid prior to maturity. On December 29, 2000, we repurchased 261,904 shares of our common stock from Mr. Dwyer for $10.50 per share, which was the closing price for our common stock on that day, for an aggregate purchase price of $2.7 million. Mr. Dwyer used these proceeds and additional resources to pay the principal and interest on the consolidated note.

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TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years Ended December 31, 2000, 1999 and 1998

(in thousands except share and per share data)

    The net assets sold and their book values were as follows:

Inventories		$	2,485
Property, net			705
Other assets			1,775
Accrued liabilities			(98	)
Net assets sold		$	4,867

The Company realized a gain on the sale of these assets of approximately $784$784,000 before taxes.

CT Partners.

    The Company and CT Partners were related parties through common ownership. The Company provided research and development services for CT Partners at cost. In June 1999, the Company and CT Partners entered into an Asset Purchase Agreement whereby the Company purchased all intellectual property previously developed for CT Partners for $2 million in cash, less an outstanding note receivable of $1.1 million and certain related expenses. The intellectual property purchased was subsequently sold in connection with the sale of the assets of our non-life sciences product line.

N.  COMMITMENTSL.    OPERATING SEGMENT AND CONTINGENCIES

    The Company is not a party to any material legal proceedings.

O.  SALES AND PRODUCTGEOGRAPHIC INFORMATION

        ThePrior to 2002 the Company believes it is advantageous to operatewas managed and operated on a fully integrated basis in one operating segment. Accordingly,During 2002, management determined it was appropriate to evaluate the Company's operations based upon the nature of the products and services provided. Accordingly, the Company evaluates performancehas determined that it operates in two reportable segments, BioSystems and determinesNucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at

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operating income for the segment. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company's Balance Sheet are made at the corporate level and, accordingly, operating segment Balance Sheet information is not typically reviewed by operating decision makers.

        The BioSystems operating segment generates revenue from the sale of resources on an entity-wide basis.automated instrument systems and associated consumable products and services. This segments products are based upon two of the Company's three core competencies, separations chemistries and enzymology. Specifically, this segment's main products are the WAVE system, related bioconsumables and research services.

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

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

			2002			2001			2000
Sales
	BioSystems		$	24,235		$	28,040		$	23,712
	Nucleic Acids			13,319			10,427			—
	Sub-total			37,554			38,467			23,712
	Divested product line			—			—			2,171
	Total		$	37,554		$	38,467		$	25,883
Loss/Income from operations
	BioSystems		$	(9,417	)	$	(4,595	)	$	(3,549	)
	Nucleic Acids			(1,004	)		1,090			—
	Corporate			(11,276	)		(6,234	)		(4,473	)
	Sub-total			(21,697	)		(9,739	)		(8,022	)
	Divested product line			—			—			(671	)
	Total		$	(21,697	)	$	(9,739	)	$	(8,693	)

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        The following is information for fixed assets and fixed asset additions by segment. Fixed assets are tracked by location and department and thus can be identified to operating segments even though specific segment Balance Sheets are not produced.

			2002			2001
Fixed Assets
	BioSystems		$	4,895		$	3,865
	Nucleic Acids			8,892			1,811
	Corporate			1,865			2,509
	Total		$	15,652		$	8,185
Fixed Asset Additions
	BioSystems		$	2,533		$	2,725
	Nucleic Acids			8,563			1,365
	Corporate			372			1,616
	Total		$	11,468		$	5,706

        The following is supplemental information for net sales by geographic area and product group:area.

				2000			1999			1998
Sales by Geographic Area:
	United States			$	11,586		$	10,002		$	10,215
	Europe				10,237			9,286			6,249
	Pacific Rim				3,313			2,992			1,704
	Other				747			755			767
		Total		$	25,883		$	23,035		$	18,935
Sales by Product Group:
	Bio-Systems			$	18,842		$	11,219		$	5,460
	Wave-Consumables				2,083			905			210
	Other Bio-Consumables				2,787			2,117			1,769
		Sub-total—life science products		$	23,712		$	14,241		$	7,439
	Non-life sciences products				2,171			8,794			11,496
		Total		$	25,883		$	23,035		$	18,935

			2002			2001			2000
Sales by Geographic Area:
	United States		$	16,805		$	18,063		$	11,586
	Europe			16,011			15,918			10,237
	Pacific Rim			4,129			2,901			3,313
	Other			609			1,585			747
	Total		$	37,554		$	38,467		$	25,883

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        Long-lived assets by geographic area as of December 31 2000 are as follows:

					2002			2001
United States		$	3,505		$	23,882		$	21,865
Europe			1,072			8,203			2,223
Pacific Rim			14			30			44
Total		$	4,591		$	32,115		$	24,132

        Prior to fiscal year 2000, long-lived assets held outsideDuring 2002 no single customer accounted for more than 10% of the United States were not material.total sales. During 2001, one customer accounted for approximately 14% of our total sales. No single customer accounted for more than 10% of total sales in 2000.

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P.M.    SUPPLEMENTAL CASH FLOW INFORMATION

		2000			1999			1998			2002			2001			2000
Cash paid for interest		$	233		$	319		$	473		$	30		$	10		$	233
Cash paid for taxes		$	4		$	38		$	30
Cash paid for income taxes											$	120		$	3		$	4
Noncash investing and financing activities:
Exchange of note receivable for intellectual property		$	—		$	1,086		$	—
Liabilities assumed in connection with business acquisitions		$	—		$	135		$	—		$	—		$	3,388		$	—
Conversion of Notes Payable and Accrued Interest into Common Stock		$	13,909		$	—		$	—		$	—		$	—		$	13,909
Reclassification of demonstration inventory to property		$	975		$	41		$	9		$	—		$	—		$	975
Issuance of common stock as acquisition consideration											$	—		$	13,084		$	—

Q.N.    ALLOWANCE FOR DOUBTFUL ACCOUNTS

        The following is a summary of activity for the allowance for doubtful accounts during each of the three years ended December 31, 2000:2002:

		Beginning Balance			Additional Charges to Income			Deductions from Reserve			Ending Balance
Year Ended December 31, 2000		$	161		$	19		$	—		$	180
Year Ended December 31, 1999			562			122			(523	)		161
Year Ended December 31, 1998			100			463			(1	)		562

		Beginning Balance			Additional Charges to Income			Deductions from Reserve			Ending Balance
Year Ended December 31, 2002		$	213		$	418		$	181		$	450
Year Ended December 31, 2001		$	180		$	65		$	32		$	213
Year Ended December 31, 2000		$	161		$	19		$	—		$	180

    During 1999O.    ACQUISITION

        Effective May 1, 2001, the Company wrote-off one uncollectible accountacquired Annovis, Inc, a privately held company, for approximately $16.9 million through the issuance of approximately 1.9 million shares of Transgenomic, Inc. common stock, the payment of approximately $563,000 in cash in lieu of common stock to certain Annovis stockholders and the payment of approximately $3.2 million of direct acquisition related expenses. The acquisition was structured as a former European distributormerger of non-lifeAnnovis with a subsidiary of the Company and resulted in Annovis becoming a wholly-owned subsidiary of the Company. Annovis is a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid based products and service for the life sciences products.industry. Annovis's results of operations have been included in the accompanying financial statements beginning on May 1, 2001.

47        The Company accounted for this transaction as a purchase. The Company obtained an appraisal of the fair value of the tangible and intangible assets acquired from an independent appraiser. All identifiable

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R.  PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)tangible and intangible assets acquired and liabilities assumed have been allocated a portion of the cost equal to their estimated fair values as follows:

Net tangible assets and liabilities		$	1,390
Intangible assets		$	60
Goodwill		$	15,463
Total Purchase Price (including direct expenses)		$	16,913

        The costs assigned to intangible assets have been amortized through December 31, 2002 on a straight-line basis over a period averaging 5 years.

        The Company's unaudited pro forma results of operations for the year ended December 31, 2000 and 1999,2001, assuming the saleacquisition of the non-life sciences instrument product lineAnnovis, Inc. occurred as of the beginning of the periodsperiod presented areis as follows:

		Twelve Months Ended December 31,							Twelve Months Ended December 31,
		2000			1999				2001			2000
Net Sales		$	23,713		$	14,241			$	42,581		$	32,728
Net Loss		$	(8,596	)	$	(10,120	)		$	(7,672	)	$	(10,293	)
Basic and diluted loss per share		$	(0.52	)	$	(0.78	)		$	(0.33	)	$	(0.56	)

    The pro forma results for 2000 do not include the realized gain on the sale of the non-life sciences product line of $784 before taxes.

S.P.    QUARTERLY RESULTS (UNAUDITED)

        The following table contains selected unaudited consolidated statements of operations data for each quarter for fiscal years 20002002 and 1999.2001.

		2000
		1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Net Sales		$	6,944		$	5,593		$	6,249		$	7,097		$	25,883
Gross Margin			3,113			2,912			3,294			3,764			13,083
Operating Loss			(3,029	)		(2,270	)		(2,120	)		(1,274	)		(8,693	)
Loss before taxes			(3,498	)		(2,713	)		(2,077	)		(193	)		(8,481	)
Net loss		$	(3,498	)	$	(2,713	)	$	(2,077	)	$	(373	)	$	(8,661	)
Basic & Diluted Loss Per Share		$	(0.27	)	$	(0.21	)	$	(0.11	)	$	(0.02	)	$	(0.52	)
Basic and Diluted Weighted Average Shares Outstanding			13,007,692			13,025,000			19,030,546			21,448,220			16,629,555

		1999
		1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Net Sales		$	5,227		$	6,080		$	5,595		$	6,133		$	23,035
Gross Margin			2,524			2,901			2,438			3,082			10,945
Operating Loss			(1,520	)		(1,212	)		(2,061	)		(2,091	)		(6,884	)
Loss before taxes			(1,613	)		(1,517	)		(2,437	)		(2,515	)		(8,082	)
Net loss		$	(978	)	$	(4,013	)	$	(2,437	)	$	(2,399	)	$	(9,827	)
Basic & Diluted Loss Per Share		$	(0.08	)	$	(0.31	)	$	(0.19	)	$	(0.18	)	$	(0.76	)
Basic and Diluted Weighted Average Shares Outstanding			13,000,000			13,000,000			13,000,000			13,000,000			13,000,000

		2002
		1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Net Sales		$	9,831		$	9,424		$	9,087		$	9,212		$	37,554
Gross Profit			5,108			4,862			4,249			3,766			17,985
Net loss		$	(3,359	)	$	(3,981	)	$	(4,727	)	$	(9,298	)	$	(21,365	)
Basic & Diluted Loss Per Share		$	(0.14	)	$	(0.17	)	$	(0.20	)	$	(0.40	)	$	(0.91	)
Basic and Diluted Weighted Average Shares Outstanding			23,653,544			23,699,047			23,483,315			23,498,935			23,582,687

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		2001
		1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Total
Net Sales		$	7,930		$	9,545		$	10,254		$	10,738		$	38,467
Gross Profit			4,263			5,408			5,663			5,935			21,269
Net loss		$	(1,128	)	$	(1,648	)	$	(1,910	)	$	(2,715	)	$	(7,401	)
Basic & Diluted Loss Per Share		$	(0.05	)	$	(0.07	)	$	(0.08	)	$	(0.12	)	$	(0.33	)
Basic and Diluted Weighted Average Shares Outstanding			21,227,564			22,504,309			23,183,637			23,302,793			22,560,057

        Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share losses may not equal the annual loss per share. Effective May 1, 2001, the Company acquired Annovis, Inc. Annovis's results of operations have been included in the accompanying financial statements beginning on May 1, 2001.

48Q.    CORPORATE RESTRUCTURING AND ADDITIONAL FINANCING

        The Company has experienced net losses and negative cash flows from operations. As a result, during the fourth quarter of 2002 management formulated and executed a significant portion of a restructuring plan. The plan was developed to reduce expenses thereby better aligning the Company's expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. Specifically, in the fourth quarter of 2002 the Company notified approximately 60 employees of their termination, notified landlords of our intent to close four facilities and reduce our space commitment under lease at two other facilities, terminated certain consulting and collaboration agreements and abandoned certain patents. As a result of the plan $3.3 million in restructuring charges were recorded and are included in operating expenses. These charges consisted of approximately $800,000 of employee severance costs, $1.2 million in office closure related costs, $400,000 of collaboration and other agreement termination charges and $900,000 in write-offs of abandoned intellectual property. Approximately 45% of the total charges were for non-cash items. Management expects that, as a result of the restructuring, our total operating expenses will be initially decreased by 20% to 25% from 2002 levels. Additional restructuring charges totaling between $500,000 and $700,000 are expected in the first half of 2003.

        Additionally, in March 2003 the Company entered into a loan commitment agreement with a financial institution for a secured line of credit up to a maximum commitment of $5.0 million. Collateral for the line of credit consists of qualified accounts receivable balances. Funds available under the line are equal to 80% of eligible accounts receivable balances. Management expects to finalize the line of credit agreement in the second quarter of 2003. The proposed term of the agreement is 1 year carrying a variable interest rate of 2.25% over prime. Management believes, as a result of the restructuring activities, current cash balances and funds available from the secured line of credit will be sufficient to fund operations through at least fiscal year 2003.

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Item 9.    Changes in and Disagreement With Accountants on Accounting and Financial Disclosure.


        None.


Part III


Item 10.    Directors and Executive Officers of the Registrant.


        We will file a definitive Proxy Statement with the Securities Exchange Commission not later than April 30, 2001.2003. Information about our directors required by Item 401 of Regulation S-K and information about our directors and executive officers required by Item 405 of Regulation S-K is incorporated by reference to the Proxy Statement. Information about our Executive Officers is shown in Part I of this filing.

    Section 16(a) Beneficial Ownership Reporting Compliance.  Item 405 of Regulation S-K requires disclosure of any known late filing or failure by an insider to file a report required by Section 16 of the Securities Exchange Act of 1934. Other than Form 3's for each Executive Officer and Director, we believe all Section 16 reports were filed in a timely manner during 2000.


Item 11.    Executive Compensation.


        Information required by this Item is incorporated by reference to our definitive Proxy Statement.


Item 12.    Security Ownership of Certain Beneficial Owners and Management.


        Information required by this Item is incorporated by reference to our definitive Proxy Statement.


Item 13.    Certain Relationships and Related Transactions


        Information required by this Item is incorporated by reference to our definitive Proxy Statement.

Item 14.    Controls and Procedures

        Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in our reports under the Securities Exchange Act of 1934. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.


Part IV


Item 14.15.    Exhibits, Financial Statement Schedules and Reports of Form 8-K.


(a)

The following documents are filed as part of this report:



1.

Financial Statements

The financial statements listed in the Index to Form 10-K for the Fiscal Year Ended December 31, 2000, on page 32 of this report are filed as part of this report.herewith.

2.

Financial Statement Schedules—None.



3.

Exhibits. The Exhibits required by Item 601 of Regulation S-K of the Securities ofand Exchange Act of 1934, as amended, filed as part of this report are listed in the Exhibit Index under paragraph (c) of this Item 14.




(b)

Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended December 31, 2000.2002.

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(c)

Exhibits.




	22.1		Asset Purchase Agreement, dated May 16, 2000 between the Registrant and SD Acquisition Inc.(2)
2.2		Agreement and Plan of Merger, dated as of April 30, 2001 among Transgenomic, Inc., TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc.(3)
2.3		Addendum to Agreement and Plan of Merger, dated as of May 18, 2001 among Transgenomic, Inc., TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc.(3)
3.1		Second Amended and Restated Certificate of Incorporation of the Registrant(2)
	3.2		Bylaws of the Registrant(1)
4	4.1		Form of Certificate of the Registrant's Common Stock(1)
	4.2		Form of Warrant for Purchase of Common Stock between the Registrant and various Placement Agents(1)
	10.1		Amended and Restated 1997 Stock Option Plan of the Registrant(1)Registrant(4)

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	10.2		1999 UK Approved Stock Option Sub Plan of the Registrant(1)
	10.3		Employment Agreement, dated April 1, 2000, between the Registrant and ColinCollin J. D'Silva(1)
	10.4		Employee Stock Purchase Plan of the Registrant(5)
10.5		Employment Agreement, dated AprilJune 1, 2000,2001, between the Registrant and William P. Rasmussen(2)John L. Allbery(7)
	10.5		Employment Agreement, dated March 4, 2000, between the Registrant and Douglas T. Gjerde(1)
	10.6		Employment Agreement, dated November 16, 1998, between the Registrant and William B. Walker(1)
	10.7		Letter Agreement, dated February 18, 2000, between the Registrant and Gregory J. Duman(1)
	10.8		License Agreement, dated September 1, 1994, between Registrant and Professor Dr. Gunther Bonn, et. al. and Amendment thereto, dated March 14, 1997(1)
10.7	10.9		License Agreement, dated August 20, 1997, between the Registrant and Leland Stanford Junior University(1)
10.8	10.10		Supply Agreement, dated January 1, 2000, between the Registrant and Hitachi Instruments(1)
10.9	10.11		LeaseServices Provider Agreement, dated November 2, 1998,December 28, 2001, between the Registrant and Westlake Development Company, Inc.(1)Genodyssee S.A.(7)
10.10	10.12		LeaseRevolving Line of Credit Agreement, dated May 15, 1996, between Interaction Chromatography Inc. and Westlake Development Co., Inc.(1)
	10.13		Business Property Lease, dated April 20, 2000,December 28, 2001, between the Registrant and Todd Smith(2)Genodyssee S.A.(7)
10.11		License Agreement, dated December 1, 1989, between Cruachem Holdings Ltd. (a wholly owned subsidiary of the Registrant) and Millipore Corporation(7)
10.12		Sublicense Agreement, dated October 1, 1991, between Cruachem Holdings Ltd. (a wholly owned subsidiary of the Registrant) and Applied Biosystems, Inc.(7)
10.13		Employment Agreement, dated January 22, 2002, between the Registrant and Keith A. Johnson(8)
10.14		$6,693,772 Promissory Note,Term Loan Agreement, dated July 21, 2000, from SD Acquisition, Inc.February 1, 2002, between the Registrant and Genodyssee S.A. Certain confidential portion s of this Exhibit were omitted by means of redacting a portion of the text. This Exhibit has been filed separately with the Secretary of the Commission with the redacted text pursuant to the Registrant's Application Requesting Confidential Treatment under Rule 24b-2 of the Securities Exchange Act(8)
10.15		Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited(9)
10.16		Agreement between The Royal Bank of Scotland plc and Cruachem Limited (a wholly-owned subsidiary of the Registrant), dated August 18, 2002(10)
10.17		Standard Security by Cruachem Limited (a wholly-owned subsidiary of the Registrant) in Favour of The Royal Bank of Scotland plc, dated August 13, 2002(10)
10.18		Lease Agreement by and between Yew Tree Investments LTD., LLLP and the Registrant, (incorporated by reference to Exhibit 10.1 to Form 10-Qdated August 23, 2002(10)

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10.19		Master Lease Agreement between General Electric Capital Corporation and the Registrant, dated December 12, 2002
21		Subsidiaries of the Registrant for the quarter ended September 30, 2000 (file no.  000-30975)).
	21		Subsidiaries of the Registrant(3)
	23		Consent of Deloitte & Touche LLP
	24		Powers of Attorney

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(1)

This Exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-32174), which was filed on March 10, 2000.



(2)

This Exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-32174), as amended by Amendment 1, which amendment was filed on May 17, 2000.



(3)

This Exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-51960)000-30975), which was filed on December 15, 2000.May 31, 2001.



(4)

This Exhibit is incorporated by reference to the Registrant's Report on Form 10-Q, which was filed on August 14, 2001.



(5)

This Exhibit is incorporated by reference to the Registration Statement of the Registrant (Registration No. 333-71866), which was filed on October 19, 2001.



(6)

This Exhibit is incorporated by reference to the Registrant's Report on Form 10-Q, which was filed on May 14, 2001.



(7)

This Exhibit is incorporated by reference to the Registrant's Annual Report on Form 10-K, which was filed on March 25, 2002.



(8)

This Exhibit is incorporated by reference to the Registrant's Report on Form 10-Q, which was filed on May 14, 2002.



(9)

This Exhibit is incorporated by reference to the Registrant's Report on Form 10-Q, which was filed on August 14, 2002.



(10)

This Exhibit is incorporated by reference to the Registrant's Report on Form 10-Q, which was filed on November 12, 2002.

5049

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SIGNATURES


        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 16th31st day of March 2001.2003.

		TRANSGENOMIC, INC.
		By		/s/  COLLIN J. D'SILVA       Collin J. D'Silva, Chairman and Chief Executive Officer

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 16th31st day of March 2001.2003.

Signature		Title
/s/  COLLIN J. D'SILVA       Collin J. D'Silva		Chairman of the Board, Director and Chief Executive Officer (Principal Executive Officer)
/s/  WILLIAM P. RASMUSSEN       William P. Rasmussen		Chief Financial Officer (Principal Financial Officer)
/s/  GREGORY J. DUMAN*       Stephen F. Dwyer*Gregory J. Duman		Director
/s/  JEFFREY SKLAR*       Douglas T. Gjerde,Jeffrey Sklar, M.D., Ph.D.*		Director
/s/  ROLAND J. SANTONI*       Jeffrey Sklar, M.D., Ph.D.*Roland J. Santoni		Director
/s/  Roland J. Santoni*PARAG SAXENA*		Director
Gregory J. Duman*		Director
Parag Saxena*Saxena		Director
*By Collin J. D'Silva, as attorney-in-fact
/s/  COLLIN J. D'SILVA       Collin J. D'Silva Attorney-in-fact for the individuals as indicated.

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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER


I, Collin J. D'Silva, certify that:

1.

I have reviewed this annual report on Form 10-K of Transgenomic, Inc. (the Registrant);



2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4.

The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:



a)

Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b)

Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and



c)

Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;




5.

The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function):



a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and



b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and




6.

The Registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.




Date: March 31, 2003

/s/COLLIN J. D'SILVA Collin J. D'Silva,Chief Executive Officer

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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER


I, William P. Rasmussen, certify that:

1.

I have reviewed this annual report on Form 10-K of Transgenomic, Inc. (the Registrant);



2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;



4.

The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:



a)

Designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;



b)

Evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and



c)

Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;




5.

The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent function):



a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and



b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and




6.

The Registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.




Date: March 31, 2003

/s/WILLIAM P. RASMUSSEN William P. Rasmussen,Chief Financial Officer

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QuickLinks


Index
PART I
FORWARD-LOOKING STATEMENTS
Item 1. Business.
Overview
Industry Background
Our Technology and Products
Strategy
Research and Development
Scientific Advisors
Sales and Marketing
Customers
Manufacturing
Backlog
Intellectual Property
Competition
Employees
Risks Related to Our Business
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 4a. Executive Officers.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Results of Operations
Years Ended December 31, 2000 and 1999
Years Ended December 31, 1999 and 1998
Liquidity and Capital Resources
Impact of Inflation
Recent Account Pronouncements
Foreign Currency Rate Fluctuations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
INDEPENDENT AUDITORS' REPORT
Item 9. ChangesTRANSGENOMIC, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 2002 and 2001 (In thousands except share and per share data)
TRANSGENOMIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2002, 2001 and 2000 (in thousands except share and per share data)
TRANSGENOMIC, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years Ended December 31, 2002, 2001 and 2000 (in thousands except share data)
TRANSGENOMIC INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001 and 2000 (In thousands)
TRANSGENOMIC, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2002, 2001 and 2000 (Tabular amounts in thousands except share and Disagreement With Accountants on Accounting and Financial Disclosure.per share data)
Part III
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K.
SIGNATURES
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER