UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 20062008

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes                No      X    

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.

Yes                No      X    

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 Form10-KForm 10-K      X          

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

Large Accelerated Filer¨         Accelerated Filer¨         Non-Accelerated Filer¨         Smaller Reporting Companyx

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes                No      X    

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the last reported closing price per share of Common Stock as reported on The Nasdaq Global Marketthe OTC Bulletin Board on the last business day of the registrant’s most recently completed second quarter was approximately $22.63$26.6 million. An affiliate is anyone who owns 10% or more of our stock.

At March 30, 2007,2009, the registrant had 49,189,672 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant Proxy Statement relating to its 20072009 Annual Meeting of Stockholders (the “Proxy Statement”) have been incorporated into Part III of this Report on Form 10-K.

TRANSGENOMIC, INC.

Index to Form 10-K for the Fiscal Year Ended December 31, 20062008

This Annual Report on Form 10-K references the following registered trademarks which are the property of Transgenomic:Transgenomic, Inc.: DNASEP^® Columns, WAVE^® System, WAVEMAKER^® Software, TRANSFORMING THE WORLD^® for Laboratory Equipment, TRANSGENOMIC^® and the Globe Logo^®; MutationDiscovery.com^® Website, OLIGOSEP^® for Systems and Reagents, OPTIMASE^® Polymerase, RNASEP^® Columns, SURVEYOR^® WAVE OPTIMIZED^® reagents, and WAVE^® MD Systems. Additionally, this Annual Report on Form 10-K references the following trademarks which are the property of Transgenomic: MitoScreen^™Transgenomic, Inc.: MitoScreen™ Kits, ProtocolWriter^™ProtocolWriter™ Software, Navigator^™Navigator™ Software, THE POWER OF DISCOVERY^™DISCOVERY™ for Lab Reagents and Educational Programs, and Surveyor^™Surveyor™ Nuclease. All other trademarks or trade names referred to in this Annual Report on Form 10-K are the property of their respective owners.

PART I

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements. Many of these forward-looking statements refer to our plans, objectives, expectations and intentions, as well as our future financial results and are subject to risk and uncertainty. You can identify these forward-looking statements by 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 many factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements, including those discussed under “Risks Related to Our Business”Item 1A “Risk Factors” and other factors identified by cautionary language used elsewhere in the Annual Report on Form 10-K.

Transgenomic, Inc. (the(together with its affiliates, the “Company” or “Transgenomic”) provides innovative products for the synthesis, purification and analysis of nucleic acids used in the life sciences industry for research focused on molecular genetics and diagnostics. WeThe Company also provideprovides genetic variation analytical services to the medical research, clinical and pharmaceutical markets. Net sales are categorized as bioinstruments, bioconsumablesInstrument Related Business and discovery services.Laboratory Services.

Instrument Related Business:

Laboratory Services:

in pharmacogenomic, biomarker analysis services toand mutation discovery research serving the pharmaceutical and biopharmaceutical companies to support preclinicalbiomedical industries worldwide for disease research, drug and diagnostic development and clinical development of targeted therapeutics; and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.trial support.

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

Business Strategy

Since inception, our business strategy has been to provide products and services to biomedical researchers, medical institutions, and diagnostic and pharmaceutical companies that are tied to advancements in the field of genomics. Advances in genomics have fueled efforts to understand individual differences in disease susceptibility, disease progression, and response to therapy. Accordingly, a principal component of our strategy has beenand continues to be to establish our WAVE System as an industry standard in the biomedical research market and to develop additional markets for the WAVE System such as clinical research and diagnostics. We attained ISO90001:2000 accreditation for our Omaha manufacturing site in the fourth quarter of 2008.

Over the last couple of years our strategy has shifted somewhat to include another area of strategic focus that we believe can provide significant opportunities. Through an expanding base of installed systems, we expect to increase the sales of consumable products used with the WAVE System and create opportunities to market additional products to this customer base.

In addition, through our DiscoveryLaboratory Services offerings we have gained exposure to the translational and clinical research markets, laying the foundation for increasing our participation in the full value chain associated with activities ranging from basic biomedical research to development of diagnostic and therapeutic products. During the fourth quarter of 2005, our laboratory in Omaha, Nebraska was certified under the Clinical Laboratory Improvement Amendments and we received our first patient samples for molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories. In December of 2008 we were awarded an accreditation by the Commission on Laboratory Accreditation of the College of American Pathologists (CAP) based on the results of an onsite investigation. The CAP Laboratory Accreditation Program, begun in the early 1960’s, is recognized by the federal government as being equal to or more stringent than the government’s own inspection program. We believe there is a significant opportunity for us to capitalize on the increasing demand for molecular-based personalized medicine by leveraging on our technologies and experience gained from the genomic biomarker analysis that our DiscoveryLaboratory Services Groupbusiness has and will continue to provide to pharmaceutical and biopharmaceutical companies.

Significant Recent Events

There have been key changes to our senior management.

On April 3, 2006, Collin J. D’Silva resigned as our President and Chief Executive Officer. Mr. D’Silva served as our Chairman until January 19, 2007, when he also resigned from our Board of Directors and as our Chairman. The Board of Directors appointed Gregory Sloma, a current independent director, to serve as the interim Chairman of the Board.

Craig J. Tuttle joined the Company as the President and Chief Executive Officer on July 12, 2006, Mr. Tuttle, age 54, has over 25 years of general management, sales and marketing, and research and development experience in medical diagnostic and biotechnology companies. During 2004 and 2005, Mr. Tuttle was the President and Chief Operating Officer of Duke Scientific, a Northern California specialty chemistry manufacturer, and led the sale of Duke Scientific to Fisher Healthcare in 2005.

On September 20, 2006, Michael A. Summers, resigned as our Chief Financial Officer in order to pursue another professional opportunity. On December 4, 2006, Debra A. Schneider, age 48, joined the Company as Vice President and Chief Financial Officer. Ms. Schneider also serves as the Secretary and Treasurer of the Company. Ms. Schneider was most recently employed by First Data Corporation, a provider of processing and related services to institutions issuing credit and debit cards. Ms Schneider’s tenure at First Data Corporation covered seventeen years during which she served in a number of roles including finance planning, accounting and Chief Financial Officer for various business units. Most recently she served as Senior Vice President of Finance.

The Company has been engaged in a process of exploring strategic alternatives, which it recently terminated.

The Company’s Board of Directors hired an independent financial advisor to assist the Board in its evaluation of potential strategic alternatives available to the Company that included but were not

limited to (i) the sale of all or a portion of the continuing business or related assets; (ii) the acquisition of complementary businesses or assets; (iii) a merger; and (iv) other complementary business partnerships and collaborations. Although the financial advisor contacted a substantial number of companies, both in and outside of the genomics industry, regarding a potential strategic transaction, and management entered into negotiations with a number of these companies, no agreements were reached with any company with respect to such a transaction. The Board of Directors has elected to terminate its contract with the independent financial advisor effective April 25, 2007.

We exited our former Nucleic Acids operating segment.

On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consisted primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell this operating segment as a going concern were evaluated, we did not receive any offers to purchase the Nucleic Acids operating segment. Accordingly, we closed the Glasgow facility and began the liquidation of the assets associated with the Nucleic Acids operating segment. All employees of this operating segment were either dismissed or redeployed to our Bioinstruments operating segment. The Glasgow facility was sold on February 28, 2007 for approximately $2.7 million after associated selling costs. Proceeds will be used in the normal operations of the Company.

We have continued to work to reduce operating costs

On February 20, 2007, we announced a cost reduction plan designed to align our cost structure with anticipated revenues. The plan is expected to yield annualized savings of approximately $1.5 million once all components of the plan are fully implemented. The closing of the Company’s Cramlington, England production facility is the principal component of this plan. We expect to incur aggregate charges estimated at $1.2 to $1.4 million during the first and second quarters of 2007, relating primarily to severance, benefits and facility closure costs.

Our stock has been delisted from the Nasdaq Capital Market and is now trading on the OTC Bulletin Board (OTCBB)

On February 1, 2007, we received a staff determination letter from Nasdaq’s Listing Qualifications Department indicating that we no longer met the minimum bid price requirement for continued listing on the Nasdaq Capital Market. As a result, the listing of our common stock on the Nasdaq Capital Market was ended on February 22, 2007. Trading information about our common stock became available on the OTC Bulletin Board beginning on February 26, 2007.

Sales and Marketing

We have sold our products to customers in over 50 countries. We use a direct sales and support staff for sales in the U.S., U.K. and most countries in Western Europe. For the rest of the world, we sell our products through dealers and distributors located in those local markets. We have over 35 dealers and distributors. We also maintain regionally-based technical support staffsstaff and applications scientists to support our sales and marketing activities throughout the U.S. and Europe. The nature of our instruments and bioconsumables businessInstrument Related Business does not generally lend itself to tracking and reporting sales backlog.

Customers

Customers include numerous leading academic and medical institutions in the U.S. and abroad. In addition, our customers also include a number of large, established U.S. and foreign pharmaceutical, biotech and commercial companies. No customer accounts for more than 10% of our consolidated net sales. For the year ended December 31, 2008 four customers each made up more than 10% of the Laboratory Services net sales. Combined they represent 56% of the Laboratory Services net sales.

Research and Development

We maintain an active program of research and development primarily directed toward the improvement of the DNA separation media used in our WAVE System, the refinement of the hardware and software components of the WAVE System, the creation of unique enzymes and WAVE-Optimized enzymes, and the development of assays on the WAVE System. We have also focused on further refinements and process manufacturing improvements for our Surveyor DNA mismatch cutting enzyme. Most importantly, we completed a large cancer mutation scanning study where we employed our SURVEYOR and WAVE System technology to discover a significant number of cancer linked mutations which we believe may have commercial value in the future. We plan to prepare patent submissions on discovered mutations for up to 40 key cancer regulating and signaling genes.

For the years ended December 31, 2006, 2005 and 2004, our research and development expenses were $2.36 million, $2.20 million and $4.50 million, respectively. We will need to continue to invest in research and development activities in order to remain competitive and to take advantage of new business opportunities as they arise. During 2007, we expectWe maintain a program of research and development expensewith respect to be approximately equalinstruments and services, engaging existing and new technologies to the 2006 levels.

In additioncreate scientific and medical applications that will have significant commercial value. Major areas of focus include ultra-high sensitivity DNA mutation detection building in our WAVE and Surveyor products; a “toolbox” of mitochondrial DNA assays to the amounts reflected above, our discontinued operations incurred no researchassess damage, copy number, deletion and mutation for applications ranging from toxicology to diabetes to aging; clinical development of in-licensed diagnostics in neurodegenerative diseases, including Alzheimer’s and Parkinson’s diseases; and development expenses duringof oncology mutation kits using WAVE/Surveyor for selection of anti-cancer therapies.

For the years ended December 31, 20062008 and 20052007, our research and $2.18development expenses were $2.5 million during the year ended December 31, 2004.and $3.0 million, respectively.

Manufacturing

We manufacture bioconsumable products including our separation columns, liquid reagents, and enzymes. The major components of our WAVE Systems are manufactured for us by a third party. We integrate our own hardware and software with these third party manufactured components. Our manufacturing facilities for our WAVE Systems and bioconsumables are located in Omaha, Nebraska and San Jose, California, and Cramlington, England (through December 31, 2006). As noted earlier, we plan to close the Cramlington, England facility in 2007.California.

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 presently own rights to more than 7066 issued patents and 1310 pending applications in both the U.S. and abroad. Our WAVE System and related consumables are protected by patents and in-licensed technologies that expire in various periods beginning in 2013 through 2022.2023. We will continue to file patent applications and seek new licenses as warranted to protect and develop new technologies of interest to our customer base in the coming years.

Competition

The markets in which we operate are highly competitive and characterized by rapidly changing technological advances. A number of our competitors possess substantialsubstantially greater resources than us and are able to develop and offer a much greater breadth of products and/or services, coupled with significant marketing and distribution capabilities. We compete principally on the basis of uniquely enabling technical advantages in specific but significant market segments.

Competition for our WAVE Systems arises primarily from DNA sequencing and genotyping technologies. Competitors in these areas include Applied Biosystems, Beckman Coulter, Amersham (now part of GE Healthcare), Affymetrix, AgilentIdaho Technologies, Nanogen, Illumina,Roche, Sequenom, Pyrosequencing (now part of Biotage AB), Varian, and others. Competition for some of our non-WAVE consumable products comes from numerous well-diversified life sciences reagents providers, including, among others, Invitrogen, Qiagen, Roche, Stratagene, and Promega. Our discovery servicesLaboratory Services face competition from a number of companies offering contract DNA sequencing and other genomic analysis services, including Genaissance Pharmaceuticals, GeneLogic, Agencourt,Genizon, Clinical Data, SeqWright Gentris, and Perlagen.others. In addition, several clinical diagnostics service providers, such as Labcorp, Quest, Athena and Specialty Laboratories,Baylor College of Medicine, also offer related laboratory services in support of clinical trials.services. Finally, additional competition arises from academic core laboratory facilities.

Employees

As of December 31, 2006, 20052008 and 2004,2007, we had employees focused in the following areas of our operation:

Our employees were employed in the following geographical locations:

We supplement our workforce through the use of independent contractors and consultants. At December 31, 2006, 2005 and 2004, we have engaged independent contractors or consultants who provide services to us approximately equivalent to one, one and five full-time employees, respectively.

		December 31,
		2008		2007
United States		89		89
Europe (other than the United Kingdom)		13		13
United Kingdom		17		14
		119		116

General Information

We were incorporated in Delaware on March 6, 1997. Our principal office is located at 12325 Emmet Street, Omaha, Nebraska 68164 (telephone: 402-452-5400). We maintain manufacturing facilities in Omaha, Nebraska and San Jose, California, and Cramlington, England.California. We maintain research and development offices in Gaithersburg, Maryland and Omaha, Nebraska. As noted earlier, we plan to close the Cramlington, England facility in 2007.

We make reports filed by us with the SEC available free of charge on our website as soon as reasonably practicable after these reports are filed. The address of our website iswww.transgenomic.com. Information on our website, including any SEC report, is not part of this Annual Report on Form 10-K.

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

We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we currently have no plans to borrow additional funds or to issue additional equity securities for this purpose. At March 30, 2007 and December 31, 2006,2008, we had cash and cash equivalents of$7.91 million and $5.87 million, respectively. $4.8 million. While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2007,2009, we will need to increase our revenuesnet sales or further reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. However, we cannot assure you that we will be able to increase our revenuesnet sales or further reduce our expenses and, accordingly, we may not have sufficient sources of liquidity to continue the operations of the Company indefinitely.

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

We have experienced annual losses from continuing operations since inception of our operations. Our lossesnet loss for the year ended December 31, 2008 was $0.5 million. Our loss from continuing operations for the yearsyear ended December 31, 2006, 2005 and 2004 were $2.96 million, $4.98 million, and $13.75 million, respectively.2007 was $2.2 million. These historical losses have been due principally to the high levels of research and development expenses and sales and marketing expenses that we have incurred in order to develop and market our products, the fixed nature of our manufacturing costs, restructuring charges and impairment charges. In addition, markets for our products and services have developed more slowly than expected in many cases and may continue to do so. As a result, we may incur operating losses in the future.

Markets forMarket demand is outside of our products and services may continue to develop slowly.control.

There are many factors that affect the market demand for our products and services that we cannot control. Demand for our WAVE System is affected by the needs and budgetary resources of research institutions, universities, hospitals and others who use the WAVE System for genetic-variation research. The WAVE System represents a significant expenditure by these types of customers and often requires a long sales cycle. Similarly, the sales cycle for the OEM equipment that we sell can also be lengthy. If revenuesnet sales from the sales of our products and services continue at current levels, we may need to take steps to further reduce operating expenses or raise additional working capital. We cannot assure you that sales will increase or that we will be able to reduce operating expenses or raise additional working capital. Similarly,

The current economy may decrease sales.

Demand for our instruments is affected by the sales cyclebudgetary resources of institutions that use our products. Potential customers may be unable to obtain the financing that they need to make such significant capital expenditures during these troubled economic times. In addition, potential customers may be under budgetary restrictions which do not allow for such capital expenditures in the OEM products that we sell can also be a long sales cycle.foreseeable future.

Sales of our DiscoveryLaboratory Services have been variable.

SalesLaboratory Services include services performed by both our Molecular Clinical Reference Laboratory and our Pharmacogenomics Research Services. Testing volumes at the Molecular Clinical

Reference Laboratory is dependent on patient visits to doctors’ offices and other providers of discovery services have varied significantly duehealth care and tends to fluctuate on a seasonal basis. Volume of testing generally declines during the year end holiday periods, other major holidays and the summer. The Pharmacogenomics Research Services depends on project based work which will change from quarter to quarter. Therefore, comparison of the results of successive quarters may not accurately reflect trends or results for the full year.

Compliance with HIPAA is time consuming and costly.

The Health Insurance Portability and Accountability Act (HIPAA) and associated regulations protect the privacy and security of certain healthcare information and establish standards for electronic healthcare transactions in large part to the fact that approximately 82%United States. These privacy regulations establish federal standards regarding the uses and 90%disclosures of discovery services sales in 2004 and 2005, respectively, were realized from orders from a single large pharmaceutical company. Sales to this customer were governed by a non-binding master services agreement dated August 22, 2002. Accordingly, the amount of sales to this customerprotected health information. Our Molecular Clinical Reference Laboratory is subject to change. In 2006,HIPAA and its associated regulations and if we did not sell any discovery servicesfail to this customer.comply with these laws and regulations we could suffer civil and criminal penalties, fines, exclusion from participation in governmental healthcare programs and the loss of various licenses, certificates and authorizations necessary to operate our Laboratory Services business. We could also incur liabilities from third party claims.

The sale of our products and business operations in international markets subjects us to additional risks.

During the past several years, international sales have represented more than half50% of our total net sales. As a result, a major portion of our revenues and expensesnet sales are subject to risks associated with international sales and operations. These risks include:

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

We rely on a single supplier, Hitachi High Technologies America, to provide the basic instrument modules used in our WAVE Systems. While other suppliers of instrumentation and computer hardware are available, we believe that our arrangement with Hitachi offers strategic advantages. Hitachi is replacing its current instrument line with a new instrument line. While we presently planWe have successfully converted the latest model of WAVE Systems to convert our technology and applications to this new instrument line, such conversion may not be successful and, therefore, we may incur additional costs for the custom manufacturing of the currentutilize Hitachi’s newest instrument line. If we were required to seek alternative sources of supply, it could be more 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.net sales.

The current economy may cause suppliers of products to not be able to perform.

We rely on various suppliers for products and materials needed to produce our products. In the event that they would be unable to deliver those items due to product shortage or business closure, we would be unable to deliver our products or may need to increase our prices. The current economy poses additional risk of our suppliers’ ability to continue their businesses as usual.

We may not have adequate personnel to execute our business plan.

In order to reduce our operating costs, we have reduced the number of employees in all areamost areas of theour business. In addition, we may lose other key management, scientific, technical, sales and manufacturing personnel from time to time. It may be very difficult to replace personnel if they are needed in the future, and the loss of key personnel could harm our business and operating results. We cannot assure you that our employee reductions will not impair our ability to continue to develop new products and refine existing products in order to remain competitive. In addition, these reductions could prevent us from successfully marketing our products and developing our customer base.

Our markets are very competitive.

Many of our competitors have greater resources than we do and/orand may enjoy other competitive advantages. This may allow them to more effectively market their products to our customers or potential customers, to develop products that make our products obsolete or to produce and sell products less expensively than us. As a result of these competitive factors, demand for and pricing of our products and services could be negatively affected.

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

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. 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. 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 substantialadequate protection or be commercially beneficial. 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 such measures do not protect our rights, third parties could use our technology and our ability to compete in the market would be reduced.

We are dependent upon our licensed technologies and may need to obtain additional licenses in the future to offer our products and remain competitive.

We have licensed key components of our technologies from third parties. If these agreements were to terminate prematurely due to our breach of the terms of these licenses or we otherwise fail to maintain our rights to such technology, we may lose the right to manufacture or sell a substantial portion of 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.

A significant percentage of our sales are 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.

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.

Our failure to comply with any applicable government regulations or otherwise respond to claims relating to improper handling, storage or disposal of hazardous chemicals that 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. We are subject to federal, state, local and international 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.

The price for our common stock is volatile and may drop.

The trading price for our common stock has fluctuated significantly over recent years. The volatility in the price of our stock is attributable to a number of factors, not all of which relate to our operating results and financial position. The delisting of ourOur stock fromis traded on the NASDAQ may negatively affect the volume of shares traded and the price for our stock. OTC Bulletin Board (OTCBB).

Continued volatility in the market price for our stock should be expected and we cannot assure you that the price of our stock will not decrease in the future. Fluctuations or further declines in the price of our stock may affect our ability to sell shares of our stock and to raise capital through future equity financing.

Our stock has been delisted from the Nasdaq Capital Market and is now trading on the OTC Bulletin Board (OTCBB).

On February 1, 2007, we received a staff determination letter from Nasdaq’s Listing Qualifications Department indicating that we no longer met the minimum bid price requirement for continued listing on the Nasdaq Capital Market. As a result, our common stock on the Nasdaq Capital Market was ended on February 22, 2007. Trading information about our common stock became available on the OTC Bulletin Board beginning on February 26, 2007.

Our common stock is deemed to be “penny stock”, which may make it more difficult for investors to sell their shares due to suitability requirements.

Our common stock is classified as a “penny stock” under the rules of the SEC. The Securities and Exchange Commission has adopted Rule 3a51-1 which establishes the definition of a “penny stock”, for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, Rule 15g-9 requires:

In order to approve a person'sperson’s account for transactions in penny stocks, the broker or dealer must:

·

make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:

Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock"“penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and

the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

We may issue a substantial amount of our common stock to holders of options and warrants and this could reduce the market price for our stock.

At December 31, 2006,2008, we had obligations to issue 13,530,24111,524,786 shares of common stock includingupon exercise of outstanding stock options representing 5,467,6643,531,064 shares and warrants representing 8,062,5777,993,722 shares. The issuance of these additional shares of common stock may be dilutive to our current shareholders and could negatively impact the market price of our common stock.

Our common stock is thinly traded and a large percentage of our shares are held by a small group of unrelated, institutional owners.

At March 30, 2007,December 31, 2008, we had 49,189,672 shares of common stock outstanding. Fewer than ten unrelated, institutional holders own more than 50% of these sharesshares. The sale of significant shares into the public market has potential to cause significant downward pressure on the price of our common stock. This is particularly the case if the shares being placed into the market exceed the market’s ability to absorb the stock. Such an event could place further downward pressure on the price of our common stock. This presents an opportunity for short sellers to contribute to the further decline of our stock price. If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market.

None.

Item 2.

Properties

We currently lease and occupy a total of sevensix facilities throughout the world under non-cancelable leases with various terms. The following table summarizes certain information regarding the leased facilities. Annual rent amounts presented in the table are reflected in thousands.

The Company no longer occupies its formerWe occupy the leased facilities, with the exception of the Paris, France facility which we have vacated and are in San Diego, Californiathe process of finding a tenant to sublease this facility. In the event we are unable to sublease the Paris, France facility, we will exercise the early termination clause which allows for the lease to terminate in February 2011. We have a reserve of $0.2 million in other accrued expenses for the remaining lease liability.

We believe that our facilities are suitable and Cambridge, Massachusetts and leases on these facilities expired in January 2007. The Company expects to be able to renew leases that expire in 2007 on terms substantially similar to the existing lease terms.adequate for our current level of operations.

The Company is not a party to any pending legal proceedings which, if decided adversely to the Company, will have a material adverse effect on our financial position, results of operations or cash flows.

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.

PART II

Market Information.    Share price information for our common stock is available on the OTC Bulletin Board under the symbol TBIO.OB. Prior to February 22, 2007, our common stock was listed for trading on the Nasdaq Capital Market under the symbol TBIO. The following table sets forth the high and low closing prices for our common stock during each of the quarters of 20052007 and 2006.2008.

Holders.    At March 30, 2007,December 31, 2008, there are 49,189,672 shares of our common stock outstanding and approximately 3,3102,851 holders of record.

Dividends.    We have never declared or paid any cash dividends on our common stock and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We 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.

Securities authorized for issuance under equity compensation plans.

The following equity compensation plan information summarizes plans and securities approved and not approved by security holders as of December 31, 2006.

(1)	Consists of our 2006 Equity Compensation Plan

Five Year Performance Comparison:    The following graph provides an indicator of cumulative total shareholder returns for the Company as compared to a peer group index comprised of Argonaut Technologies, Caliper Life Sciences, Cepheid, Cipergen Biosystems, Inc,Harvard Bioscience IC, Illumina, Inc., Luminex Corporation, Nuvelo, Inc., Orchid Biosciences, Inc. and Sequenom, Inc and to the Nasdaq Market Index. The graph assumes that the value of the investment in the Company’s common stock, the Nasdaq Market Index and the Peer Group Index, was $100 on December 31, 2001, and that all dividends were reinvested.

Sale of Unregistered Securities.    The Company made no sales of its common stock during the years ended December 31, 20062008 and 20042007 that were not registered under the Securities Act of 1933 (the “Securities Act”). Information regarding sales of equity securities by the Company during the yearsyear ended December 31, 2005 that were not registered under the Securities Act of 1933 have been previously reported by the Company on Form 8-Ks filed on March 18, 2005, March 30, 2005 and October 31, 2005.

Issuer Purchase of Equity Securities.    The Company made no purchases of its common stock during the quarter ended December 31, 2006.2008. Therefore, tabular disclosure is not presented.

Item 6.

Selected Consolidated Financial DataData.

The selected consolidated balance sheet data as of December 31, 20062008 and 20052007 and the selected consolidated statements of operations data for each year ended December 31, 2006, 20052008 and 20042007 have been derived from our audited consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. The selected consolidated balance sheet data as of December 31, 2004, 20032006, 2005 and 20022004 and the selected consolidated statements of operations data for each year ended December 31, 20032006, 2005 and 20022004 have been derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Dollar amounts, except per share data, are presented in thousands.

(3)

Other income (expense) for all years presented primarily includes interest expense and interest income. Other income in 2007 includes $.9 million from the sale of an investment security and $.2 million in insurance proceeds related to equipment destroyed in fire at our Cramlington, England facility. The loss on debt extinguishment of $0.5 million in 2005 related to the repayment of long-term debt and $2.9 million resulting from certain modifications to long-term borrowing agreements that were treated as extinguishments for financial reporting purposes. Refer to Note F to the accompanying consolidated financial statements.Other expense in 2004 of $5.3 million consisted of interest expense of $2.4 million and loss on debt extinguishment of $2.9 million.

The following discussion should be read in conjunction with the Consolidated Financial Statements and applicable Notes to Consolidated Financial Statements and other information in this report, including Risk Factors set forth in Item 1A and Critical Accounting Policies set forth at the end of this Item 7.

The Company’sOur continuing operations consist of the Instrument Related Business (including the manufacture and sale of itsour WAVE System and related consumable productsproducts) and discovery services which make usethe Laboratory Services (see the description of our business in Item 1). The Company has, for the Company’s WAVE System to perform genomic research on a contract basisfirst time, broken out our business into two reportable segments: Instrument Related business and disease testing services. These functionsLaboratory Services business. While we have been showing Net Sales and Cost of Sales for these segments, we have not previously disclosed any further detail. There are categorized as one reportable operating segment. Although revenue is analyzed by type,estimates involved in breaking out the Company’s net financial results are analyzed as a single segment due to the integrated nature of the productsremaining expenses and services that we sell.other disclosures. The Consolidated Financial Statements also reflect the assets and results of our former Nucleic Acids operating segment, which are shown as discontinued operations in all periods as a result of the implementation of a plan to exit this operating segment in the fourth quarter of 2005.

Executive Summary

20062008 Results

SalesFull year net sales for 2008 of $24.0 million increased by 4% compared with total net sales for 2007 of $23.2 million. Our bioinstruments and associated consumables continued to declinebusiness declined in 2006,2008 due to fewer WAVE instruments sold in both the US and European markets. The Instrument Related Business decreased 3% from 2007 to 2008. The growth in our Laboratory Services was 56% over the prior year. Overall gross margins increased from 55% to 57%. Operating expenses in 2008, exclusive of $1.0 million in foreign currency revaluation gains, a numbergoodwill impairment write-off of factors including competition from sequencing$0.6 million, and other evolving technologies. Sales from our discovery services group during$0.1 million of restructure charges, were $14.3 million as compared to $14.4 million in 2007, exclusive of $0.1 million of revaluation losses and $1.5 million of restructure charges. While in total there has only been a slight decrease here, after adjusting for the year wereitems noted above, there has been some movement within the components. General and administrative costs are down substantially from 2005 as we completed a significant engagement for a large pharmaceutical companyby approximately $0.5 million, research and were not abledevelopment costs are down by $0.6 million and sales and marketing costs are up by $0.9 million due to replace these sales in 2006. the focus around growing the laboratory business.

Although we have taken significant steps to reduce our operating expenses, we have also increased sales and marketing costs to drive growth in response to declining revenues, wethe business. We continued to operate at a loss and to generate a

negative cash flow during the year. However,year; however, our loss and use of cash werewas reduced significantly over each of the last threetwo years.

We continue to work to respond to changes in the overall business climate for our products and our liquidity position. On December 22, 2005, we decided to sell or close and liquidate the Nucleic Acids operating segment, which consisted primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. While opportunities to sell the operating segment as a going concern were evaluated, we ultimately ended up closing the facility and terminating or redeploying all of the employees of this business segment. In February of 2007, we completed the sale of the facility in Glasgow, Scotland. We now reflect the results of this operating segment as discontinued operations for all periods presented.

As a result of the actions undertaken since the fourth quarter of 2004, including the reclassification of the Nucleic Acids operating segment as a discontinued operation, our Our losses from

continuing operations have gone from $13.75 million and $4.98$2.2 million in 2004 and 2005, respectively,2007 to $2.96net loss of $0.5 million in 2006. Net cash flows used by operating activities have gone from $12.75 million2008. We were able to avoid new debt and $3.63 millionimprove our gross margins in 2004 and 2005, respectively to $1.21 million in 2006.2008.

20072009 Outlook

Timing of the demand for our products, particularly our flagship WAVE Systems, has been difficult to predict due largely to ongoing changes in the marketplace and the funding arrangements of our customers. Because our net sales are largely dependent upon sales of a limited number of products, including WAVE Systems and OEM Instruments, and our cost structure is largely fixed, historical results have been somewhat sporadic. For these reasons, it is not our practice to provide prospective financial guidance related specifically to revenues, costs, net income (loss) or cash flows. However, our financial objectives are to generate income from continuing operations and positive cash flows from continuing operations. To accomplish these goals we must generate sequential growth in net sales, leverage manufacturing expenses and continue to better control operating expenses. We will continue to look for opportunities, through consolidation or otherwise, to reduce our operating expenses related to our core business.

Develop sequential growth in net sales.

We will work to continue to leverage on and strengthen our core instrument business. Challenges exist for WAVE System and consumable growth in traditional markets. We believecontinue to look for emerging markets and novel applications willto provide forus with new opportunities for our WAVE System. We intend to continue to look for opportunities to diversify into new markets, including the personalized medicine market (particularly in oncology), where the sensitivities of our technologies are essential. In the short-term, we believe that the introduction of the newest generation of our flagship product, the WAVE System 4500 will provide upgrade opportunities to our current installed base. In addition, we are also selling refurbished WAVESystems in order to allow an opportunity for customers that may not be able to afford the cost of a new system. In the intermediate to longer-term, we believe that newly developed “targeted” consumable products will increase usability of our installed base and enhance net sales of consumables. Additionally, we have developed credibility and momentum with third-party platforms that will allow us to leverage on our direct sales force and distribution network.

On the discovery servicesLaboratory Services front, we will seek to leverage past successes with pharmaceutical customers to diversify our customer base. While we have performed discovery servicescompleted cancer pathway gene mutation projects for a number of largehigh visibility pharmaceutical customers, these engagements do not materialize at a constant ratecompanies which have continued to demonstrate the unique sensitivity of detecting DNA mutations in cancer genes which are central to effective therapy selection for current and future cancer therapeutics. To compliment our mutation detection expertise, we also have strengthened our capabilities in biomarker development and mutation detection in novel cancer pathway genes which will aid in the lead time to develop major contracts is often lengthy. To mitigate this risk, we believe there is a significant opportunity for us to capitalize on the increasing demand for molecular-baseddevelopment of true personalized medicine for our pharmaceutical partners. We have also increased our efforts to expand our Molecular Clinical Reference Laboratory sales by leveraginghiring additional experienced field sales representatives and adding new tests to our technologies and experience gained from the genomic biomarker analysis that discovery services provides to pharmaceutical and biopharmaceutical companies. During the fourth quarter of 2005, our laboratory in Omaha, Nebraska was certified under the Clinical Laboratory Improvement Amendments, and we received our first patient samples from physicians and third-party laboratories for molecular-based testing for hematology, oncology and certain inherited diseases. This capability also allows us to offer a vertically-integrated suite of services that can support activities ranging from discovery researchproducts.

Although we have experienced declining sales and recurring net losses (resulting in an accumulated deficit of $128.3 million at December 31, 2008), management believes existing sources of liquidity, including cash and cash equivalents of $4.8 million, are sufficient to clinical trials to diagnostic testing. As the need for drug/diagnostic combination products increases, we believe this suite of service offerings will prove attractive to various customers. We have recently added some new customers in this area of the business.

Continue to control operating expenses.

Operating expenses include selling, general and administrative expenses and research and development expenses.meet expected cash needs during 2009. We will need to continue to invest in research and development activitiesincrease net sales in order to remain competitivemeet our liquidity needs on a long-term basis. In future periods, there is no assurance that we will be able to increase net sales or further reduce expenses and, accordingly, we may not have sufficient sources of liquidity to take advantagecontinue operations indefinitely. The current economic conditions may have a negative impact on our net sales in 2009. The tightening of new business opportunities as they arise. During 2007,the credit market may make it difficult for customers to purchase instruments due to lack of funding. In the event we expect operatingdo not have net sales growth, we will continue to make cost reductions to align our expenses including research and development expense, to be approximately equal to 2006 levels.with our net sales.

Results of Continuing Operations

Years Ended December 31, 20062008 and 20052007

Net Sales.    Net sales for the years ended December 31, 20062008 and 20052007 consisted of the following (dollars in thousands):

Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, revenuesnet sales from service contracts that we enter into with purchasers of our instruments, as well as sales of instruments we distribute for other manufacturers (“OEM equipment”). We also sell refurbished WAVE Systems in order to access customers that may not be able to afford new systems. We sold 6830 WAVE Systems during the year ended December 31, 20062008 compared to 9756 systems during the same period of 2005.2007. This decrease resulted from lower demand in all major geographic markets and among both research and diagnostic users particularly in our largest markets throughout Western Europe.markets. Demand for the WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. The decrease inOffsetting the WAVE System salesdecline was largely offset byour OEM instrument sales, increased net sales from product upgrades and service contracts.sales. We sold 13 OEM instruments during the year ended December 31, 2008 compared to only 8 in the same period of 2007.

Bioconsumable net sales decreased during the year ended December 31, 20062008 compared to 2005. Despite2007. The primary decrease in consumables is due to lower usage of the increaseWAVE consumables in installedEurope and the negative impact of the foreign currency exchange rates, primarily the Great British Pound to the US Dollar. The active WAVE System base of WAVE instrumentshas declined from 1,290 units at2007 to 2008 which causes a decrease in the demand for our consumable products.

Laboratory Services net sales increased during the year ended December 31, 20052008 compared to 1,358 units at2007 by approximately $1.5 million. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of $2.9 million increased 70% over the year ended December 31, 2006, we do not believe that all of these instruments are being fully utilized. In addition, consumable products are available from other manufacturers which can be used in place of many of our consumable products. Some of these competitive products sell at prices below the prices we charge for our products, which have caused us to have some price compression, principally in Europe.

2007. The decrease in discovery servicesMolecular Clinical Reference Laboratory Services net sales was primarilygrowth is attributable to the expirationincreased sales focus. We have increased the number of certain research contracts with a large pharmaceutical company in 2005,sales employees during 2008. The number of $2,188 that was partially offset bycustomers has increased as well as the net sales from research projects from otherpenetration per account. The Pharmacogenomics Research Services net sales of $1.4 million during 2008 increased 33% over the year ended December 31, 2007. Our sales focus for the Pharmacogenomics Research Services has been

to increase the number of sales representatives to allow them to build relationships with the pharmaceutical companies and services provided by our CLIA lab,government agencies. The growth in 2008 net sales is attributable to three large customers which accounted for 85% of $384.the net sales. All of these customers had an increase in the amount of work performed from 2007 to 2008.

Costs of Goods SoldSold.    Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation) as well as the wholesale price we pay manufacturers of OEM equipmentEquipment that we distribute. It also includes direct costs (primarily personnel costs, test outsourcing fees, rent, supplies and depreciation) associated with our discovery servicesLaboratory Services operations. Cost of goods sold for the years ended December 31, 20062008 and 20052007 consisted of the following (dollars in thousands):

Gross profit equaled $11.37$13.7 million or 49%57% of total net sales during the year ended December 31, 20062008 compared to $12.33$12.7 million and 48%55% during the same period of 2005.2007. The increase in gross profit as a percent of revenuenet sales is largely attributable to changes in the composition of products sold. Sales of our OEM instruments (third party platforms) provided for higher gross profit in 2006, while gross profitMargins on WAVE sales is down,bioinstruments improved from 63% to 64% from 2007 to 2008 due to the lower numberchange in the mix of instruments sold and the fixed base of costs associated with this area. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) were up slightlysold. Margins on bioconsumables decreased from 54% in 2006 and these products generate higher gross profits than base buffers and enzymes. Gross profit from discovery services is significantly less2007 to 53% in 20062008 largely due to the decrease inimpact on net sales. The Laboratory Services business segment improved margins for the year ended December 31, 2008 to 45% as compared to 23% for the year ended December 31, 2007 due primarily to leveraging a fixed cost structure with increased net sales and consolidation of our Pharmacogenomic Research Services from Gaithersburg to a large pharmaceutical customer which produced net sales of $2,188Omaha in 2005 and $8 in 2006, coupled with a much smaller decrease in the cost of goods sold due to the fixed base of cost associated with the discovery services group.2008.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, facility costs and facility costs.foreign currency revaluation. These costs remained essentially flat in 2006 compared to 2005, but increaseddecreased as a percentage of net sales from 47%49% in 2007 to 52% as a result of reduced sales. Foreign45% in 2008. These reductions were primarily due to gains from foreign currency transactionrevaluation which decreased operating expenses by approximately $1.0 million for the year ended December 31, 2008. SG&A would have been $11.8 million excluding the foreign currency revaluation gain for the year ended December 31, 2008. In the year ended December 31, 2007 foreign currency revaluation adjustments increased operating expenses by approximately $.08$0.1 million. SG&A would have been $11.4 million compared toexcluding the foreign currency revaluation expense for the year ended December 31, 20052007.

Research and Development Expenses.    Research and development expenses primarily include personnel costs, legal fees, supplies, and facility costs. These costs totaled $2.36$2.4 million during the year

ended December 31, 20062008 compared to $2.20$3.0 million during the same period of 2005, an increase2007, a decrease of $0.16$0.6 million or 7%19%. 2007 research and development expenses included $0.4 in legal and collaboration fees that were not needed in 2008. As a percentage of net sales, research and development expenses totaled 10% and 9%13% of net sales during the year ended December 31, 20062008 and 20052007 respectively. We expect to continue to invest upapproximately 10% to 10%12% of our net sales in research and development activities.expenses. Research and development costsexpenses are expensed in the year in which they are incurred.

ImpairmentRestructuring Charges.We didrecorded restructuring charges of $0.1 million in 2008 related to the additional lease expense on the shut down of the Paris facility due to changes in the market place causing our inability to sublease it of $0.3 million, which is offset by reserves for fixed assets and severance of $0.2 million not incur any impairmentutilized. In addition, we took restructuring charges during 2006, but incurred $0.43 million of impairment charges during 2005 consisting of a $0.25 million charge associated with certain international patent pursuits that were no longer consistent with our strategic plan and a charge of $0.18less than $0.1 million related to inventoryseverance due to the relocation of the Pharmacogenomics Laboratory from Gaithersburg, Maryland to Omaha, Nebraska. We recorded restructuring charges totaling $1.5 million during 2007. The restructuring charges were comprised of severance payments totaling $.9 million, facility closure costs totaling $.5 million and other costs totaling $.1 million. Restructuring charges related to three events: A restructuring plan completed in the second quarter of 2007, which resulted in the termination of four employees in Omaha, Nebraska; the closure of the Cramlington, England bioconsumable production facility and consolidation of this production in the Omaha, Nebraska facility; and the closure of an administrative office outside Paris, France and combining those operations with those functions performed elsewhere in the organization. These restructuring charges do not relate to any activities taken by us during 2007 or prior periods in connection with the termination of our Nucleic Acids business segment. All costs associated with certain OEM instruments.those activities are included in income (loss) from discontinued operations.

Goodwill.    We review goodwill for impairment on an annual basis. As part of our 2008 impairment assessment we determined that goodwill was impaired and, accordingly, it was written off. The goodwill is attached to the WAVE related business. See goodwill discussion in Footnote B.

Other Income (Expense).    Other income during the year ended December 31, 2006 of $0.202008 was $0.1 million consisted of interestwhile other income of $0.22 million which was partially offset by interest expense of

$0.01 million, and other expense of $0.01 million. Other expense duringfor the year ended December 31, 2005 consisted2007 was $1.4 million. In 2008 other income mainly included interest income. In 2007 we sold an investment in equity securities. On May 10, 2007, we sold 250,000 shares of stock in Pinnacle Pharmaceuticals, Inc. which we acquired in connection with a prior business acquisition. Gross proceeds realized from the sale were $0.9 million and because our carrying cost in this stock was $0, the sale resulted in a gain of $0.9 million. Other income also included $0.2 million in insurance proceeds related to equipment destroyed in the fire at our Cramlington facility and $0.3 million of interest income we received from cash and cash equivalents invested in overnight instruments. Other income was offset by a nominal amount of interest expense of $1.98 million and a loss on debt extinguishment of $0.54 million which was partially offset by interest income of $0.03 and other income of $0.04 million. Interest expense consisted of the following for the years ended December 31, 2006 and 2005 (dollars in thousands):

We had previously entered into a $7,500,000 line of credit (the “Credit Line”) and a $2,750,000 convertible note (the “Term Note,” and collectively with the Credit Line the “Laurus Loans”) from Laurus Master Fund, Ltd. (“Laurus”). On March 18, 2005, Laurus converted $1.87 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of our common stock at $0.52 per share. In addition, on March 24, 2005, Laurus converted $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of our common stock at $0.52 per share. In conjunction with these conversions, we accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $1.37 million related to the fair value of incremental shares received by Laurus. Contemporaneously with the closing of a private offering of common stock in November 2005 (the “2005 Private Placement”), we repaid all outstanding principal and accrued interest on the Laurus Loans. In conjunction with this prepayment, we recorded a loss on debt extinguishment of $0.54 million. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $0.84 million offset by the elimination of associated net debt premiums of $0.30 million.2007.

Income Tax Expense.Income tax expense recorded during the years ended December 31, 20062008 and 20052007 related to income taxes in states, foreign countries and other local jurisdictions.jurisdictions and totaled $0.2 million in each year. A net deferred tax asset was recorded during 2008 relating to the UK income taxes of $0.1 million. Due to the our cumulative losses expected losses in future years and inability to utilize any additional losses as carrybacks, we did not provide for an income tax benefit during the yearsyear ended December 31, 2006 or 20052008 based on our determination that it was more likely than not that such benefits would not be realized. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate taxable income in future periods and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized

at such time. While the Company has significant net operating loss carryforwards, it is likely that Section 382 (Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses following Ownership Change) of the Internal Revenue Code, and the regulations promulgated thereunder, will significantly limit the amount of net operating loss carryforward that the Company could utilize in any tax year. Our federal net operating loss carryforwards from continuing and discontinued operations of $106.23$109.3 million will expire at various dates from 20082009 through 2026,2028, if not utilized. We also had state income tax loss carryforwards from continuing and discontinued operations of $43.84$41.9 million at December 31, 2006.2008. We plan to do a study related to our net operating loss carryforwards in 2009 to determine if these have been limited due to change of control provisions. These carryforwards will also expire at various dates beginning in 2007 if not utilized.

Years Ended December 31, 2005 and 2004

Net Sales. Net sales for the years ended December 31, 2005 and 2004 consisted of the following (dollars in thousands):

WAVE Systems sold totaled 97 during the year ended December 31, 2005 compared to 107 during the same period of 2004. We had an installed base of 1,290 units at December 31, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in Discovery Services revenue during 2004 was primarily attributable to the discovery services agreements that we entered into with pharmaceutical companies to support their clinical development of oncology therapeutics.

Costs of Goods Sold.    Cost of goods sold for the years ended December 31, 2005 and 2004 consisted of the following (dollars in thousands):

Overall, our cost of goods sold increased despite an overall decline in net sales due to the fixed-cost burden associated with our manufacturing facilities.

Gross profit equaled $12.33 million or 48% of total net sales during the year ended December 31, 2005 compared to $13.25 million and 52% during the same period of 2004. The decrease in gross profit as a percent of revenue is largely attributable to changes in the composition of products sold. Generally, sales of WAVE Systems and ancillary instrumentation generate higher gross profits than sales of third party platforms. Sales of specialty consumables (SURVEYOR Nuclease, HPLC separation columns, etc.) generate higher gross profits than base buffers and enzymes. Gross profits from discovery services have been less than expected due to the continuing build out of capacity and expansion of product offerings.

Selling, General and Administrative Expenses.    Selling, general and administrative expenses totaled $12.22 million in 2005 compared to $15.96 million in 2004, a decrease of $3.74 million or 23%. As a percentage of revenue, selling, general and administrative expenses totaled 43% and 63% during the year ended December 31, 2005 and 2004, respectively. This decrease resulted primarily from termination of personnel and the elimination of facilities related costs in conjunction with the

2004 Restructuring Plan. Foreign currency transaction adjustments increased operating expenses by approximately $0.33 million during the years ended December 31, 2005 compared to the same period of 2004 when foreign currency transaction adjustments reduced operating expenses by approximately $0.45 million.

Research and Development Expenses.    Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled $2.20 million during the year ended December 31, 2005 compared to $4.50 million during the same period of 2004, a decrease of $2.30 million or 51%. The decrease related primarily to the 2004 Restructuring Plan.

As a percentage of revenue, research and development expenses totaled 8% and 18% of revenue during the year ended December 31, 2005 and 2004, respectively. Research and development costs are expensed in the year in which they are incurred.

Impairment Charges.    Impairment charges totaled $0.43 million during the year ended December 31, 2005 and consisted of $0.25 million associated with certain international patent pursuits that were no longer consistent with our strategic plan and $0.18 million related to certain inventory associated with third party platforms.

Restructuring Charges.    On November 13, 2004, our Board of Directors approved a restructuring plan designed to refocus and to better align the Company’s cost structure with anticipated revenues. The plan included a workforce reduction and the closure of various facilities and field offices. In order to recognize the various costs associated with workforce reduction and facilities closings, we incurred a charge of $1.23 million during the quarter ending December 31, 2004.

Other Income (Expense).    Other expense during the year ended December 31, 2005 of $2.45 million consisted of interest expense of $1.98 million and a loss on debt extinguishment of $0.54 million, which were partially offset by interest income of $0.03 and other net income of $0.04 million. Other expense during the year ended December 31, 2004 consisted of consisted of interest expense of $2.37 million, loss on debt extinguishment of $2.86 million and other net expense of $0.38 million.

Interest expense consisted of the following for the years ended December 31, 2005 and 2004 (dollars in thousands):

We had previously entered into a $7,500,000 line of credit (the “Credit Line”) and a $2,750,000 convertible note (the “Term Note,” and collectively with the Credit Line the “Laurus Loans”) from Laurus Master Fund, Ltd. (“Laurus”). On March 18, 2005, Laurus converted $1.87 million of the outstanding principal balance under the Credit Line into 3,600,000 shares of our common stock at $0.52 per share. In addition, on March 24, 2005, Laurus converted $0.65 million of the outstanding principal balance of the Term Note into 1,250,000 shares of our common stock at $0.52 per share. In

conjunction with these conversions, we accelerated amortization of $0.41 million of related debt premiums and discounts and recorded a charge to interest expense of $1.37 million related to the fair value of incremental shares received by Laurus. Contemporaneously with the closing of a private offering of common stock in November 2005 (the “2005 Private Placement”), we repaid all outstanding principal and accrued interest on the Laurus Loans. In conjunction with this prepayment, we recorded a loss on debt extinguishment of $0.54 million. This loss consisted of prepayment penalties and fees paid to Laurus to facilitate the 2005 Private Placement of $0.84 million offset by the elimination of associated net debt premiums of $0.30 million.

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

Income Tax Expense.    Income tax expense recorded during the years ended December 31, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions. Due to our cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, we did not provide for an income tax benefit during the years ended December 31, 2005 or 2004 based on our determination that it was more likely than not that such benefits would not be realized. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent we begin to generate taxable income in future periods and determine that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

Results of Discontinued Operations

In the fourth quarter of 2005, we implemented a plan to exit our Nucleic Acids operating segment. In conjunction with the decision to exit this operating segment, the Company recorded impairment charges of $0.43 million and $8.02 million in 2006 and 2005, respectively, consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value. Accordingly, we now reflect the results of this segment as discontinued operations for all periods presented. Expenses that are not directly identified to this operating segment or are considered corporate overhead have not been allocated to this segment in determining the results from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows (dollars in thousands):

On December 22, 2005, the Company’s Directors voted to either sell or close and liquidate the Nucleic Acids operating segment, which consists primarily of a manufacturing facility in Glasgow, Scotland. This decision was made after an evaluation of, among other things, short and long-term sales projections for products sold by this operating segment, including estimates of 2006 sales to the operating segment’s largest customer. In addition, the Company expects to incur additional period costs attributable to closure of the facility that will be recorded in discontinued operations in 2007. In conjunction with the decision to exit this operating segment, the Company recorded an impairment chargecharges of $8,022$.4 million and $8.0 million in 2006 and 2005, respectively, consisting of valuation adjustments to reflect the carrying value of the related net assets at estimated fair market value.

There was no goodwill associated with Accordingly, the former Nucleic Acidsresults of this business segment are shown as discontinued operations for all periods presented. Expenses that are not directly attributable to this operating segment ator are considered corporate overhead have not been allocated to this segment in determining the results from discontinued operations.

Income attributable to these discontinued operations during the year ended December 31, 2005 and 2004. The former Nucleic Acids operating segment recorded charges of $9,865 during 2004, related to the impairment of goodwill. The 2004 charge resulted2007 was less than $0.1 million. No income or loss from an interim period impairment test performed during the second quarter of 2004.

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

The former Nucleic Acids operating segment also recorded a chargeconsisted principally of $2,100 during 2004 related to the impairment of property and equipment associated with this operating segment.

On November 13, 2004, the former Nucleic Acids operating segment sold the assets associated with its specialty oligonucleotides manufacturingour facility in Boulder, Colorado to a subsidiary of Eyetech Pharmaceuticals, Inc. (“Eyetech”). TheGlasgow, Scotland. During 2007 we completed the sale price was $3,000 in cash plus the assumption of the lease on the BoulderGlasgow facility and the associated equipment for $2.9 million, net of certain equipment leases with a gross value of $2,377. Substantially all of the 27 employees at the Boulder facility became Eyetech employees. Net proceeds from the sale (after transactionselling expenses, and fees paid to our investment advisors) equaled approximately $2,700. In conjunction with this transaction, the Nucleic Acids operating segment recordedwhich resulted in a gain on sale of $1,466 in the fourth quarter of 2004.$.1 million.

The Company implemented restructuring plans in 2004 and 2002 designed to better align its cost structure with anticipated revenues. In conjunction with these plans, the former Nucleic Acids operating segment recorded restructuring charges in 2004 and 2003 of $2,303 and $222, respectively, related primarily to employee severance agreements, office closures, property and equipment and intellectual property. There were accrued expenses associated with these restructuring plans of $191 at December 31, 2005.

The Company accepted common stock from a customer of the former Nucleic Acids operating segment, Geron Corporation (“Geron”) as payment for goods and services. These shares were classified as available-for-sale securities. Net realized gains on these securities during 2005 of $52 and realized losses on these securities of $128 during 2004 were reflected as other expense. Proceeds from the sales of these available for sale securities are reflected within net cash flows from investing activities. During 2005 and 2004, sales to Geron totaled $1,949 and $4,151, respectively, representing 50% and 49%, respectively, of net sales within this operating segment.

Liquidity and Capital Resources

Our working capital positions at December 31, 20062008 and 20052007 were as follows (in thousands):

We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. In 2008 we had a net loss of $0.5 million and needed to use $0.4 million for operating expenses and $0.4 million in investing activities. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we currently have no borrowings and have no plans to issue additional equity securities for this purpose. At March 30, 2007December 31, 2008 and December 31, 2006,2007, we had cash and cash equivalents of $7.91 million$4.8 and $5.87$5.7 million, respectively. While we believe that existing sources of liquidity are sufficient to meet expected cash needs through 2007,during 2009, we will need to increase our revenuesnet sales,

focus on receivables and inventory management or further reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. On February 20, 2007, we announced a cost reduction plan designed to align our cost structure with anticipated revenues. The plan is expected to yield annualized savings of approximately $1.5 million once all components of the plan are fully implemented. The closing of the Company’s Cramlington, England production facility is the principal component of this plan. We expect to incur aggregate charges estimated at $1.2 to $1.4 million during the first and second quarters of 2007, relating primarily to severance, benefits and facility closure costs. However, we cannot assure you that we will be able to increase our revenuesnet sales or further reduce our expenses and, accordingly, we may not have sufficient sources of liquidity to continue theour operations of the Company indefinitely.

Analysis of Cash Flows

Years Ended December 31, 20062008 and 20052007

Net Change in Cash and Cash Equivalents.Cash and cash equivalents decreased $0.87$1.0 million during the year ended December 31, 20062008 as a result of net cash of $1.21$0.4 million being used by operating activities, and of $0.20 million being used in investing activities, which was partially offset by net cash provided by financing activities of $0.01 million and changes in foreign currency exchange rates of $0.54$0.1 million and net cash used in investing activities of $0.4 million.

Cash Flows Used In Operating Activities.    Cash flows used in operating activities totaled $1.21$0.4 million during the year ended December 31, 20062008 compared to $3.63$2.9 million during the same period of 2005.2007. The use in 20062008 resulted from an increase in accounts receivable of $1.1 million and higher inventory levels of $0.7 million related primarily to the acquisition of OEM Equipment and a net loss of $0.5 million offset somewhat by non-cash charges. Non-cash charges consisted of depreciation and amortization of $0.9 million, goodwill impairment of $0.6 million and non-cash stock based compensation of $0.4 million. The use in 2007 resulted primarily from our net loss of $3.43$2.1 million, higher inventory levels of $1.4 million related to the acquisition of OEM Equipment and gain on investment securities of $0.9 million and changes in other assets and liabilities totaling $0.9 million. This was offset by accounts receivable collection of $1.5 million and non-cash charges of $2.55$1.1 million. Non-cash charges consisted primarily of depreciation and amortization, impairment charges and non-cash stock based compensation. Working capital and other adjustments decreased cash flows from operating activities by $0.34 million during 2006.

Cash Flows Used In Investing Activities.    Cash flows used in investing activities totaled $0.20$0.4 million during the year ended December 31, 20062008 compared to $1.65$3.1 million of cash flow provided by investing activities during the same period of 2005. The cash2007. Cash flows used in 2006 wasinvesting activities in 2008 consisted primarily of $0.3 million for purchases offset by

sales, of property and equipment. The principal source of cashCash flows fromprovided by investing activities in 2005 was2007 consisted primarily of sales proceeds from our Glasgow facility and equipment of available for$2.9 million and proceeds from the sale of an investment in equity securities of $2.15 million that were$0.9 million. This was offset by purchases of $0.64$0.7 million of property and equipment.

Cash Flows from Financing Activities.    Cash flows from financing activities totaled $0.01 million during the year ended December 31, 2006 as a result of the sale of common stock, through the Employee Stock Purchase Plan. This compares with $7.92 million of cash flow from financing activities during 2005 resulting from the receipt of approximately $13.8 million in net proceeds from the 2005 Private Placement offset by repayment of approximately $5.9 million under the Laurus Loans.

Obligations and Commitments

The following identifies material obligations and commitments as of December 31, 2006:

Off Balance Sheet Arrangements

At December 31, 20062008 and 2005,2007, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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 our accounting policies are considered critical as they are both important to the portrayal of our 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 Account.    Accounts receivable are shown net of an allowance for doubtful accounts. In determining an allowance for doubtful accounts, we consider the following.

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. We write down slow-moving and obsolete inventory by the difference between the value of the inventory and our estimate of the reduced value based on potential future uses, the likelihood that overstocked inventory will be sold and the expected selling prices of the inventory. If our ability to realize value on slow-moving or obsolete inventory is less favorable than assumed, additional write-downs of the inventory may be required.

Depreciation and Amortization of Long-Lived Assets.    Our long-lived assets consist primarily of equipment, 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 believe the assets may have declined in value we may record impairment charges resulting in an increase to operating expenses. Property and equipment are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets ranging from 31 to 1510 years. We capitalize external and in-house legal costs and filing fees associated with obtaining patents on our new discoveries and amortize 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.    We evaluate goodwill for impairment on an annual basis. We assess 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 our estimate of future undiscounted and discounted cash flows to determine recoverability of these assets. IfAs part of our assumptions about these assets were to change as a result of events or circumstances,2008 impairment assessment, we may be required to record an impairment loss.determined that goodwill was impaired, and accordingly, it was written off.

RevenueNet Sales Recognition.    Revenue on the sales of our instrument and bioconsumable 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 normal sales terms do not provide for the right of return unless the product is damaged or defective. RevenuesNet Sales 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. Net sales recognition for our Molecular Clinical Reference Laboratory is on an individual test basis and takes place when the test report is compete, all sign offs have been completed and the report is sent to the client net of reimbursement allowance for insurance, Medicare

and Medicaid expected reimbursement. In our Pharmacogenomics research group we recognize net sales based on proportionate performance measurement for each project. Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.

Recently Issued Accounting Pronouncements

In July 2006, the FASB issued Interpretation (“FIN”) No. 48, “UncertaintyAccounting for Uncertainty in Income Taxes.”Taxes(“FIN 48”). FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. We adopted FIN 48 will become effective in the first quarter ofon January 1, 2007. Management continues to evaluate the effect that adoption ofUnder FIN 48, will have ontax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our consolidated results of operationstax returns that do not meet these recognition and financial position.

In September 2006, the SEC issued Staff Accounting Bulletin. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and then evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial are now considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior year’s financial statements are not restated, the cumulative effect adjustment is recorded in opening accumulated earnings (deficit) as of the beginning of the fiscal year of adoption. SAB 108 is effective for us at the end of 2006. There was no impact to our Consolidated Financial Statements as a result of adoption of this pronouncement.measurement standards.

In September 2006, the FASB issued Statement No. 157,Fair Value Measurement (FAS 157)(“FAS 157”). While this statementStatement does not require new fair value measurements, it provides guidance on applying fair value and expands required disclosures. FAS 157 is effective as of January 1, 2008 for us beginningfinancial assets and financial liabilities within its scope. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”), which defers the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the first quarterfinancial statements on a recurring basis (at least annually), for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years for items within the scope of 2008.FSP FAS 157-2. We are currently assessing the impacthave implemented FAS 157 may have on our Consolidated Financial Statements.and FSP FAS 157-2.

In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159)(“FAS 159”). This statement,Statement, which is expected to expandexpands fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value. We implemented FAS 159 on January 1, 2008. We currently have no financial assets or financial liabilities for which FAS 159 would be applicable.

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

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

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

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

In June 2008 the FASB issued Abstract Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 clarifies the exceptions that are allowable under FAS 133, “Accounting for Derivative Instruments and Hedging Activities” in paragraph 11A. Under FAS 133 most derivatives are recorded as assets or liabilities with changes in their fair value being recorded through earnings. One of the exceptions outlined in paragraph 11A of FAS 133 states that if a derivative is indexed to the entity’s own stock and is classified in shareholder’s equity, the derivative accounting is avoided. EITF 07-5 clarifies whether or not a derivative is indexed to an entity’s own stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact, FAS 159 may haveif any, of EITF 07-5 on our Consolidated Financial Statements.the consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reported period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments and the determination of goodwill impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these financial statements.

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.

Item 7A.

Quantitative and Qualitative Disclosure about Market RiskRisk.

Interest Rate Risk.    Previously, our principal market risk was interest rate risk on our variable-rate borrowings under the Laurus Loans. During the fourth quarter of 2005, we repaid the entire principal balance of the Laurus Loans with the proceeds from the 2005 Private Placement and have terminated these loans. Accordingly, we no longer have any borrowings which subject us to material interest rate risk.

Foreign Currency Translation Risk.    During the last threetwo fiscal years, our international sales have represented more than 50% of our net sales. These sales of products in foreign countries are mainly completed in either British Pounds Sterling or the Euro. Additionally, we have two wholly owned subsidiaries, Transgenomic Limited, and Cruachem Limited, whose operating currency is British Pounds Sterling and the Euro. Results of operation and the Balance Sheet are translated from the functional currency of the subsidiary, Great British Pounds, to our reporting currency of the US dollar. Results of operations for the Company’s foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect onat the balance sheet dates.date. As a result we are subject to exchange rate risk. The operational expensesforeign exchange rates have had large variances during 2008. At January 1, 2008 the Euro to GBP exchange rate was .73650 as compared to December 31, 2008 rate of our foreign subsidiaries help.9740. The GBP to reduce the currency exposure we have based on our sales denominatedUS Dollar exchange rate was 1.9970 at January 1, 2008 compared to 1.44790 at December 31, 2008. This is a decrease of 27%. These large changes in foreign currencies by converting foreign currencies directly into goods and services. As such, we feel we do not have a material exposure to foreign currency rate fluctuations at this time.exchange rates may negatively impact our business in 2009.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

of Transgenomic, Inc.

Omaha, Nebraska

We have audited the accompanying consolidated balance sheets of Transgenomic, Inc. and subsidiaries (the “Company”) as of December 31, 20062008 and 2005,2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006.then ended. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,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, suchthe consolidated financial statements referred to above present fairly, in all material respects, the financial position of Transgenomic, Inc. and subsidiaries atas of December 31, 20062008 and 2005,2007, and the results of its their operations and their cash flows for each of the three years in the periodthen ended, December 31, 2006, in conformity with accounting principlesU.S. generally accepted accounting principles.

We were not engaged to examine management’s assessment of the effectiveness of Transgenomic, Inc.’s internal control over financial reporting as of December 31, 2008, included in the United States of America.

As discussed in Note B to the consolidated financial statements, in 2006 the Company adopted Statement ofaccompanying Management’s Report on Internal Control Over Financial Accounting Standards No. 123(R),Share-Based Payment.Reporting and, accordingly, we do not express an opinion thereon.

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 20062008 and 20052007

(Dollars in thousands except per share data)

See notes to consolidated financial statements.

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2006, 20052008 and 20042007

(Dollars in thousands except per share data)