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 Company considers its critical accounting policies to be:

•

Allowance For Doubtful Accounts



•

Inventories



•

Depreciation and Amortization of Long-lived Assets



•

Impairment of Long-lived Assets



•

Revenue Recognition.

        For additional discussion of these critical accounting policies, see the "Management Discussion and Analysis" section of the Company's 2002 Annual Report on Form 10-K.

Results of Operations Three Months Ending March 31, 2004 and 2003

Three Months Ended March 31, 20032004 and 20022003

Net Sales.    Net sales decreased 3% to $9.5 million in 2003 from $9.8 million in 2002. Sales in our BioSystems operating segment decreased in the first quarter of 2004 compared to the first quarter 2003. Bioinstruments revenues were significantly lower than 2003 partially offset by increased 13% to $6.9 million in 2003 from $6.1 million in 2002. Total revenues from sales of WAVE Systems increased 9% to $5.3 million in 2003 from $4.9 million in 2002. Bioconsumable product sales included in this operating segment increased 29% to $1.6 million in 2003 from $1.2 million in 2002. Sales in our Nucleic Acid operating segment decreased 31% to $2.6 millionDiscovery Services. The decline in 2003 from $3.7 million in 2002. Sales of WAVE systems increasedsales is mainly due to strong sales in Europe and the Far East offset by lowercontinued low sales volumes to commercial and industrial customers and our North American customer base. Increased services revenue is attributable to our focus on providing genetic variation discovery and analysis services to our pharmaceutical base of customers. We believe that our genetic variation discovery and analysis services provide us a significant opportunity to expand revenues in the future. In the first quarter ofDecember 2003, we sold no systems to commercialannounced a discovery services agreement with Novartis Pharmaceuticals Corp. supporting the clinical development of oncology therapeutics and industrial customers compared to approximately 8%believe this provides a good model of unitthe opportunity for our services offering. Bioconsumable product sales in 2002. Systems sold in North America accounted for approximately 24% of unit sales in 2003 as compared to approximately 39% in 2002. Sales ofstrengthened from increased WAVE related consumable products increasedusage as the installed base of WAVE Systems has increased resulting in increased consumable usage.

Sales in our Nucleic Acid operating segment continued to decreased in the first quarter of 2004 due to a decline in demand for our chemical building block products. These products are used by our biopharmaceutical and pharmaceutical customers as researchers begin to use them more extensivelyraw materials in place of other methods of DNA analysis.based drug candidates. The decrease in nucleic acid product salesdemand is largely attributable largely to declinesthe timing of completion and/or failure of Phase III clinical trials by certain of our large customers. We look for demand for these products to rebound slightly during the balance of 2004 as other customer products move through the clinical trial phases. This decrease in demand for standard chemicalDNA building blocks. Demand forblocks in the development and productionfirst quarter of novel chemistries has remained constant.2004 was partially offset by sales of oligonucleotides generated by our start-up manufacturing facility in Boulder, Colorado. Part of our business strategy ishas been to position ourselves as a unique partner to biopharmaceutical and pharmaceutical companies in the early stages of their efforts to develop genomic-based diagnostics and therapeutics. As part of this strategy we are focusing our sales efforts on large consumers of our Synthetic Nucleic Acid products who are willing to commit to long-term supply agreements. While we expect to see increased sales of these products based upon this strategy, we also may see varying demand depending on the success of the biopharmaceutical and pharmaceutical companies on which we are targeting our sales efforts. Therefore,diagnostic and therapeutic products. As a result we may see large variations in quarterly revenue flows for these products.

Cost of Goods Sold. Cost of goods sold increased 23%remained relatively flat year to $5.8 millionyear despite the decline in 2003 from $4.7 millionour revenues. Fixed costs associated with excess manufacturing capacity in 2002, representing 61%our Nucleic Acids business unit and a lower number of net sales in 2003 and 48% of net sales in 2002. BioSystems sales margins and average selling prices were consistent year over year. During the remainder of 2003 we anticipate thathigh margin Wave systems sold kept our cost of goods sold for ourcomparable to the first quarter of 2003. The BioSystems products will remainbusiness unit cost of goods sold as a percentage of sales increased year over year but remained within historical averages or improve slightly.ranges at approximately 44%. We expect that our Biosystems margins will fluctuate within historical ranges based upon the sales mix of systems, consumables and services. Currently our Nucleic Acid products are sold at lower margins compared to our Biosystems products. The margins in our Nucleic Acids operating segment are lower due to bulk sales of nucleic acid building block products andbusiness unit have been negatively impacted by higher manufacturing costs and excess capacity due largely to our plant expansion efforts in Glasgow, Scotland and Boulder, Colorado. Both totalWe anticipate that our cost of goods sold andfor our Nucleic Acid products will remain under pressure due to continued excess capacity during 2004. Overall we anticipate that our cost of goods sold as a percentpercentage of sales increased year over year due to the mix of products sold and additional manufacturing costs related to our new production facility in Boulder, Colorado. Overall we

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anticipate that our total cost of goods sold will be consistent with 20022003 or slightly higher. This is the result of the underutilization of our new oligonucleotide production facility in Boulder, Colorado. After 2003, we anticipate that the overall cost of goods sold percentage will improvelower as we refine our systems configurations potentially reducing material costs, improve upon production methods inare hopeful that demand for our Nucleic Acid operating segment which currently result in higher overallproducts will rebound slightly. Margin improvement will depend largely on the return of product demand thereby more fully utilizing our manufacturing capacity and spreading fixed costs and as product revenues increase thereby spreading our fixed production costs overacross a larger revenue base.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 22% to $4.6 million in 2003 from $5.9 million in 2002. This decrease is primarily theas a result of our restructuring activities that have reducedfocus on expense control. Reductions in personnel and personnel-relatedpersonnel related expenses outside services, rent and travel related costs. Additionally, we recordedcosts attributed to the decrease, offset by foreign currency transaction exchange rate gainsincreases. We will remain focused on controlling and reducing expenses during the quarter. Combined these items accounted for over 90% of the total decrease. Total selling, general2004.

Research and administrativeDevelopment Expenses. Research and development expenses represented 48% of net sales in 2003 versus 60% of net sales in 2002. It is expected that,decreased as a result of our restructuring activities described below,and focus on expense control. Approximately 60% of the total decrease was in personnel and personnel related expenses as we have reduced our selling, generalemployee headcount. Additionally, reductions in outside services and administrativesupplies were realized. We will remain focused on controlling and reducing expenses will decrease from 2002 levels.

        Research and Development Expenses.    Research and development expenses decreased 16% to $2.3 million in 2003 from $2.8 million in 2002. Research and development expenses consist of salaries and related personnel costs of researchers and software developers, material costs for prototypes and test units, legal expenses relating to intellectual property research and application development activities, testing and enhancement of our products, and amortization of intellectual property.during 2004. We expense our research and development costs in the year in which they are incurred with the exception of certain capitalized software development costs. The decrease is the result of our restructuring activities that have reduced personnel and personnel-related expenses, outside services, supplies and travel related costs. These decreased expenses were offset by a decline in the amount of capitalized software development costs. Combined these items accounted for approximately 85% of the total decrease. Total research and development expenses represented 24% of net sales in 2003 versus 28% of net sales in 2002. It is expected that, as a result of our restructuring activities discussed below, our research and development expenses will decrease from 2002 levels.incurred.

        Stock Based Compensation.    Stock based compensation expense was $35,000 in 2003 as compared to $25,000 in 2002. This expense represents the amortization of deferred compensation related to stock options issued.

Restructuring Charges. During the fourth quarter of 2002 management formulated and executed a significant portion of a restructuring plan. The plan was developed to reduce expenses thereby better aligning the Company'sCompany’s expense structure with current business prospects. The plan included employee terminations, office closures, termination of collaborations and write-offs of abandoned intellectual property. We continued to execute upon the plan during the first quarter of 2003. As a result, $264,0002003 resulting in restructuringthe additional charges were recorded and are included in operating expenses.2003. These charges consisted of mainly of employee severance costs.costs and office closings. We expect that, as a result of thedid not incur further restructuring our total operating expenses for 2003 will be 20% to 25% below 2002 levels. Further restructuring activities are expectedcharges in the secondfirst quarter of 2003. As such, additional restructuring charges totaling between $235,000 and $435,000 are expected.2004.

        Other Income (Expense).    Other income and expense, which consists mainly of net interest income and expense, decreased to an expense of $41,000 in 2003 from income of $237,000 in 2002. Interest income for the quarter was $34,000 as compared to $251,000 in 2002. Interest expense for the quarter was $42,000 as compared to none in 2002. The decrease in interest income is a result of declining interest rates on investments and reductions in our short-term investment balances. Interest expense will increase in 2003 due to the long-term debt obtained by the Company during 2002 and the recently committed line of credit.

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Income Taxes.    Income The Company’s tax expense during the quarter was $14,000 while in 2002 income tax expense was $21,000. During the quarter the Company recorded current tax expense related(benefit) relates to its Japan branch operations in certain foreign countries and certain state taxes. Our deferredstates. The tax assets asbenefit recorded in the first quarter of March 31, 2003 were $24.6 million and were offset by a valuation allowance of $24.6 million. Our deferred tax assets as of December 31, 2002 were $23.2 million and were offset by a valuation allowance of $23.2 million.2004 relates to refunds received in the United Kingdom. No further tax benefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate taxable income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized. Our deferred tax assets as of March 31, 2004 were $32.1 million and were offset by a valuation allowance of $32.1 million.

Liquidity and Capital Resources

Overview

The Company’s liquidity position continued to be difficult during the first quarter of 2004 due primarily to continued losses and increases in working capital components. We have historically experienced net lossesbeen and negative cash flows. As a result, we had an accumulated deficit of $53.4 million as of March 31, 2003.will continue to be focused on improving accounts receivables collections and reducing inventory levels. As of March 31, 2003,2004 and December 31, 2002,2003 we had approximately $6.4$2.2 million and $9.7$1.2 million, respectively, in cash and cash equivalents. In addition, as of DecemberMarch 31, 2002,2004, we had approximately $3.6 million$316,000 in short-term investments and no short-term investments as of December 31, 2003, for total cash and short-term investments of approximately $13.3 million.$2.5 million and $1.2 million, respectively.

 During the first quarter of 2003

The following table summarizes our major cash expenditures were the funding of our operationsshort-term liquidity and capital projects. A total of approximately $6.9 millionsources and uses of cash, as of March 31, 2004 and investments was used with approximately $3.1 million used to fund our operationsDecember 31, 2003 and $3.7 million for capital projects. Operating activities and capital projects were funded through existing cash and investments. Major capital projects during the quarter included facility build-out, expansion and improvement at our two nucleic acid production facilities in Boulder, Colorado and Glasgow, Scotland. The Boulder facility project is designed to be a cGMP (Good Manufacturing Practices) facility for the synthesis of oligonucleotides. This facility began non-GMP production operations during the first quarter of 2003periods ended March 31, 2004 and is expected to begin cGMP production in the second quarter of 2003. The Glasgow facility project, which produces nucleic acid building blocks, included the upgrading of equipment and processes at the current production facility and the build-out of a new facility that will include significant capacity expansion along with further equipment and process improvements. The current production facility improvements were completed during 2002 and the first production line, or pilot line, in the new facility is expected to be completed in 2003.2003:

 Our operating activities resulted in net outflows of $3.1 million in 2003 and $4.7 million in 2002. The operating cash outflows for these periods resulted mainly from our operating losses. Significant investments in research and development and sales and marketing contributed to the operating losses. The operating cash outflows for 2003 are lower than those in the prior year due in large part to increases in accounts payables and accrued liabilities offset by operating losses and increased accounts receivable balances. Accounts receivable balances increased due largely to the concentration of sales during the fourth quarter of 2002 and first quarter of 2003 in European countries where payment terms of 90 days or more are customary.

        Net cash provided by investing activities was $157,000 in 2003 as compared to cash used of $7.8 million for 2002. The investing cash flow in 2003 is due primarily to the maturity of short-term investment funds offset by investment in property, plant and equipment. Cash used in investing activities in 2002 was due primarily to net reinvestment of funds in short-term investments and investments in property, plant and equipment.

        Net cash provided by financing activities was $33,000 in 2003 and $388,000 for 2002. The financing cash inflows were the result of proceeds from the sale of common stock.

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        We are party to a number of lease agreements mainly for office, research and development and production facilities. Such lease agreements expire at various dates through 2007, with future minimum annual lease payments of approximately $2.8 million in 2003 declining to less than $1.0 million in 2007.

We expect to devote substantial capital resources to continue our research and development efforts, to expandsupport our marketing and sales and customer support activities, and for other general corporate activities. Our capital requirements for operations depend on a number of factors, including sales levels, the level of our research and development activities, market acceptance of our products and services, the resources we devote to developing and supporting our products and services normaland general capital expenditures and other factors.expenditures. The restructuring plan developed in 2002 is expected to reducehas reduced our operating expenses and thereby reducereduced the cash needed to fund our operations until such time as we become cash flow positive.operations. Additionally, our capital budget includes expenditures for the completion of our facility expansion projects in Glasgow, Scotland, and Boulder, Colorado, and for general facility and equipment improvements. Additional expansion projects for the Glasgow and Boulder production facilities may be incurred over the next 2 to 3 years as business demand dictates. During the second quarter 2003 we expect to continue to make significant investments in property, plant and equipment, however, in the second half of 2003 weWe expect our capital expenditures to dropdecrease significantly as our production expansion projects come to an end. Our original capital expenditures budget for 2003 was approximately $8.4 million. We have re-evaluated the budget and have revised it downward. We nowin 2004. Currently, we expect capital expenditures for the full year2004 to be in the range of $6.7$1.7 million to $7.4 million.$2.5 million, depending largely upon demand for our nucleic acid products.

In December 2003, we entered into a three year line of credit facility with Laurus. Under the terms of the agreement, we can borrow up to $7.5 million based on eligible accounts receivable and inventory balances. The agreement carries an interest rate of 2.0% over the prime rate or a minimum of 6.0%. Funds available under the line are determined by a borrowing base equal to 90% of eligible accounts receivable balances plus up to $1.0 million related to inventory balances. This line of credit is secured by most of our assets. Payment of interest and principal can, under certain circumstances, be made with shares of our common stock at a fixed conversion price of $2.20 per share. In January and February 2004, Laurus exercised its conversion rights on the line of credit and converted $2.0 million of amounts outstanding on the line into approximately 910,000 shares of common stock of the Company. As of March 31, 2004, we had approximately $4.4 million outstanding on this line of credit. In February 2004, Laurus waived the borrowing base limitation on our line through December 12, 2004, thereby making the full $7.5 million facility available to us regardless of the available collateral.

 We

In February 2004, we entered into a $2.75 million convertible note with Laurus, our line of credit provider. Management determined that the terms of the convertible note with Laurus were more favorable to the Company as compared to the previously announced proposed sale/leaseback transaction on our Glasgow, Scotland facility. The note carries an interest rate of prime plus 2% over the prime rate or a minimum of 6.0% and has a term of 3 years. The principal and interest on the note may be converted into common stock of the Company at a fixed conversion price of $2.61 per share. Proceeds from this transaction was used to retire the mortgage debt on the Glasgow facility, complete the build-out and consolidation of the Glasgow facility and provide funds for operations. Proceeds, net of transaction costs and amounts used to repay our existing mortgage debt on the Glasgow facility, were approximately $750,000.

As a result of our cost control measures and reduced capital expenditures, we expect our cash usage to decrease during 2004. Based upon our current projections, we expect to meet totalour cash needs for the remainder of 20032004 from existing cash, as of March 31, 2003 of $6.4 million, additional cash generated from operations during 2003our working capital, and funds available to us under a new $5.0our $7.5 million credit facility. In March 2003, we entered into a loan commitment agreement with a financial institutionThese projections assume revenue strength from our Biosystems business unit. We believe growth will result from increased consumable product offerings and an increase in demand for up to a $5.0 million secured line of credit. Collateral for the line consists of all assets held by Transgenomic, Inc. Funds available under the line are equal to 80% of eligible accounts receivable balances. Management expects to finalize the line of credit agreementour instruments. These projections also assume that revenues from our Nucleic Acid business unit increase in the second quarter of 2003. The proposed termfuture. Much of the agreement is 1 year carrying a variable interest rateanticipated increase in the Nucleic Acid business unit revenues will come from new customers and additional business from existing customers of 2.25% over prime. Additionally, we continue to pursue financing of up to an additional $5.0 million beyond the committed line of credit. We feelour Boulder, Colorado facility that such additional financing will be securedbegan production in 2003. CurrentMore specifically, our current financial and cash flow projections indicate that we expect to use approximately $1.5 million in cash to fund further operating losses and an additional $1.3 million to $2.1 million for capital expenditures. The majority of the capital expenditures will be associated with our Nucleic Acids business unit.

These projections indicate a cash flows are expectedneed of $2.6 million to turn positive during$3.4 million for the fourth quarterremainder of 2003.2004. Based upon the waiver received in February 2004, an additional $3.1 million is available when calculated as the total line of credit available of $7.5 million less $4.4 million outstanding at March 31, 2004. These projections may or may not be realized based upon actual operating results and capital project requirements. Thus, during or after this period, if our existing cash and short-term investments,balances, cash generated by operationsour working capital, and available borrowings under credit agreements isare insufficient to satisfy our liquidity requirements, we may need to sell additional equity or debt securities, or obtain additional credit arrangements. We are monitoring our liquidity position and are prepared to take appropriate measures, as needed, to address liquidity. Such measures may include, but are not limited to, further expense reductions, an expansion of our line of credit, asset sales and the placement of equity or debt. We cannot assure you that any financing arrangement will be available in amounts or on terms acceptable to us. Our failure to raise additional capital, if needed, would harm our financial condition, results of operations and our business.

Analysis of Cash Flows

During the first quarter of 2004, our major cash expenditures were the funding of our operations and capital projects. Cash and investments increased by a total of approximately $1.0 million in 2004 as compared to a decrease of approximately $3.3 million in 2003. In 2004 approximately $4.0 million was used to fund our operations and $600,000 used in investing activities offset by $3.4 million provided by advances on our line of credit and $1.0 million of additional long-term debt.

Our operating activities resulted in net outflows of approximately $4.0 million and $3.1 million in 2004 and 2003, respectively. The operating cash outflows for these periods resulted mainly from our operating losses. Significant manufacturing operations overcapacity, and significant investment in research and development and sales and marketing contributed to the operating losses.

Net cash utilized for investing activities was approximately $600,000 in 2004 compared to net cash provided by investing activities of $200,000 for 2003. The cash out flow for investing activities in 2004 is due primarily to the investment in property, plant and equipment.

Net cash provided by financing activities was approximately $4.4 million in 2004 and zero for 2003. The financing cash inflows in 2004 were the result of advances on our line of credit and additional long-term debt increase.

Obligations and Commitments

Our ongoing capital commitments consist of debt service requirements and obligations under capital leases. The following table sets forth our contractual obligations along with cash payments due in each period indicated:

Off Balance Sheet Arrangements

At March 31, 2004 and 2003, the Company 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 the Company’s accounting policies are considered critical as they are both important to the portrayal of the Company’s financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances.

The Company considers its critical accounting policies to be:

For additional discussion of these critical accounting policies, see the “Management Discussion and Analysis” section of the Company’s 2003 Annual Report on Form 10-K.

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.

Foreign Currency Rate Fluctuations

 Historically

During the last three fiscal years, our international sales have represented approximately 50%50-65% of our net sales. These sales have been to customers outside the United States. Most of these salesproducts in foreign countries are mainly completed by our wholly owned subsidiaries, Transgenomic, Ltd. and Cruachem, Ltd., and are made in their operating currency, theeither British Pounds Sterling or the Euro. Additionally, we have two wholly-owned subsidiaries, Transgenomic, LTD., and Cruachem, LTD., whose operating currency is British Pounds Sterling and the Euro. Results of operations for the Company'sCompany’s foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. To further limit our exposure to exchange rate risk all sales quotes issued by

13

Transgenomic, Ltd. are based upon the United States dollar pricing converted at prevailing exchange rates at the time of the quote. Additionally, such quotes have short expiration dates. As a result although we are subject to exchange rate riskrisk. The operational expenses of our foreign subsidiaries help to reduce the currency exposure we have based largely upon the levels of outstanding accounts receivables,on our sales denominated in foreign currencies by converting foreign currencies directly into goods and services. As such management feels we do not have a material exposure to foreign currency rate fluctuations at this time.

Forward-looking Information

This report contains a number of "forward-looking statements"“forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. Many of these forward-looking statements refer to our plans, objective, expectations and intentions, as well as our future financial results. You can identify these forward-looking statements by forward-looking words such as "expects," anticipates," "intends," "plans," "may," "will," "believes," "feels", "seeks," "estimates,"“expects,” “anticipates,” “intends,” “plans,” “may,” “will,” “believes,” “feels,” “seeks,” “estimates,” and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors would include the growth of the markets for DNA analysis technology and consumable products, the acceptance of our technology, our ability to continue to improve our products, the development of competing technologies, and our ability to protect our intellectual property rights.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Risk.

 We recently committed to

In December 2003, we obtained a secured line of credit that carries a variable interest rate. This line of credit will exposeexposes us to interest rate riskrisk. If the prime lending rate in 2003. We no longer have short-term investmentsthe United States were to increase we would experience higher interest costs. Based upon our total available credit of $7.5 million, a 1% increase in the prime rate would increase our annual interest expense by approximately $75,000.

In February, we obtained a secured long-term convertible note that subjectcarries a variable interest rate. This note exposes us to interest rate risk. If the market risks describedprime lending rate in the United States were to increase we would experience higher interest costs. Based upon our most recent Annual Report on Form 10-K.principal balance of $2.75 million, a 1% increase in the prime rate would increase our annual interest expense by approximately $27,500.

Item 4.    Controls and Procedures

A review and evaluation was performed by the Company'sCompany’s management, including the Company'sCompany’s Chief Executive Officer ("CEO"(“CEO”) and Chief Financial Officer ("CFO"(“CFO”), of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures as of a date within 90 days prior to the filingend of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO concluded that the Company'sCompany’s current disclosure controls and procedures, as designed and implemented, were effective. There have been no significant changes in the Company'sCompany’s internal controls subsequent to the date of their evaluation. There were no significant material weaknesses identified in the course of such review and evaluation and, therefore, no corrective measures were taken by the Company.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to, and none of our assets or properties are subject to, any material legal proceedings.

Item 2. Changes in Securities and Use of Proceeds

d)

The amount of net proceeds from our initial public offering was approximately $69.9 million. Approximately $3.5 million of these net offering proceeds was used to repay outstanding indebtedness and approximately $4.6 million was used to acquire notes evidencing loans made by a bank to the Company owned by one of our directors that purchased the assets of our non-life sciences product line in May 2000. We used approximately $3.1 million of the net proceeds for capital expenditures during 2000, an additional $5.7 million during 2001, an additional $11.5 million during 2002 and an additional $3.7 million in the first three months of 2003. We expect to apply up to $3.7 million of the net proceeds of this offering for capital expenditures during the remainder of 2003. Such expenditures were made for, and are expected to be made for, general infrastructure investments (i.e. computer equipment, software and leasehold improvements) and production facility improvements and expansion. At March 31, 2003, approximately $3.4 million was invested in cash equivalent investments. We expect to use the remaining amount of the net offering proceeds for general working capital needs. The amounts actually expended for each purpose may vary significantly depending upon many factors, including future sales growth, the progress of our product development efforts and the amount of cash generated or used by our operations.

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

 None

None.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits