Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

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

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

As of November ~~5, 2009,~~15, 2010, the number of shares of common stock outstanding was ~~49,189,672.~~49,289,672.


	September 30, 2009 (unaudited)			December 31, 2008			September 30, 2010 (unaudited)			December 31, 2009

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	4,661		$	4,771		$	4,589		$	5,642
Accounts receivable (net of allowances for bad debts of $345 and $388, respectively)		4,145			5,385
Inventories (net of allowances for obsolescence of $353 and $108, respectively)		4,134			4,775
Accounts receivable (net of allowances for bad debts of $335 and $310, respectively)								3,536			4,522
Inventories (net of allowances for obsolescence of $520 and $507, respectively)								3,658			3,552
Prepaid expenses and other current assets		655			654			646			738

Total current assets		13,595			15,585			12,429			14,454

PROPERTY AND EQUIPMENT:
Equipment		10,276			10,059			10,371			9,972
Furniture, fixtures & leasehold improvements		3,931			3,920			3,836			3,834

		14,207			13,979			14,207			13,806
Less: accumulated depreciation		(13,148	)		(12,781	)		(13,160	)		(12,839	)

		1,059			1,198			1,047			967

OTHER ASSETS:
Other assets (net of accumulated amortization of $478 and $425, respectively)		701			773
Other assets (net of accumulated amortization of $524 and $525, respectively)								461			583

	$	15,355		$	17,556		$	13,937		$	16,004


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	795		$	905		$	889		$	1,013
Other accrued expenses		2,330			2,810			2,722			2,517
Accrued compensation		538			520			668			573

Total current liabilities		3,663			4,235			4,279			4,103
Other long-term liabilities		202			116			351			239

Total liabilities		3,865			4,351			4,630			4,342

STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 15,000,000 shares authorized, none outstanding		—			—			—			—
Common stock, $.01 par value, 100,000,000 shares authorized, 49,189,672 shares outstanding		497			497
Common stock, $.01 par value, 100,000,000 shares authorized, 49,289,672 and 49,189,672 shares outstanding, respectively								498			497
Additional paid-in capital		139,652			139,501			139,715			139,703
Accumulated other comprehensive income		1,653			1,470			1,644			1,645
Accumulated deficit		(130,312	)		(128,263	)		(132,550	)		(130,183	)

Total stockholders’ equity		11,490			13,205			9,307			11,662

	$	15,355		$	17,556		$	13,937		$	16,004


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008			2010			2009			2010			2009
NET SALES	$	5,046		$	5,367		$	15,508		$	17,869		$	4,419		$	5,046		$	14,956		$	15,508
COST OF GOODS SOLD		2,293			2,448			7,291			7,570			2,402			2,293			7,568			7,291

Gross profit		2,753			2,919			8,217			10,299			2,017			2,753			7,388			8,217
OPERATING EXPENSES:
Selling, general and administrative		2,215			2,757			7,922			8,824			2,159			2,215			7,623			7,922
Research and development		938			684			2,468			1,816			613			938			1,952			2,468
Restructuring Costs		—			—			—			8
Restructuring charges														72			—			72			—

		3,153			3,441			10,390			10,648			2,844			3,153			9,647			10,390

LOSS FROM OPERATIONS		(400	)		(522	)		(2,173	)		(349	)		(827	)		(400	)		(2,259	)		(2,173	)
OTHER INCOME (EXPENSE):
Interest income, net of interest expense		1			22			14			80
Interest, net														—			1			1			14
Other, net		(1	)		14			(4	)		13			—			(1	)		—			(4	)

		—			36			10			93			—			—			1			10

LOSS BEFORE INCOME TAXES		(400	)		(486	)		(2,163	)		(256	)		(827	)		(400	)		(2,258	)		(2,163	)
INCOME TAX EXPENSE (BENEFIT)		(34	)		13			(114	)		20			71			(34	)		109			(114	)

NET LOSS	$	(366	)	$	(499	)	$	(2,049	)	$	(276	)	$	(898	)	$	(366	)	$	(2,367	)	$	(2,049	)

BASIC AND DILUTED LOSS PER SHARE	$	(0.01	)	$	(0.01	)	$	(0.04	)	$	(0.01	)	$	(0.02	)	$	(0.01	)	$	(0.05	)	$	(0.04	)

BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING		49,189,672			49,189,672			49,189,672			49,189,672			49,289,672			49,189,672			49,228,561			49,189,672


	Common Stock														Common Stock
	Outstanding Shares	Par Value		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total			Outstanding Shares		Par Value		Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance, January 1, 2009	49,189,672	$	497	$	139,501	$	(128,263	)	$	1,470		$	13,205
Balance, January 1, 2010																49,189,672	$	497	$	139,703		$	(130,183	)	$	1,645		$	11,662
Net loss	—		—		—		(2,049	)		(2,049	)		(2,049	)		—		—		—			(2,367	)		(2,367	)		(2,367	)
Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax	—		—		—		—			183			183			—		—		—			—			(1	)		(1	)

Comprehensive (loss)										(1,866	)
Comprehensive loss																										(2,368	)
									��
Non-cash stock-based compensation	—		—		151		—			—			151			—		—		(29	)		—			—			(29	)
Issuance of shares for employee stock options																100,000		1		41			—			—			42

Balance, September 30, 2009	49,189,672	$	497	$	139,652	$	(130,312	)	$	1,653		$	11,490
Balance, September 30, 2010																49,289,672	$	498	$	139,715		$	(132,550	)	$	1,644		$	9,307


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2010			2009
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss	$	(2,049	)	$	(276	)	$	(2,367	)	$	(2,049	)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:
Depreciation and amortization		615			494
Depreciation, amortization and disposals								523			615
Non-cash, stock based compensation		151			209			(29	)		151
Loss on sale of investment and assets		—			6
Changes in operating assets and liabilities:
Accounts receivable		1,461			151			969			1,461
Inventories		709			(335	)		(167	)		709
Prepaid expenses and other current assets		20			32			90			20
Accounts payable		(142	)		(429	)		(121	)		(142	)
Accrued expenses and accrued compensation		(557	)		(324	)		242			(557	)
Other long term liabilities		29			—			(44	)		29
Long term deferred income taxes								20			—

Net cash flows provided by (used in) operating activities		237			(472	)		(884	)		237

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment		(327	)		(215	)		(141	)		(327	)
Change in other assets		(20	)		(39	)		(25	)		(20	)

Net cash flows used in investing activities		(347	)		(254	)		(166	)		(347	)

CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of common stock								42			—
Principal payments on capital lease obligations								(57	)		—

Net cash flows provided by financing activities								(15	)		—

EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH		—			(210	)		12			—

NET CHANGE IN CASH AND CASH EQUIVALENTS		(110	)		(936	)		(1,053	)		(110	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		4,771			5,723			5,642			4,771

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	4,661		$	4,787		$	4,589		$	4,661

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	—		$	—		$	—		$	—
Income taxes, net		163			61			4			163
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Acquisition of equipment through capital leases							$	286			—

Transgenomic, Inc. provides innovative products for the purification and analysis of nucleic acids used in the life sciences industry for research focused on molecular genetics and diagnostics. We also provide genetic variation analytical services to the medical research, clinical and pharmaceutical markets. Net sales are categorized as Instrument Related Business and Laboratory Services.

Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in mitochondrial and molecular diagnostic testing including genetic testing for oncology, hematology and inherited disorders. Located in Omaha, Nebraska, the molecular clinical reference laboratory operates in a Good Laboratory Practices compliant environment and is certified under the Clinical Laboratory Improvement Amendment (CLIA) as a high complexity lab and is accredited by CAP (College of American Pathologists).

Pharmacogenomics Research Services. Pharmacogenomics research services are provided by our Contract Research Organization located in Omaha, Nebraska. It specializes in pharmocogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.

~~Management~~Although we have experienced recurring net losses (resulting in an accumulated deficit of $132.6 million at September 30, 2010) management believes existing sources of liquidity, including cash and cash equivalents of ~~$4.7~~$4.6 million, are sufficient to meet expected cash needs ~~during 2009. Our business consolidation efforts, recent reduction~~through 2011. We will need to increase net sales in ~~force and cost containment management over the last few years have helped control~~order to meet our liquidity needs on a long-term basis. If we cannot increase net sales, further reductions to operating costs, however, we have added sales and marketing costs over the last two years in an effort to drive increased sales. In addition we have increased our research expenditures to drive development of new products and to support business opportunities and collaborations.expenses will be needed. In future periods, there is no assurance that we will be able to increase net sales or further reduce expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations indefinitely.

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

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

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

No customer accounted for more than 10% of consolidated net sales during the three and nine months ended September 30, ~~2009~~2010 and ~~2008.~~2009. For the three and nine months ended September 30, 2010 one customer accounted for more than 10% of the Laboratory Services net sales. This customer represented 16% of the Laboratory Services net sales for the three months ended September 30, 2010 and 15% of the Laboratory Services net sales for the nine months ended September 30, 2010. For the three and nine months ended September 30, 2009 one customer ~~made up~~accounted for more than 10% of the Laboratory Services net sales. This customer represented 18% of the Laboratory Services net sales for the three months ended September 30, 2009 and 20% for the nine months ended September 30, 2009. For the three and nine months ended September 30, 2008 two customers each made up more than 10% of the Laboratory Services net sales. Combined for the nine months they represented 35% of the Laboratory Services net sales.

From time to time, we may maintain a cash position with financial institutions in amounts that exceed federally insured limits. We have not experienced any losses on such accounts as of September 30, ~~2009.~~2010.

The condensed consolidated balance sheet as of December 31, ~~2008~~2009 was derived from our audited balance sheet as of that date. The accompanying consolidated financial statements as of and for the three and nine months ended September 30, ~~2009~~2010 and ~~2008~~2009 are unaudited and reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2008~~2009 contained in our Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.

Cash and cash equivalents include cash and investments with original maturities at acquisition of three months or less. Such investments presently consist of ~~only~~ temporary overnight investments.

~~Accounts receivable are shown net of allowance for doubtful accounts.~~ The following is a summary of activity for the allowance for doubtful accounts during the three and nine months ended September 30, ~~2009~~2010 and ~~2008:~~2009:

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

Inventories are stated at the lower of cost or market net of an allowance for obsolete inventory. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in ~~process.~~process, which approximates the first-in, first-out (FIFO) method.

The following is a summary of activity for the allowance for obsolete inventory during the three and nine months ended September 30, ~~2009~~2010 and ~~2008:~~2009:

We determine the allowance for obsolete inventory by ~~regularly~~ evaluating quarterly the inventory for items deemed to be slow moving or obsolete. ~~During~~Included in our provision is the ~~three months ended September 30, 2009 we recorded $0.2 million related to control plasmids used for~~foreign currency impact of the consolidation of our ~~surveyor kits.~~subsidiary.

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

Depreciation during the three months ended September 30, 2009 and 2008 was $0.1 million and $0.2 million, respectively. Depreciation during both the nine months ended September 30, 2009 and 2008 was $0.5 million related to depreciation of property and equipment.

Initial costs paid to license intellectual property from independent third parties are capitalized and amortized using the straight-line method over the license period. Ongoing royalties related to such licenses are expensed as incurred.

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

Each of these assets is treated as long-lived assets. Long-lived assets will be tested for impairment on an annual basis or when a significant event occurs which may impact impairment. We ~~periodically review the carrying value of our long-lived assets to assess recoverability and impairment. We~~ recorded no impairment in the three ~~and~~or nine months ended September 30, ~~2009 and 2008.~~2010 or 2009.

Other ~~Assets. Other~~long-term assets include USU.S. security deposits and deferred tax ~~assets.~~assets, net of applicable valuation allowances.

All stock options awarded to date have exercise prices equal to the market price of our common stock on the date of grant and have ten-year contractual terms. Unvested options as of September 30, ~~2009~~2010 had vesting periods of three years from date of grant. None of the stock options outstanding at September 30, ~~2009~~2010 are subject to performance or market-based vesting conditions.

We measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period).

During the nine months ended September 30, 2010, we recorded compensation expense recovery of less than $0.1 million within the selling, general and administrative expense. The vesting of options exercisable for the purchase of 1.3 million shares was offset by the expense recovery for stock options which were forfeited due to the requisite service not being rendered. During the nine months ended September 30, 2009, we recorded compensation expense of $0.2 million within the selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of 1,745,000 shares. During the nine months ended September 30, 2008, we recorded compensation expenses of $0.2 million within selling, general and administrative expense as a result of the vesting of options exercisable for the purchase of ~~1,560,000~~1.7 million shares. As of September 30, ~~2009,~~2010, there was ~~$0.2~~less than $0.1 million of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of nearly three years.

No stock options were granted during the quarters ended September 30, 2010 and 2009. The fair value of the options granted during the ~~quarter~~nine months ended September 30, ~~2008~~2010 and 2009 was estimated on their respective grant dates using the Black-Scholes option pricing model. There were no75,000 stock options granted during the ~~quarter~~nine months ended September 30, ~~2009.~~2010. The Black-Scholes model was used with the following assumptions: risk-free interest rates of ~~2.12% to 3.99%,~~1.98% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected ~~lives~~life of ~~2 to 10~~five years, based on ~~historical exercise activity behavior; and volatility of 106.08% and 80.03% based on the~~ historical volatility of our stock over a time that is consistent with the expected life of the option. A small group of senior executives hold the majority of the stock options and are expected to hold the options until they are vested. ~~Therefore, no forfeitures were assumed.~~Forfeitures of 2.2% have been assumed in the calculation.

The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 2010.

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities at each balance sheet date using tax rates expected to be in effect in the year the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that it is more likely than not that they will not be realized.

Net sales of products are recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product under a purchase order. Our sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. We also enter into various service contracts that cover installed instruments. These contracts cover specific time ~~periods and net~~periods. Net sales associated with these contracts are deferred and recognized ratably over the service period. At September 30, ~~2009~~2010 and September 30, ~~2008,~~2009, deferred net sales, mainly associated with our service contracts, included in the balance sheet in other accrued expenses, ~~were~~was approximately $1.5 million and $1.4 million ~~and $1.6 million, respectively.~~respectively for each of the periods.

Net sales from our Molecular Clinical Reference Laboratory Services are recognized on an individual test basis and takes place when the test report is completed, reviewed and sent to the client less the reserve for insurance, Medicare and Medicaid expected ~~payment.~~reimbursement. There are no deferred net sales associated with our Molecular Clinical Reference Laboratory. Adjustments to the allowances, based on actual receipts from third party payers, are recorded upon settlement. In our Pharmacogenomics Research Services Group, we ~~recognize net sales based~~perform services on a ~~proportionate performance measurement for each project.~~project by project basis. When we get payment in advance we recognize revenue when we deliver the service. These projects typically do not extend beyond one year. At September 30, ~~2009~~2010 and ~~2008,~~2009, deferred net sales associated with the pharmacogenomics research projects included in the balance sheet in other accrued expenses, was less than $0.1 million for each period.

Taxes collected from customers and remitted to government agencies for specific net sales producing transactions are recorded net with no effect on the income statement.

Research and development and various collaboration costs are charged to expense when incurred.

~~Financial statements of subsidiaries outside the U.S. are measured using~~Our foreign subsidiary uses the local currency of the country in which they are located as ~~the~~their functional currency. ~~The adjustments to translate those amounts~~Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Cumulative translation losses of less than $0.1 million are ~~accumulated in a separate account in stockholders’ equity and are included in~~reported as accumulated other comprehensive ~~income. Foreign currency revaluation gains or losses resulting from changes in currency exchange rates are included in~~income on the ~~determination of net income. Foreign currency revaluation adjustments decreased operating expenses and net loss by $0.1 million for the three months ended~~accompanying

Nine Months Ended September 30, ~~2009~~2010 and ~~increased operating expenses and net loss by $0.3 million~~2009

consolidated balance sheets for the nine months ended September 30, ~~2009,~~2010. Revenues and ~~decreased operating~~ expenses ~~and~~are translated at the average exchange rates during the period. For transactions that are not denominated in the functional currency, we recognized net ~~loss by $0.5~~losses of $0.3 million ~~during~~as foreign currency transaction losses in the determination of net income for each of the nine months ~~ended~~ending September 30, ~~2008. Foreign currency translation adjustments had a nominal impact on net loss for the three months ended September 30, 2008.~~2010 and 2009.

Accumulated other comprehensive income at September 30, ~~2009~~2010 and December 31, ~~2008~~2009 consisted of foreign currency translation adjustments, net of applicable tax of zero. We deem our foreign investments to be permanent in nature and do not provide for taxes on currency translation adjustments arising from converting investments in a foreign currency to U.S. dollars.

Basic earnings per share ~~are~~is calculated based on the weighted average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of our common stock. ~~At September 30, 2009, there were outstanding options,~~Options, warrants and conversion rights ~~exercisable for~~pertaining to 10,598,156 and 11,383,720 shares of our common stock ~~all of which were~~have been excluded from the computation of diluted earnings per share at September 30, 2010 and 2009, respectively. The options, warrants and conversion rights that were exercisable in 2010 and 2009 were not included because the effect would be anti-dilutive due to the net ~~loss in that period. At September 30, 2008 there were~~loss. As a result, none of our outstanding options, warrants ~~and~~or conversion rights ~~exercisable for 12,046,704 shares of our common stock all of which were excluded from~~affect the calculation of diluted earnings per ~~share because the effect would be anti-dilutive due to the net loss in that period.~~share.

In ~~June~~October 2009, the FASB issued ~~FASB ASC 105, Generally Accepted Accounting Principles, which establishes~~ASU No. 2009-13,Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB Accounting Standards Codification as the sole source of authoritative generally accepted accounting principles. Pursuant to the provisions of FASB ASC 105, the Company has updated references to GAAP in its financial statements issuedEmerging Issues Task Force); effective for ~~the period ended September 30, 2009. The adoption of FASB ASC 105 did not impact the Company’s financial position or results of operations.~~

~~ASC 820, “Fair Value Measurement and Disclosures” defines fair value, establishes a framework~~years beginning after June 15, 2010. This standard update will be effective for ~~measuring fair value and expands disclosures about fair value measurements. We have adopted ASC 820 with no impact on our financial statements.~~

ASC 350, “Intangibles – Goodwill and Other” 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. ASC 350 was adoptedus on January 1, 2011. Vendors often provide multiple products and/or services to their customers as part of a single arrangement. These deliverables may be provided at different points in time or over different time periods. The existing guidance regarding how and whether to separate these deliverables and how to allocate the overall arrangement consideration to each was originally captured in EITF Issue 00-21,Revenue Arrangements with Multiple Deliverables, which is now codified at ASC 605-25,Revenue Recognition – Multiple-Element Arrangements. The issuance of ASU 2009-13 amends ASC 605-25 and represents a significant shift from the existing guidance that was considered abuse-preventative and heavily geared toward ensuring that revenue recognition was not accelerated. The application of this new guidance is expected to result in accounting for multiple-deliverable revenue arrangements that better reflects their economics as more arrangements will be separated into individual units of accounting. We are currently evaluating the impact of adopting ASU 2009-13.

~~ASC 815-40, “Derivatives and Hedging” addresses freestanding contracts that are indexed to, and potentially settled in, an entity’s own stock. We adopted ASC 815-40~~the FASB issued ASU No. 2009-14,Software (ASC 985): Certain Revenue Arrangements That Include Software Elements (a consensus of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. This standard update will be effective for us on January 1, ~~2009.~~2011. ASU 2009-14 modifies the existing scope guidance in ASC 985-605,Software Revenue Recognition, for revenue arrangements with tangible products that include software elements. This modification was made primarily due to the changes in ASC 605-25 noted previously, which further differentiated the separation and allocation guidance applicable to non-software arrangements as compared to software arrangements. Prior to the modification of ASC 605-25, the separation and allocation guidance for software and non-software arrangements was more similar. Under ASC 985-605, which was originally issued as AICPA Statement of position 97-2,Software Revenue Recognition, an arrangement to sell a tangible product along with software was considered to be in its scope if the software was more than incidental to the product as a whole. We are currently evaluating the impact of adopting ASU 2009-14.

In the third quarter of 2010 we made a decision to consolidate our research and development activities in Omaha, Nebraska. We expect to substantially complete the transition by December 31, 2010. We have ~~assessed our warrants~~recognized expenses for restructuring, including but not limited to, severance, facility costs and ~~determined the fair value is $0 so there is no impact~~costs to move equipment from Gaithersburg, Maryland to Omaha, Nebraska. These restructuring charges are attributable to our ~~financial statements.~~lab services and instrument segments.

Accounting Standards Update No. 2009-13 addresses the accounting for multiple deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This update is effective for fiscal years on or after June 15, 2010.

~~Accounting Standards Update No. 2009-05 provides amendments to ASC Topic 820, “Fair Value Measurements~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Liabilities recorded for the ~~fair value measurement~~consolidation of ~~liabilities. We have implemented ASU 2009-05 with no impact on~~ our ~~financial statements.~~


	Dollars in Thousands				Dollars in Thousands
	September 30, 2009		December 31, 2008		September 30, 2010			December 31, 2009
Finished goods	$	2,458	$	2,911	$	2,167		$	2,322
Raw materials and work in process		1,300		1,658		1,590			1,588
Demonstration inventory		376		206		421			149

	$	4,134	$	4,775		4,178			4,059
Less allowance for obsolescence						(520	)		(507	)

Total					$	3,658		$	3,552


	Dollars in Thousands												Dollars in Thousands
	September 30, 2009						December 31, 2008						September 30, 2010						December 31, 2009
	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Intellectual property	$	310	$	226	$	84	$	310	$	195	$	115	$	290	$	273	$	17	$	310	$	284	$	26
Patents		664		252		412		679		230		449		531		251		280		598		241		357
Other		205		—		205		209		—		209		164		—		164		200		—		200

Total	$	1,179	$	478	$	701	$	1,198	$	425	$	773	$	985	$	524	$	461	$	1,108	$	525	$	583

Amortization expense for intangible assets was less than $0.1 million during the three and nine months ended September 30, ~~2009~~2010 and ~~2008,~~2009, respectively. Amortization expense for intangible assets is expected to be ~~approximately~~less than $0.1 million for each of the years ~~2009 through 2013.~~2010 and thereafter. During the nine months ended September 30, 2010 we abandoned patents of $0.1 million.

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

We lease certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through ~~2014. Some of our leases have early termination clauses.~~2016. The future minimum lease payments required under these leases are approximately $0.3 million ~~for the remainder of 2009, $0.8 million~~ in 2010, $0.6 million in 2011, $0.3 million in 2012, ~~and~~less than $0.1 million in ~~2013.~~each of the years 2013 through 2016. Rent expense for each of the three months ended September 30, 2010 and 2009 ~~and 2008~~ was ~~approximately~~ $0.2 ~~million for each period.~~million. Rent expense for each of the nine months ended September 30, ~~2009~~2010 and ~~2008~~2009 was $0.6 million.

We have entered into an employment ~~agreements~~agreement with Craig J. Tuttle, our President and Chief Executive ~~Officer, Debra A. Schneider, our Chief Financial Officer, Vice President, Secretary and Treasurer, and Eric P. Kaldjian M.D., our Chief Scientific~~ Officer. The current term of Mr. Tuttle’s employment agreement ends on July 12, ~~2010.~~2011. The ~~current term of Ms. Schneider’s employment agreement ends on December 4, 2009. The current term of Dr. Kaldjian’s employment agreement ends on December 31, 2009. Each~~ employment agreement provides that ~~the executive officer~~Mr. Tuttle will be entitled to receive severance payments from the Company if his ~~or her~~ employment is terminated involuntarily except if such termination is based on “just cause”, as that term is defined in the employment agreement. The severance payment payable in the event of involuntary termination without just cause is equal to ~~their~~his annual base salary at the time of termination and will be paid ~~to them~~ over a twelve-month period. The employment ~~agreements provide~~agreement provides that the severance payment provisions will be honored if the Company is acquired by, or merged into, another company and ~~their positions are~~his position is eliminated as a result of such acquisition or merger. In addition we have one employee who is entitled to a severance payment of less than $0.1 million if the employee’s position is eliminated prior to July 2012.

~~We have entered into agreements for professional services related to our annual audit, quarterly SEC filings, tax preparation and Sarbanes Oxley compliance work.~~ At September 30, ~~2009 our commitment for these services is $0.2 million.~~

~~At September 30, 2009,~~2010, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $0.3 million.

We file income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. We have statutes of limitation open for Federal income tax returns related to tax years 2007 ~~and 2008.~~through 2009. We have state income tax returns subject to examination primarily for tax years 2006 through ~~2008.~~2009. Open tax years related to foreign jurisdictions remain subject to examination. Our primary foreign jurisdiction is the United Kingdom which has open tax years for ~~2005~~2006 through ~~2008.~~2009.

Income tax ~~benefit~~expense for the nine months ended September 30, ~~2009~~2010 was ~~a benefit of~~ $0.1 million. This is ~~partially~~ the result of the change in deferred tax assets and liabilities reported in financial statements of ~~subsidiaries~~our subsidiary outside the U.S due primarily to foreign currency exchange losses. A refundable tax credit related to the 2008 Federal and State Income Tax returns was also recorded. This credit is anticipated to continue for 2009.U.S. This tax ~~benefit is partially offset by tax~~ expense ~~related to~~

includes state and franchise taxes as well as reserves for uncertain income taxes. ~~We believe the~~Income tax benefit ~~recorded will be partially offset in future periods by a tax expense related to income reported in financial statements of subsidiaries outside the United States. Income tax expense~~ for the nine months ended September 30, ~~2008~~2009 was ~~less than~~ $0.1 million. The effective tax rate for the nine months ended September 30, ~~2009~~2010 is ~~5.3%,~~(4.84)% which is primarily the result of valuation allowances against the ~~Net Operating Losses~~net operating losses for the ~~United States~~U.S. partially ~~offset~~adjusted by ~~the return to provision adjustment recorded in the financial statements and a refundable tax credit~~permanent differences related to intercompany foreign currency exchange of our subsidiary outside the ~~2008 Federal and State Income Tax returns.~~U.S. The effective tax rate for the nine months ended September 30, 2009 was 5.27%.

During the three and nine months ended September 30, ~~2009,~~2010, there were no material changes to the liability for uncertain tax positions.

We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. ~~Prior to June 1, 2009 we matched~~We currently match the employee’s contributions at the rate of 50% on the first 6% of ~~contributions. Effective June 1, 2009, Transgenomic discontinued matching employee 401(k)~~ contributions. We may, at the discretion of our Board of Directors, make additional contributions on behalf of the Plan’s participants. ~~There were no contributions to the 401(k) plan in the third quarter of 2009.~~ Contributions to the 401(k) plan were less than $0.1 million for each of the three and nine months ended September 30, ~~2009. Contributions to the 401(k) plan were less than $0.1 million for the three months ended September 30, 2008,~~2010 and ~~$0.1 million for the nine months ended September 30, 2008.~~2009.

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

No common stock warrants were issued or exercised during the three and nine months ended September 30, ~~2009 and 2008.~~2010 or 2009. At September 30, ~~2009,~~2010, there were warrants outstanding which were exercisable to purchase 7,978,156 shares of common stock.


Warrant Holder	Issue Year	Expiration Year	Underlying Shares	Exercise Price		Issue Year		Expiration		Underlying Shares		Exercise Price
Various Institutional Holders (1)	2005	2010	6,903,156	$	1.20		2005		Oct. 2010		6,903,156	$	1.20
Laurus Master Fund, Ltd. (2)	2003	2010	200,000	$	1.92		2003		Dec. 2010		200,000	$	1.92
Laurus Master Fund, Ltd. (2)	2003	2010	200,000	$	2.07		2003		Dec. 2010		200,000	$	2.07
Laurus Master Fund, Ltd. (2)	2003	2010	150,000	$	2.35		2003		Dec. 2010		150,000	$	2.35
Laurus Master Fund, Ltd. (2)	2004	2011	125,000	$	2.57		2004		Feb. 2011		125,000	$	2.57
Laurus Master Fund, Ltd. (2)	2004	2011	400,000	$	1.18		2004		Aug. 2011		400,000	$	1.18

Total			7,978,156								7,978,156

(2)

These warrants were issued in conjunction with two loans that had been made to us by Laurus Master Fund, Ltd. (the “Laurus Loans”), and subsequent modifications of these loans. In conjunction with the 2005 ~~Private Placement,~~private placement, the exercise prices of these warrants were adjusted according to repricing provisions contained in the original warrant agreements. While the Laurus Loans have been terminated, the warrants remain outstanding. Due to the repricing provision, these warrants are considered liabilities for financial reporting purposes. We have assessed and determined the fair value is $0.

The Company’s Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or

any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing for the purchase or redemption of such shares; (iv) whether shares shall be convertible and, if so, the terms and provisions thereof; (v) what restrictions are to apply, if any, on the issue or reissue of any additional preferred stock; and (vi) whether shares have voting rights. The preferred stock may be issued with a preference over the common stock as to the payment of dividends. The Company has no current plans to issue any series of preferred stock. Classes of stock such as the preferred stock may be used, in certain circumstances, to create voting impediments on extraordinary corporate transactions or to frustrate persons seeking to effect a merger or otherwise to gain control of the Company. For the foregoing reasons, any preferred stock issued by the Company could have an adverse effect on the rights of the holders of the common stock.

The following table summarizes stock option activity during the nine months ended September 30, ~~2009:~~2010:

During the nine months ended September 30, ~~2009,~~2010, we granted options exercisable to purchase ~~70,000~~75,000 shares of common stock at a weighted average exercise price of ~~$0.42~~$0.58 under our 2006 Equity Incentive Plan. ~~The weighted average fair value per share on grant date of options granted during the nine months ended September 30, 2009 was $0.35.~~

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

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

Segment information for the three months ended September 30, ~~2009~~2010 and ~~2008~~2009 is as follows:


	Dollars in Thousands																		Dollars in Thousands
	2009									2008									2010									2009
	Instrument Business			Lab Services			Total			Instrument Business			Lab Services			Total			Instrument Business			Lab Services			Total			Instrument Business			Lab Services			Total
Net Sales	$	3,852		$	1,194		$	5,046		$	4,395		$	972		$	5,367		$	3,155		$	1,264		$	4,419		$	3,852		$	1,194		$	5,046
Gross Profit		2,229			524			2,753			2,531			388			2,919			1,849			168			2,017			2,229			524			2,753
Net Income/(Loss) before Taxes		70			(470	)		(400	)		(109	)		(377	)		(486	)
Net Income (Loss) before Taxes																				(30	)		(797	)		(827	)		70			(470	)		(400	)
Income Tax Expense (Benefit)		(34	)		—			(34	)		13			—			13			71			—			71			(34	)		—			(34	)

Net Income/(Loss)	$	104		$	(470	)	$	(366	)	$	(122	)	$	(377	)	$	(499	)
Net Income (Loss)																			$	(101	)	$	(797	)	$	(898	)	$	104		$	(470	)	$	(366	)

Depreciation/Amortization		92			74			166			130			53			183			47			77			124			92			74			166
Restructure		—			—			—			—			—			—
Restructuring Charges																				38			34			72			—			—			—
Interest Income, Net		1			—			1			18			4			22			—			—			—			1			—			1

Segment information for the nine months ended September 30, ~~2009~~2010 and ~~2008~~2009 is as follows:


	Dollars in Thousands				Dollars in Thousands
	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Instrument Related Business:
Bioinstruments	$	1,356	$	1,999	$	5,925	$	6,215
Bioconsumables		1,799		1,853		5,255		5,579

		3,155		3,852		11,180		11,794
Laboratory Services:
Molecular Clinical Reference Laboratory		918		923		2,790		2,886
Pharmacogenomics Research Services		346		271		986		828

		1,264		1,194		3,776		3,714

Total Net Sales	$	4,419	$	5,046	$	14,956	$	15,508

Net sales for the three and nine months ended September 30, 2010 and 2009 by country were as follows:

No customer accounted for more than 10% of consolidated net sales during the three and nine months ended September 30, 2009 and 2008. For the three and nine months ended September 30, 2009 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 18% of the Laboratory Services net sales for the three months ended September 30, 2009 and 20% for the nine months ended September 30, 2009. For the three and nine months ended September 30, 2008 two customers each made up more than 10% of the Laboratory Services net sales. Combined they represent 35% of the Laboratory Services net sales.

Approximately 80% of our long-lived assets are within the United States. Substantially all of the remaining long-lived assets are within Europe.

Events or transactions that occur after the balance sheet date, but before the financial statements are complete, are reviewed to determine if they should be recognized.

On October 27, 2010 6,903,156 common stock warrants to various institutional holders expired unexercised.

We have ~~no material subsequent events~~been awarded a federal grant under the Qualifying Therapeutic Discovery Project Program related to ~~be disclosed as~~2009 projects. Net of ~~November 5, 2009 which is~~our consultant fees we expect to receive $0.6 million cash in the ~~date our financial statements were issued.~~

This report, including Management’s Discussion & Analysis, contains forward-looking statements. These statements are based on management’s current views, assumptions or beliefs of future events and financial performance and are subject to uncertainty and changes in circumstances. Readers of this report should understand that these statements are not guarantees of performance or results. Many factors could affect our actual financial results and cause them to vary materially from the expectations contained in the forward-looking statements. These factors include, among other things: our expected revenue, income(loss), receivables, operating expenses, supplier pricing, availability and prices of raw materials, Medicare/Medicaid/Insurance reimbursements, product pricing, foreign currency exchange rates, sources of funding operations and acquisitions, our ability to raise funds, sufficiency of available liquidity, future interest costs, future economic circumstances, industry conditions, our ability to execute our operating plans, the success of our cost savings initiatives, competitive environment and related market conditions, actions of governments and regulatory factors affecting our business and other risks as described in our reports filed with the Securities and Exchange Commission. In some cases these statements are identifiable through the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and similar expressions.

You are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements we make are not guarantees of future performance and are subject to various assumptions, risks and other factors that could cause actual results to differ materially from those suggested by these forward-looking statements. Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons including those described in Part II, Item 1A, “Risk Factors,” of this report.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements, related notes, and Management’s Discussion & Analysis in our annual report on Form 10-K for the fiscal year ended December 31, ~~2008.~~2009. Results for the quarter ended September 30, ~~2009~~2010 are not necessarily indicative of results that may be attained in the future.

Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in mitochondrial and molecular diagnostic testing including genetic testing for oncology, hematology and inherited disorders. Located in Omaha, Nebraska the molecular clinical reference laboratory operates in a Good Laboratory Practices compliant environment and is certified under the Clinical Laboratory Improvement Amendment (CLIA) as a high complexity lab and is accredited by CAP (College of American Pathologists).

Although we have experienced recurring net losses (resulting in an accumulated deficit of $132.6 million at September 30, 2010) management believes existing sources of liquidity, including cash and cash equivalents of $4.6 million, are sufficient to meet expected cash needs during 2010. We will need to increase net sales in order to meet our liquidity needs on a long-term basis. If we cannot increase net sales, further reductions to operating expenses will be needed. In future periods, there is no assurance that we will be able to increase net sales or further reduce expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations indefinitely.

Net sales for the nine months ended September 30, ~~2009 decreased by $2.4 million or 13%~~2010 were down 4% compared to the same period in ~~2008.~~2009. Net sales in our Instrument Related Business were down ~~21%~~5% or ~~$3.1~~$0.6 million for the nine months ended September 30, ~~2009~~2010 compared to the same period ~~in 2008. The difficult global economic climate has had an impact on our business~~ in 2009. Net sales from bioinstruments were down ~~22%~~5% and net sales of consumables were down ~~19%~~6% for the comparable nine month periods. During the nine months ended September 30, ~~2009,~~2010, net sales from Laboratory Services ~~grew 25%, or $0.8 million,~~were up 2% compared to the same nine month period in ~~2008.~~2009. The Clinical Reference Laboratory ~~showed revenue growth of 48%~~decreased 3% and net sales from Pharmacogenomics Research Services ~~decreased~~increased by ~~18%~~19%.

Our gross profit margin decreased ~~from 58%~~by 4% for the nine months ended September 30, ~~2008~~2010 compared to ~~53%~~the same period in 2009. The Instrument Related Business gross margin was flat at 57% for each of the nine months ended in 2010 and 2009. Laboratory Services gross margin decreased from 41% gross profit in the nine months ended September 30, 2009 to 28% for the same period in ~~2009. Our~~2010. Net loss was $2.4 million for the nine months ended September 30, 2010 compared to net loss ~~was~~of $2.0 million for the nine months ended September 30, ~~2009 compared to net loss of $0.3 million for the nine months ended September 30, 2008.~~

~~As of September 30, 2009, we had cash and cash equivalents of $4.7 million, compared to $4.8 million at December 31, 2008.~~2009.

We continue to ~~work toward~~leverage our ~~objective of generating income from continuing operations~~core instrument business for on-going instrument sales worldwide as well as employing our instruments and ~~positive cash flows from continuing operations. To accomplish these goals, we must generate sequential~~related expertise in our two laboratory services businesses. We anticipate continued growth in ~~net sales~~both of our laboratory services businesses and we continue to ~~control manufacturing~~seek out new assay technologies and ~~other operating expenses.~~tests to license or develop internally to expand our menu offerings for both service businesses. And although challenges do exist for WAVE System and consumable sales growth in our traditional markets, we are having some success with selling systems into new geographic areas, including the Middle East, to continue the revenue from our instrument related business segment. We continue to look for emerging markets and novel applications to provide us with new opportunities for our WAVE System such as our newly launched K-RAS mutation detection kit. During the third quarter we completed the requirements for CE IVD labeling of our SURVEYOR^® Scan K-RAS mutation detection kit and have significantly expanded distribution throughout most of the European Union as a result. 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. As discussed below, a recently licensed technology that could provide the highest sensitivity available in the marketplace is being refined for use on our Wave Systems. In addition, we are also selling refurbished WAVE Systems in order to allow an opportunity for customers who may not be able to afford the full cost of a new system to purchase and utilize our WAVE technology. Additionally, we have developed credibility and momentum with third-party platforms that will allow us to leverage our direct sales force and distribution network.

On the Laboratory Services front, we have completed cancer pathway gene mutation projects for a number of high visibility pharmaceutical companies 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 this end, we are now gaining clinical trial program contracts which we believe will more rapidly impact our revenue opportunities from this segment. 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 development of true personalized medicine for our pharmaceutical partners. We recently licensed and are developing a new technology for even greater DNA mutation enrichment and detection sensitivity which could prove to be the highest sensitivity technology in the market. In our Molecular Clinical Reference Laboratory we have continued to seek out or develop new tests to further expand our menu and growth opportunities for this business, including a test that would determine the likelihood of the sibling of an autistic child also developing autism.

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

We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating expenses and other cash ~~expenses.~~needs. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, there is the risk that we may not be able to obtain such funding ~~due to~~in the ~~tightened credit markets.~~future. At September 30, ~~2009~~2010 we had cash and cash equivalents of ~~$4.7~~$4.6 million. We do believe that existing sources of liquidity are sufficient to meet expected cash needs ~~during 2009.~~into 2011.

The uncertainty of the current general economic conditions could negatively impact our business in the future. There are many factors that affect the market demand for our products and services that we cannot control. Demand for our Instrument Related Business is affected by the needs and budgetary resources of research institutions, universities and hospitals. The instrument purchase represents a significant expenditure by these types of customers and often requires a long sales cycle. These customers may not have the funding available to purchase our instruments. Competition and new instruments ~~introduced~~ in the marketplace also may impact our sales.

We have foreign currency revaluation risk, which occurs when ~~the~~a transaction ~~is done~~occurs in a currency other than the ~~British Pound. This transaction must be revalued within the Transgenomic, Limited ledger, whose functional currency is the British Pound Sterling.~~entity’s “functional currency”. The majority of our international sales are transacted in the ~~transactions on this ledger are in Euro. As a result we are subject to exchange rate risk. The foreign exchange rates have had large variances recently.~~euro, which must be first converted into British pound sterling, and then into U.S. dollars. At January 1, ~~2008~~2009 the Euro to Great British Pound exchange rate was ~~.73650~~.9690 as compared to the September 30, ~~2009~~2010 rate of ~~.91660.~~.8613. The Great British Pound to USU.S. Dollar exchange rate was ~~1.9970~~1.4501 at January 1, ~~2008~~2009 compared to ~~1.59220~~1.5809 at September 30, ~~2009. These large changes~~2010. Fluctuations in the foreign exchange rates ~~may negatively~~could impact our business inresults. Foreign currency revaluation adjustments decreased operating expenses and net loss by $0.2 million and $0.1 million for the three months ended September 30, 2010 and 2009, respectively and foreign currency revaluation adjustments increased operating expenses and net loss by $0.3 million during each of the nine months ended September 30, 2010 and 2009.


	Dollars in Thousands									Dollars in Thousands
	Three Months Ended September 30,				Change					Three Months Ended September 30,				Change
	2009		2008		$			%		2010		2009		$			%
Instrument Related Business:
Bioinstruments	$	1,999	$	2,196	$	(197	)	(9	)%	$	1,356	$	1,999	$	(643	)		(32	)%
Bioconsumables		1,853		2,199		(346	)	(16	)%		1,799		1,853		(54	)		(3	)%

		3,852		4,395		(543	)	(12	)%
											3,155		3,852		(697	)		(18	)%
Laboratory Services:
Molecular Clinical Reference Laboratory		923		736		187		25	%		918		923		(5	)		(1	)%
Pharmacogenomics Research Services		271		236		35		15	%		346		271		75			28	%

		1,194		972		222		23	%		1,264		1,194		70			6	%

Total Net sales	$	5,046	$	5,367	$	(321	)	(6	)%	$	4,419	$	5,046	$	(627	)		(12	)%

Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, net 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. Bioinstrument net sales are down ~~$0.2~~$0.6 million, or 9%32%, during the three months ended September 30, ~~2009~~2010 as compared to the same period in ~~2008. In 2009 we~~2009. The decrease in bioinstrument net sales was due to changes in the product mix sold ~~6 total~~during the quarter as well as fewer instruments sold. No OEM instruments were sold in 2010 compared to 5one OEM sale in the third quarter of 2009. We sold four WAVE instruments in the ~~same period~~third quarter 2010 as compared to five WAVE instruments in the third quarter of ~~2008. There~~2009. The average sales price was ~~one OEM instrument sold~~higher in the third quarter of 2009 ~~compared~~due to ~~three OEM instrument~~the geographic location of the sales. Service contract sales ~~in the third quarter of 2008. Five WAVE systems~~ were ~~sold~~flat during the three months ended September 30, ~~2009,~~2010 as compared to ~~two during~~ the same period ~~of 2008. The WAVE instruments have a~~in 2009. Parts, freight and miscellaneous income was lower ~~average sales price compared to the OEM instruments. Accordingly, the combination of an increase in sales of WAVE instruments and the decrease in sales of OEM instruments~~by $0.1 million in the third quarter of ~~2009 contributed to our overall decline in net sales for the three months ended September 30, 2009~~2010 as compared to the same period ~~of 2008. There was also a reduction~~ in service contract net sales primarily in the European market. This reduction was due to lower sales volume and a foreign currency exchange impact of $0.1 million. Instrument related revenue is subject to many factors such as type of instrument sold and the country of sale. Due to these factors each quarter should be considered on a stand alone basis and is not indicative of future net sales streams.2009.

Net sales of bioconsumables ~~decreased~~were down less than $0.1 million, or 3%, during the three months ended September 30, ~~2009~~2010 compared to ~~2008. The foreign currency exchange impact included~~2009. This decrease is related to lower sales volume in ~~this decrease was $0.2 million.~~our European markets.

Net sales of Laboratory Services increased 6% during the three months ended September 30, ~~2009~~2010 compared to ~~2008 by approximately $0.2 million.~~2009. 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 $0.9 million increased 25% over~~were down 1% compared to the three months ended September 30, ~~2008. The Pharmacogenomics Research Services net sales of $0.3 million increased 15% over the three months ended September 30, 2008.~~2009. The Molecular Clinical Reference Laboratory ~~revenue has increased due to increased test volume. Our test volume has increased by 42% due to our increased sales focus. The~~ average revenue per test has decreased by ~~12%~~4% due to the mix of tests performed and increased Medicare and Medicaid test volumes which ~~drives~~generates lower ~~reimbursements~~reimbursement for these tests. ~~During~~The decrease in average revenue per test is offset by a 4% increase in sales volume. The Pharmacogenomics Research Services net sales of $0.3 million during the three months ended September 30, ~~2009 and 2008~~2010 was up 28% compared to 2009. The increase in Pharmacogenomics Research Services net sales ~~consisted~~is largely due to an increase in the number of ~~many midsize customers.~~customers for the third quarter of 2010 compared to 2009. The Pharmacogenomics Research Services net sales have peaks due to the project related nature of ~~project related~~the business. Each ~~quarter~~period for Pharmacogenomics Research Services should be considered on a stand alone basis and is not indicative of future net sales.

Costs of Goods Sold.Costs of goods sold include material costs for the products that we sell and substantially all other costs associated with our manufacturing facilities (primarily personnel costs, rent and depreciation). It also includes direct costs (primarily personnel costs, rent, supplies and depreciation) associated with our Laboratory Services operations. Cost of goods sold consisted of the following:


	Dollars in Thousands									Dollars in Thousands
	Three Months Ended September 30,				Change					Three Months Ended September 30,				Change
	2009		2008		$			%		2010		2009		$			%
Instrument Related Business:
Bioinstruments	$	526	$	767	$	(241	)	(31	)%	$	532	$	526	$	6			1	%
Bioconsumables		1,097		1,097		—		—	%		774		1,097		(323	)		(29	)%

		1,623		1,864		(241	)	(13	)%
											1,306		1,623		(317	)		(20	)%
Laboratory Services:
Molecular Clinical Reference Laboratory		479		429		50		12	%		670		479		191			40	%
Pharmacogenomics Research Services		191		155		36		23	%		426		191		235			123	%

		670		584		86		15	%		1,096		670		426			64	%

Cost of goods sold	$	2,293	$	2,448	$	(155	)	(6	)%	$	2,402	$	2,293	$	109			5	%

Gross profit was ~~$2.8~~$2.0 million or ~~55%~~46% of total net sales during the third quarter of ~~2009,~~2010, compared to ~~$2.9~~$2.8 million or ~~54%~~55% during the same period of ~~2008.~~2009. Margins on the instrument related business are up by 1% compared to the same period in 2009. The ~~gross~~bioinstrument margin ~~for the Instrument Related Business was 58% for both~~decreased from 74% in the three months ended September 30, 2009 to 61% in the same period of 2010. This decrease is driven by the composition of products sold and ~~2008. Cost of sales for the Instrument Related Business decreased $0.2 million for~~fewer instruments sold in the third quarter of 2010. Margins on bioconsumables increased from 41% for the three months ended September 30, 2009 ~~compared~~ to 57% in the same period of ~~2008 which was offset by net sales which were lower by $0.5 million.~~2010. During the three months ended September 30, ~~2009,~~2010, the gross margin for the Laboratory Services was ~~44%~~13% as compared to ~~40%~~44% in the same period of ~~2008.~~2009. The ~~Laboratory Services~~ gross margin ~~increase is attributed to leverage in~~on the ~~organization. Net sales increased $0.2 million and costs~~Clinical Reference Laboratory was 27% for the third quarter of goods increased less than $0.1 million. The decrease in average net revenue per test is a result of test mix and increased Medicare and Medicaid test volume which drives lower reimbursements. Test volume during this period grew by 42% as2010 compared to ~~net sales growth~~48% for the third quarter of ~~25%.~~2009. Pharmacogenomics gross margin decreased from 30% for the three months ended September 30, 2009 to a negative 23% for the three months ended September 30, 2010. These decreases are due to staff added along with higher operating supplies cost.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. In addition, foreign currency revaluation is included here. Excluding foreign currency revaluation gains or losses, ~~which was a gain~~our selling, general and administrative costs were down less than $0.1 million compared to the same period of ~~$0.1 million~~2009. Foreign currency revaluation gains in the three months ended September 30, ~~2009 and nominal in the same period of 2008, our selling, general and administrative costs decreased from $2.8~~2010 were $0.2 million compared to $0.1 million in ~~2008 to $2.3 million in~~revaluation gains for the three months ended September 30, 2009. ~~The primary decrease is due to open employment positions not being filled, lower commissions, and lower travel and stock option expense.~~

Research and Development Expenses.Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. For the ~~three months ended September 30,~~third quarter of 2010 and 2009 these costs totaled $0.6 million and $0.9 million ~~compared to $0.7 million for the three months ended September 30, 2008.~~respectively. The ~~increase is primarily due to~~2009 research and development costs included collaboration expenses with the Dana-Farber Cancer Institute related to the development of ~~high-sensitivity~~high sensitivity mutation detection technology called ~~Cold-PCR~~COLD-PCR (coamplification at lower denaturation temperature PCR).

Research and development expenses totaled ~~19%~~14% and ~~13%~~19% of net sales during the three months ended September 30, ~~2009~~2010 and ~~2008,~~2009, respectively.

Other Income (Expense).Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other ~~income~~expense during the three months ended September 30, ~~2009~~2010 and ~~September 30, 2008~~2009 was less than $0.1 million for each period.

Income Tax Expense (Benefit). Income tax expense for the three months ended September 30, 2010 was less than $0.1 million. This is the result of the change in deferred tax assets and liabilities reported in financial statements of our subsidiary outside the U.S. This tax expense includes state taxes as well as reserves for uncertain income taxes. Income tax benefit for the three months ended September 30, 2009 was a benefit of less than $0.1 million. This is primarily the result of a refundable tax credit anticipated for the 2009 Federal and State Income Tax returns recorded this period. This tax benefit is partially offset by tax expense related to subsidiaries outside the United States and state taxes as well as reserves for uncertain income taxes. We believe the tax benefit recorded will be partially offset in future periods by a tax expense, related to income reported in financial statements of subsidiaries outside the United States. Income tax expense for the three months ended September 30, 2008 was less than $0.1 million.


	Dollars in Thousands									Dollars in Thousands
	Nine Months Ended September 30,				Change					Nine Months Ended September 30,				Change
	2009		2008		$			%		2010		2009		$			%
Instrument Related Business:
Bioinstruments	$	6,215	$	7,987	$	(1,772	)	(22	)%	$	5,925	$	6,215	$	(290	)		(5	)%
Bioconsumables		5,579		6,920		(1,341	)	(19	)%		5,255		5,579		(324	)		(6	)%

		11,794		14,907		(3,113	)	(21	)%
											11,180		11,794		(614	)		(5	)%
Laboratory Services:
Molecular Clinical Reference Laboratory		2,886		1,950		936		48	%		2,790		2,886		(96	)		(3	)%
Pharmacogenomics Research Services		828		1,012		(184	)	(18	)%		986		828		158			19	%

		3,714		2,962		752		25	%		3,776		3,714		62			2	%

Total Net Sales	$	15,508	$	17,869	$	(2,361	)	(13	)%	$	14,956	$	15,508	$	(552	)		(4	)%

Bioinstrument sales consist of sales of our WAVE System and associated equipment that we manufacture or assemble, net 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. Bioinstrument net sales are down ~~$1.8~~$0.3 million, or ~~22%~~5%, during the nine months ended September 30, ~~2009~~2010 as compared to the same period in ~~2008.~~2009. The decrease in bioinstrument net sales was due to ~~a change in product mix~~lower average sales price in the nine months ended September 30, ~~2009.~~2010. We sold ~~ten~~five OEM instruments in each of the nine months ended September 30, ~~2008 compared to five in the nine months ended~~2010 and September 30, 2009. The average sales price was lower on our OEM instruments sold in 2010 as compared to 2009. We sold ~~eighteen~~twenty-two WAVE Systems in the nine months ended September 30, ~~2009~~2010 as compared to ~~sixteen~~eighteen in the nine months ended September 30, ~~2008. The WAVE instruments have a lower~~2009, and the average sales price ~~compared to the OEM instruments. The average sales price also~~ was lower due to the geographic ~~make up~~location of the sales. Service contract sales ~~which accounted~~were down $0.1 million for the ~~majority~~nine months ended September 30, 2010 compared to the same period of 2009 due to lower volumes in both the ~~decrease. The foreign currency conversion rate difference between 2009~~European and ~~2008 impacted the average net sales price on our European sales. There~~U.S. markets. Parts, freight and miscellaneous income was ~~also a reduction in service contract net sales, primarily~~lower by $0.3 million in the ~~European market. This reduction was primarily related~~nine months ended September 30, 2010 as compared to foreign currency exchange impact. Demand for WAVE Systems continues to be affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. Instrument related revenue is subject to many factors such as typethe same period of ~~instrument sold and the country of sale. Due to these factors each quarter should be considered on a stand alone basis and is not indicative of future net sales streams.~~2009.

Net sales of bioconsumables decreased during the nine months ended September 30, ~~2009~~2010 compared to ~~2008.~~2009. The primary decrease in consumables is due to ~~the negative impact of the foreign currency exchange rates, primarily the Great British Pound to the US Dollar. There is also some negative~~lower volume ~~impact~~ in our European market offset by higher volume in our U.S. market.

Net sales of Laboratory Services increased ~~during~~by 2% for the nine months ended September 30, ~~2009~~2010 compared to ~~2008 by approximately $0.8 million.~~2009. Sales of Laboratory Services ~~sales includes~~include both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales of ~~$2.9~~$2.8 million ~~increased 48%~~represented a decrease of 3% over the nine months ended September 30, ~~2008.~~2009. The Molecular Clinical Reference Laboratory average revenue per test has decreased by 6% due to the mix of tests performed and the increased Medicare and Medicaid test volumes which generates lower reimbursement for these tests. The decrease in average revenue per test is offset by a 3% increase in volume. The Pharmacogenomics Research Services net sales of ~~$0.8~~$1.0 million during the nine months ended September 30, ~~2009 decreased 18%~~2010 represented an increase of 19% from the nine months ended September 30, ~~2008.~~2009. The ~~decrease~~increase in Pharmacogenomics Research Services is largely due to ~~one large customer~~an increase in the ~~first half~~number of ~~2008 which has completed its project.~~clients for the nine months ended September 30, 2010 compared to the same period of 2009. The Pharmacogenomics Research Services net sales have peaks due to the project related nature of ~~project related~~the business. Each ~~quarter~~period for Pharmacogenomics Research Services should be considered on a stand alone basis and is not indicative of future net sales.


	Dollars in Thousands									Dollars in Thousands
	Nine Months Ended September 30,				Change					Nine Months Ended September 30,				Change
	2009		2008		$			%		2010		2009		$			%
Instrument Related Business:
Bioinstruments	$	2,167	$	2,710	$	(543	)	(20	)%	$	2,487	$	2,167	$	320			15	%
Bioconsumables		2,935		3,133		(198	)	(6	)%		2,373		2,935		(562	)		(19	)%

		5,102		5,843		(741	)	(13	)%
											4,860		5,102		(242	)		(5	)%
Laboratory Services:
Molecular Clinical Reference Laboratory		1,607		1,196		411		34	%		1,631		1,607		24			1	%
Pharmacogenomics Research Services		582		531		51		10	%		1,077		582		495			85	%

		2,189		1,727		462		27	%		2,708		2,189		519			24	%

Cost of goods sold	$	7,291	$	7,570	$	(279	)	(4	)%	$	7,568	$	7,291	$	277			4	%

Gross profit was ~~$8.2~~$7.4 million or ~~53%~~49% of total net sales during the nine months ended September 30, ~~2009,~~2010, compared to ~~$10.3~~$8.2 million or ~~58%~~53% during the same period of ~~2008. Cost of sales for~~2009. Margins on the Instrument Related Business ~~decreased by 13%~~were flat for the nine months ended September 30, ~~2009~~2010 compared to the same period ~~of 2008 on a net sales decrease of 21%. This margin erosion is related to a lower average instrument sales price globally and lower service net sales, primarily~~ in the European market. While we did reduce costs somewhat, we do have a fixed cost base related to the instrument related business in addition to more variable costs directly related to the acquisition of products. The Laboratory Services cost of goods sold increased 27% for the nine months ended September 30, 2009 over the same period of 2008.2009. During the nine months ended September 30, ~~2009,~~2010, the gross margin for the Laboratory Services was ~~relatively flat at 41%~~28% as compared to ~~42%~~41% in the same period of ~~2008. Gross~~2009. The erosion in the gross margin is ~~impacted~~driven by ~~the mix of tests sold and~~ the lower average net sales reimbursement per test due to increased Medicare and Medicaid test volume which is largely offset by leverage on the cost side. Test volume during this nine month period grew by 80%. Our direct variable costs per test can be significantly different for some of the tests we offer. For instance, the “CMA” test, our fastest growing test, has aand higher ~~direct variable cost than many other of our tests.~~operating costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. In addition, foreign currency revaluation is included here. Excluding foreign currency revaluation ~~gains or~~ losses, which was a loss of $0.3 million in each of the nine months ended September 30, ~~2009 and a gain of $0.5 million in the same period of 2008,~~2010, our selling, general and administrative costs decreased from ~~$9.3~~$7.7 million to ~~$7.7~~$7.3 million. The primary decrease is due to ~~no employee bonus accrual, reductions in staff~~lower salary and ~~open positions not filled, lower travel expenses, lower~~ stock option ~~expense and a reduction in bad debt~~ expense.

Research and Development Expenses.Research and development expenses primarily include personnel costs, legal fees, outside services, collaboration expenses, supplies, and facility costs and are expensed in the period in which they are incurred. ~~For the nine months ended September 30, 2009 these costs totaled~~Research and development expenses were $2.0 million and $2.5 ~~million compared to $1.8~~ million for the nine months ended September 30, ~~2008. The increase is primarily due to collaboration expenses with Power3 for their NuroPro assay development related to the diagnosis of Alzheimer’s~~2010 and Parkinson’s diseases, the Dana-Farber Cancer Institute related to the development of high sensitivity mutation detection technology called Cold-PCR and purchases of samples related to research work in progress.2009, respectively.

Research and development expenses totaled ~~16%~~13% and ~~10%~~16% of net sales during the nine months ended September 30, ~~2009~~2010 and ~~2008,~~2009, respectively.

Other Income (Expense).Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income during the nine months ended September 30, ~~2009~~2010 and September 30, ~~2008~~2009 was less than $0.1 million for each period.

Income Tax Expense (Benefit). Income tax ~~benefit~~expense for the nine months ended September 30, ~~2009~~2010 was ~~a benefit of~~ $0.1 million. This is ~~partially~~ the result of the change in deferred tax assets and liabilities reported in financial statements of subsidiaries outside the U.S due primarily to foreign currency exchange losses. A refundable tax credit related to the 2008 Federal and State Income Tax returns was also recorded. This credit is anticipated to continue for 2009.U.S. This tax ~~benefit is partially offset by tax~~ expense ~~related to~~includes state taxes as well as reserves for uncertain income taxes. ~~We believe the~~Income tax benefit ~~recorded will be partially offset in future periods by a tax expense, related to income reported in financial statements of subsidiaries outside the United States. Income tax expense~~ for the nine months ended September 30, ~~2008~~2009 was ~~less than~~ $0.1 million.

Our working capital positions at September 30, ~~2009~~2010 and December 31, ~~2008~~2009 were as follows:


	Dollars in Thousands							Dollars in Thousands
	September 30, 2009		December 31, 2008		Change			September 30, 2010		December 31, 2009		Change
Current assets (including cash and cash equivalents of $4,661 and $4,771, respectively)	$	13,595	$	15,585	$	(1,990	)
Current assets (including cash and cash equivalents of $4,589 and $5,642, respectively)								$	12,429	$	14,454	$	(2,025	)
Current liabilities		3,663		4,235		(572	)		4,279		4,103		176

Working capital	$	9,932	$	11,350	$	(1,418	)	$	8,150	$	10,351	$	(2,201	)

The working capital decrease at September 30, ~~2009~~2010 compared to December 31, ~~2008~~2009 is primarily a result of ~~lower accounts receivable~~our net loss of ~~$1.2~~$2.4 million for the nine months ended September 30, 2010.

We have historically operated at a loss and ~~lower inventories~~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 ~~$0.6 million offset by lower accrued expenses of $0.5 million.~~

~~Management believes existing sources of liquidity, including~~additional equity, we currently have no borrowings and have no plans to issue additional equity securities for this purpose. At September 30, 2010 we had cash and cash equivalents of ~~$4.7 million,~~$4.6 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs ~~during 2009.~~into 2011. We ~~have added experienced~~will need to increase our net sales, ~~staff~~focus on receivables and inventory management or further reduce our operating expenses in order to be assured of meeting our ~~business in an effort to drive improved sales in 2009. We have also increased our research costs to drive new products and collaborations which should drive future growth. As~~liquidity needs on a ~~result of the current economic outlook in 2009~~long-term basis. However, we cannot assure you that we will be able to ~~maintain~~increase our net sales or further reduce our expenses, or raise further capital or equity and, accordingly, we may not have sufficient sources of liquidity to continue our operations indefinitely. If necessary, management believes they can further reduce costs and expenses to conserve working capital. However, such cost and expense reductions could have an adverse impact on our new product pipeline and ultimately net sales. We could also pursue additional financing, but optimally, our goal is to achieve sufficient net sales to consistently generate net income and positive cash flow.

Net Change in Cash and Cash Equivalents.Cash and cash equivalents decreased ~~$0.1~~by $1.1 million during the nine months ended September 30, ~~2009~~2010 to $4.6 million compared to a decrease of ~~$0.9~~$0.1 million in cash balances during the nine months ended September 30, ~~2008.~~2009. In 2010 net cash used in operating activities was $0.7 million and $0.5 million was used in investing activities which was offset by less than $0.1 million provided by financing activities. The impact of foreign currency exchange revaluation was nominal. In 2009 net cash provided by operating activities was $0.2 million offset by $0.3 million of net cash flow used in investing activities with nominimal impact of foreign currency exchange rates. ~~In 2008 net cash~~

Cash Flows Used in Operating Activities. Cash flows used in operating activities ~~was $0.5 million and net cash flow used in investing activities was $0.3 million. The impact of foreign currency exchange rates was a use of cash of $0.2 million in 2008.~~

~~Cash Flows Provided by Operating Activities.~~ ~~Cash flows provided by operating activities totaled $0.2~~were $0.7 million during the nine months ended September 30, 2010, compared to cash flows provided by operating activities of $0.2 million during the same period of 2009. The cash flows used in operating activities in 2010 relate to the net loss of $2.4 million which is offset by the timely collection of accounts receivable of $1.0 million and noncash items of $0.5 million. The cash flows provided by operating activities in 2009 primarily relate to the accounts receivable collections of $1.5 million ~~the decrease in inventory of $0.7 million~~ and noncash items of $0.8 million offset by the loss of $2.0 million and lower accrued expenses and accounts payable of $0.7 million. Cash flows used in operating activities totaled $0.5 million during the nine months ended September 30, 2008. The cash flows used in operating activities in 2008 primarily relate to the net loss of $0.3 million. In addition, accounts receivable decreased by $0.2 million, inventory increased by $0.3 million, accounts payable decreased by $0.4 million, accrued expenses decreased by $0.3 million and noncash items totaled $0.7 million.

Cash Flows Used In Investing Activities. Cash flows used in investing activities totaled ~~$0.3~~$0.5 million ~~for each of~~during the nine months ended September 30, ~~2009 and September 30, 2008.~~2010 compared to cash flows used in investing activities of $0.3 million during the same period of 2009. Cash flows used in investing activities in ~~2009~~2010 and ~~2008~~2009 consisted primarily of purchases of property and equipment.

Cash Flows Provided by Financing Activities. Cash flows provided by financing activities were less than $0.1 million for the nine months ended September 30, 2010. This resulted from the issuance of common stock due to the exercise of stock options for 100,000 shares during the second quarter of 2010. There were no cash flows provided by or used in financing activities for the nine months ended September 30, 2009.

At September 30, ~~2009~~2010 and December 31, ~~2008,~~2009, 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.

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 judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies are discussed in our annual report on Form 10-K for the fiscal year ended December 31, ~~2008.~~2009.

Please refer to our annual report on Form 10-K for the fiscal year ended December 31, ~~2008.~~2009. There have been no changes to those accounting pronouncements listed except as noted in note B to the financial statements contained in this report.

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

~~Foreign Currency Translation Risk.~~ During the last two 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, the British Pound is the functional currency of our wholly owned subsidiary, Transgenomic Limited. 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 at the balance sheet date. In addition, we have revaluation risk which occurs when the transaction is done in a currency other than the British Pound. This transaction must be revalued within the Transgenomic, Limited ledger, whose functional currency is the British Pound Sterling. The majority of the transactions on this ledger are in Euro. As a result we are subject to exchange rate risk. The foreign exchange rates have had large variances recently. At January 1, 2008 the Euro to Great British Pound exchange rate was .73650 as compared to September 30, 2009 rate of .91660. The Great British Pound to US Dollar exchange rate was 1.9970 at January 1, 2008 compared to 1.59220 at September 30, 2009. These large changes in foreign exchange rates may negatively impact our business in 2009.

Evaluation of Disclosure Controls and Procedures. ~~We evaluated~~Management performed, under the ~~design~~direction of our Chief Executive Officer and ~~operating~~Interim Chief Financial Officer, an evaluation of the effectiveness of our disclosure controls and procedures as ~~of September 30, 2009 pursuant to Rule 13a-15(b)~~defined in Rules 13a-15(e) and 15d-15(e) of the ~~Securities~~Exchange Act. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act ~~of 1934. Based on this evaluation,~~are recorded, processed, summarized, and reported within the time periods specified in the SEC’s forms, and that such information is accumulated and communicated to our management including our Chief Executive Officer and our Interim Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, the Company’s Chief Executive Officer and our Interim Chief Financial Officer concluded that, ~~because~~as of ~~the material weakness in our internal control over financial reporting described in item 9A(T) of our report on Form 10-K for the fiscal year ended December 31, 2008, our~~September 30, 2010 Transgenomic’s disclosure controls and procedures ~~as defined in Rule 13a-15(e) continued to not be~~were effective. To address the material weakness in our internal control over financial reporting, management performed additional manual procedures and analysis and other post-closing procedures in order to prepare the consolidated financial statements included in this report. Notwithstanding the material weakness in our internal control over financial reporting as of September 30, 2009, we believe that the consolidated financial statements contained in this report present fairly our financial condition, results of operations, and cash flows for the fiscal years covered thereby in all material respects.

Change in Internal Control Over Financial Reporting. There ~~has~~have been no ~~change~~changes in our internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

An investment in our common stock involves a number of risks. You should carefully consider each of the risks described in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, ~~2008~~2009 before deciding to invest in our common stock. If any of the risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price of our common stock or other securities could decline and you may lose all or part of your investment.

In addition to the risks described in Item 1A of our annual report on Form 10-K for the fiscal year ~~ended~~Ended December 31, ~~2008~~2009 please consider the following risks before deciding to invest in our common stock:

Providers of clinical testing services may be subject to lawsuits alleging negligence or other similar legal claims. Potential suits could involve claims for substantial damages. Litigation could also have an adverse impact on our client base and reputation. We maintain liability insurance coverage for certain claims that could result from providing or failing to provide clinical testing services, including inaccurate testing results and other exposures. Our insurance coverage limits our maximum ~~exposure~~recovery on individual claims and, therefore, there is no assurance that such coverage will be adequate.

The clinical laboratory testing industry is subject to extensive regulation. Potential sanctions for violation of statutes and regulations include significant fines and the loss of various licenses, certificates and authorizations. We believe that we are in compliance in all material respects with all statutes, regulations and other requirements applicable to our clinical laboratory operations.

~~The United States government may pass a public health insurance option. In the event this occurs we would need to do extensive evaluation of the plan to determine the impact of our revenue streams.~~

The risk factors presented above and in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, ~~2008~~2009 are all of the ones that we currently consider material. However, they are not the only ones facing our company. Additional risks not presently known to us, or which we currently consider immaterial, may also adversely affect us. There may be risks that a particular investor views differently from us, and our analysis might be wrong. If any of the risks that we face actually occur, our business, financial condition and operating results could be materially adversely affected and could differ materially from any possible results suggested by any forward-looking statements that we have made or might make. In such case, the trading price of our common stock could decline, and you could lose part or all of your investment.We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

On October 8, 2009 we announced that we licensed a high-sensitivity mutation detection technology called Cold-PCR from the Dana-Farber Cancer Institute (DFCI), Boston, MA. This variation of the standard PCR technology enriches mutations in DNA samples and is a much more sensitive technique for finding low level mutations in tissue and body fluids that are involved with a variety of diseases. Cold-PCR was invented at DFCI by Dr. Mike Makrigiorgos who has demonstrated its effectiveness in enriching for mutations in cancer-related genes in samples where standard DNA sequencing is not sensitive enough to detect these very low concentration somatic DNA mutations. The licensing terms include exclusive rights to commercialize Cold-PCR technology combined with Sanger sequencing as well as all applications for mitochondrial DNA analysis.

Cold-PCR will have applicability in detection of cancer-related mutations where critical mutations are present at a very low percentage compared to normal DNA. Examples would be in blood and urine or where the tissue collected contains mostly normal cells. This would allow clinicians to use less intrusive methods for genetic analysis or allow more efficient use of tumor tissue samples. Additionally the method could enhance the detection of the emergence of cancer-drug resistance mutations, allowing early detection of relapse.

We believe that Cold-PCR is a critical addition to our high-sensitivity mutation detection portfolio of cutting edge technologies. It will allow us to continue offering affordable, state-of-the-art solutions to challenging areas of genetic analysis and, we hope, allow us to be able to screen patient blood for early detection of cancer, detect cancer drug resistance or relapse earlier as well as expand our mitochondrial DNA analysis toolbox. We have long wanted a technology that would permit us to screen patients earlier in their development of cancer and we hope that Cold-PCR provides us the sensitivity and analytical accuracy to achieve this goal. Discovering cancers at a much earlier phase of development will have a huge impact on cancer diagnosis and treatment.

~~The expense recorded for our license with the Dana-Farber Cancer Institute during the three and nine months ended September 30, 2009 was $0.2 million.~~

~~On January 23, 2009 we signed a definitive collaboration and exclusive license agreement with Power3 Medical Products, Inc. for the rights to Power3 Medical’s neurodegenerative biomarkers.~~

~~The agreement grants us exclusive rights in the U.S. and certain international markets to neurodegenerative biomarkers from Power3 Medical including NuroPro~~^®, a proposed diagnostic for Alzheimer’s and Parkinson’s diseases based on Power3’s proteomics platform. We will pay Power3 Medical an up-front license fee, milestone payments, royalties, and will also provide development funding and resources.

We will offer the NuroPro tests in our CLIA-certified molecular diagnostics laboratory and will add to our portfolio of molecular diagnostics used for mitochondrial disorders, oncology, hematology molecular pathology, and inherited diseases.

~~The expense recorded for payments made to Power3 Medical Products, Inc. during the three and nine months ended September 30, 2009 was less than $0.1 million and $0.2 million, respectively.~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Delaware		911789357
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12325 Emmet Street, Omaha, Nebraska		68164
(Address of principal executive offices)		(Zip Code)


		Page No.

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, ~~2009~~2010 (Unaudited) and December 31, ~~2008~~2009 (Audited)	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, ~~2009~~2010 and ~~2008~~2009	4

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, ~~2009~~2010	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2009~~2010 and ~~2008~~2009	6

	Notes to Unaudited Condensed Consolidated ~~Unaudited~~ Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

~~Item 3.~~	~~Quantitative and Qualitative Disclosures About Market Risk~~	2419

Item 4T.	Controls and Procedures	2426

PART II.	OTHER INFORMATION	2527

Item 1.	Legal Proceedings	2527

Item 1A.	Risk Factors	25

~~Item 5.~~	~~Other Information~~	2527

Item 6.	Exhibits	2627

Signatures		2728



Leasehold improvements			1 to 10 years

Furniture and fixtures			3 to 7 years

Production equipment			3 to 7 years

Computer equipment			3 to 7 years

Research and development equipment			2 to 7 years


	Number of Options	Weighted Average Exercise Price
Balance at January 1, 2009:	3,531,064	$	2.54
Granted	70,000		.42
Exercised	—		—
Forfeited/Expired	195,500		3.81

Balance at September 30, 2009:	3,405,564	$	2.42

Exercisable at September 30, 2009:	2,425,838	$	3.15


	Dollars in Thousands
	Beginning Balance		Provision			Write Offs			Ending Balance
Three Months Ended September 30, 2010	$	295	$	40		$	—		$	335
Three Months Ended September 30, 2009	$	358	$	(5	)	$	(8	)	$	345
Nine Months Ended September 30, 2010	$	310	$	29		$	(4	)	$	335
Nine Months Ended September 30, 2009	$	388	$	27		$	(70	)	$	345


	Dollars in Thousands
	Asset Balances at September 30
Classes of Property	2010		2009
Equipment	$	286	$	—
Less: Accumulated amortization		—		—

Total	$	286	$	—


	Dollars in Thousands
	Costs Incurred in the Three Months Ended September 30, 2010		Cumulative Costs Incurred at September 30, 2010		Total Expected Costs
Severance and related costs	$	40	$	40	$	53
Facility closure costs		24		24		63
Other		8		8		66

Restructuring charges	$	72	$	72	$	182


	Dollars in Thousands
	Balance at June 30, 2010		Costs Incurred and Charged to Expense		Costs Paid or Otherwise Settled			Changes in Estimates		Balance at September 30, 2010
Severance and related costs	$	—	$	40	$	—		$	—	$	40
Facility closure costs		—		24		(8	)		—		16
Other		—		8		(8	)		—		—

Total	$	—	$	72	$	(16	)	$	—	$	56


	Number of Options			Weighted Average Exercise Price
Balance at January 1, 2010:		3,331,731		$	2.39
Granted		75,000			.58
Exercised		(100,000	)		(.42	)
Forfeited		(553,500	)		(.75	)
Expired		(133,231	)		(12.50	)

Balance at September 30, 2010:		2,620,000		$	2.24

Exercisable at September 30, 2010:		2,363,334		$	2.42


	September 30, 2009						December 31, 2008
Total Assets	$	8,686	$	6,669	$	15,355	$	10,226	$	7,330	$	17,556



3.1		Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s Report on Form 10-Q (Registration No. 000-30975) filed on November 14, 2005)

3.2		Amended and Restated Bylaws of the Registrant (incorporated by reference to Registrant’s Report on Form 8-K (Registration No. 000-30975) filed on May 25, 2007)

4		Form of Certificate of the Registrant’s Common Stock (incorporated by reference to Exhibit 4 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000)

~~10.1~~		~~License Agreement between the Company and the Dana-Farber Cancer Institute dated October 8, 2009~~

~~10.2~~		~~License Agreement between the Company and Power3 Medical Products, Inc. dated January 23, 2009~~

31		Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


		TRANSGENOMIC, INC.

Date:	November ~~5, 2009~~15, 2010	By:	/S/ CRAIG J. TUTTLE
			Craig J. Tuttle President and Chief Executive Officer

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