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SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended March 31, 2011

Or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission file number:
000-30975





TRANSGENOMIC, INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)                          

(402)
452-5400

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant 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):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller Reporting Company |  | x

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 May 13, 2011, the number of shares of common stock outstanding was 49,299,672.









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TRANSGENOMIC, INC.

INDEX



|           |  |                                                                                                                |  |         
|---------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                                                |  | Page No.
|           |  |                                                                                                               
|PART I.    |  | FINANCIAL INFORMATION                                                                                          |  | 3       
|           |  |                                                                                                               
|Item 1.    |  | Financial Statements                                                                                           |  | 3       
|           |  |                                                                                                               
|           |  | Condensed Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010
(Audited)         |  | 3       
|           |  |                                                                                                               
|           |  | Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010   |  | 4       
|           |  |                                                                                                               
|           |  | Unaudited Condensed Consolidated Statements of Stockholders Equity for the Three Months Ended March 31,
 2011 |  | 5       
|           |  |                                                                                                               
|           |  | Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010   |  | 6       
|           |  |                                                                                                               
|           |  | Notes to Condensed Consolidated Unaudited Financial Statements                                                 |  | 7       
|           |  |                                                                                                               
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 22      
|           |  |                                                                                                               
|Item 4.    |  | Controls and Procedures                                                                                        |  | 27      
|           |  |                                                                                                               
|PART II.   |  | OTHER INFORMATION                                                                                              |  | 28      
|           |  |                                                                                                               
|Item 1.    |  | Legal Proceedings                                                                                              |  | 28      
|           |  |                                                                                                               
|Item 1A.   |  | Risk Factors                                                                                                   |  | 28      
|           |  |                                                                                                               
|Item 6.    |  | Exhibits                                                                                                       |  | 29      
|           | 
|Signatures |  | 30                                                                                                            



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

TRANSGENOMIC, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars
in thousands except per share data)



|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                      |  | March 31, 
2011(unaudited) |          |   | December 31,2010 |  
|ASSETS                                                                                                                                |  |                            |          |   |                  |   |          |  
|CURRENT ASSETS:                                                                                                                       |  |                            |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                             |  | $                          | 3,170    |   |                  | $ | 3,454    |  
|Accounts receivable (net of allowances for bad debts of $716 and $334, respectively)                                                  |  |                            | 7,551    |   |                  |   | 7,601    |  
|Inventories (net of allowances for obsolescence of $520 and $518, respectively)                                                       |  |                            | 3,163    |   |                  |   | 3,344    |  
|Other current assets                                                                                                                  |  |                            | 762      |   |                  |   | 635      |  
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|Total current assets                                                                                                                  |  |                            | 14,646   |   |                  |   | 15,034   |  
|PROPERTY AND EQUIPMENT:                                                                                                               |  |                            |          |   |                  |   |          |  
|Equipment                                                                                                                             |  |                            | 9,839    |   |                  |   | 9,820    |  
|Furniture, fixtures & leasehold improvements                                                                                          |  |                            | 3,707    |   |                  |   | 3,479    |  
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|                                                                                                                                      |  |                            | 13,546   |   |                  |   | 13,299   |  
|Less: accumulated depreciation                                                                                                        |  |                            | (11,885  | ) |                  |   | (11,697  | )
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|                                                                                                                                      |  |                            | 1,661    |   |                  |   | 1,602    |  
|OTHER ASSETS:                                                                                                                         |  |                            |          |   |                  |   |          |  
|Goodwill                                                                                                                              |  |                            | 6,275    |   |                  |   | 6,275    |  
|Intangibles (net of accumulated amortization of $817 and $519, respectively)                                                          |  |                            | 8,664    |   |                  |   | 8,962    |  
|Other assets                                                                                                                          |  |                            | 152      |   |                  |   | 154      |  
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|                                                                                                                                      |  | $                          | 31,398   |   |                  | $ | 32,027   |  
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                  |  |                            |          |   |                  |   |          |  
|CURRENT LIABILITIES:                                                                                                                  |  |                            |          |   |                  |   |          |  
|Accounts payable                                                                                                                      |  | $                          | 813      |   |                  | $ | 1,360    |  
|Accrued compensation                                                                                                                  |  |                            | 1,015    |   |                  |   | 875      |  
|Short term debt                                                                                                                       |  |                            | 741      |   |                  |   | 989      |  
|Accrued liabilities                                                                                                                   |  |                            | 4,017    |   |                  |   | 3,231    |  
|Contractual obligation                                                                                                                |  |                            | 1,572    |   |                  |   | 1,628    |  
|Current portion of lease obligations                                                                                                  |  |                            | 182      |   |                  |   | 170      |  
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|Total current liabilities                                                                                                             |  |                            | 8,340    |   |                  |   | 8,253    |  
|Long term debt less current maturities                                                                                                |  |                            | 8,640    |   |                  |   | 8,640    |  
|Redeemable Series A convertible preferred stock, $0.1 par value, 3,879,307 shares authorized, 2,586,205 shares issued and
outstanding |  |                            | 1,553    |   |                  |   | 1,457    |  
|Preferred stock conversion feature                                                                                                    |  |                            | 5,078    |   |                  |   | 1,983    |  
|Warrant liability                                                                                                                     |  |                            | 1,283    |   |                  |   | 2,351    |  
|Other long-term liabilities                                                                                                           |  |                            | 918      |   |                  |   | 843      |  
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|Total liabilities                                                                                                                     |  |                            | 25,812   |   |                  |   | 23,527   |  
|STOCKHOLDERS EQUITY:                                                                                                                 |  |                            |          |   |                  |   |          |  
|Preferred stock, $.01 par value, 15,000,000 shares authorized, 2,586,205 shares issued and outstanding                                |  |                            |         |   |                  |   |         |  
|Common stock, $.01 par value, 100,000,000 shares authorized, 49,299,672 and 49,289,672 shares issued and outstanding,
respectively    |  |                            | 498      |   |                  |   | 498      |  
|Additional paid-in capital                                                                                                            |  |                            | 139,746  |   |                  |   | 139,730  |  
|Accumulated other comprehensive income                                                                                                |  |                            | 1,697    |   |                  |   | 1,589    |  
|Accumulated deficit                                                                                                                   |  |                            | (136,355 | ) |                  |   | (133,317 | )
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|Total stockholders equity                                                                                                            |  |                            | 5,586    |   |                  |   | 8,500    |  
|                                                                                                                                      |  |                            |          |   |                  |   |          |  
|                                                                                                                                      |  | $                          | 31,398   |   |                  | $ | 32,027   |  
|                                                                                                                                      |  |                            |          |   |                  |   |          |  

See notes to unaudited condensed consolidated financial statements.



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TRANSGENOMIC, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)



|                                                                      |  |                             |            |   |      |   |            |  
|--------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                      |  | Three Months
EndedMarch 31, |           
|                                                                      |  | 2011                        |            |   | 2010 |  
|NET SALES                                                             |  | $                           | 7,480      |   |      | $ | 5,442      |  
|COST OF GOODS SOLD                                                    |  |                             | 3,326      |   |      |   | 2,558      |  
|                                                                      |  |                             |            |   |      |   |            |  
|Gross profit                                                          |  |                             | 4,154      |   |      |   | 2,884      |  
|OPERATING EXPENSES:                                                   |  |                             |            |   |      |   |            |  
|Selling, general and administrative                                   |  |                             | 4,323      |   |      |   | 2,432      |  
|Research and development                                              |  |                             | 557        |   |      |   | 827        |  
|Restructuring Charges                                                 |  |                             | 24         |   |      |   |           |  
|                                                                      |  |                             |            |   |      |   |            |  
|                                                                      |  |                             | 4,904      |   |      |   | 3,259      |  
|                                                                      |  |                             |            |   |      |   |            |  
|LOSS FROM OPERATIONS                                                  |  |                             | (750       | ) |      |   | (375       | )
|OTHER INCOME (EXPENSE):                                               |  |                             |            |   |      |   |            |  
|Interest expense                                                      |  |                             | (238       | ) |      |   |           |  
|Expense on preferred stock                                            |  |                             | (2,027     | ) |      |   |           |  
|Other, net                                                            |  |                             | 231        |   |      |   |           |  
|                                                                      |  |                             |            |   |      |   |            |  
|                                                                      |  |                             | (2,034     | ) |      |   |           |  
|                                                                      |  |                             |            |   |      |   |            |  
|LOSS BEFORE INCOME TAXES                                              |  |                             | (2,784     | ) |      |   | (375       | )
|INCOME TAX BENEFIT                                                    |  |                             | (6         | ) |      |   | (51        | )
|                                                                      |  |                             |            |   |      |   |            |  
|NET LOSS                                                              |  | $                           | (2,778     | ) |      | $ | (324       | )
|                                                                      |  |                             |            |   |      |   |            |  
|PREFERRED STOCK DIVIDENDS AND ACCRETION                               |  |                             | (260       | ) |      |   |           |  
|                                                                      |  |                             |            |   |      |   |            |  
|NET LOSS AVAILABLE TO COMMON STOCKHOLDERS                             |  | $                           | (3,038     | ) |      | $ | (324       | )
|                                                                      |  |                             |            |   |      |   |            |  
|BASIC AND DILUTED LOSS PER COMMON SHARE                               |  | $                           | (0.06      | ) |      | $ | (0.01      | )
|                                                                      |  |                             |            |   |      |   |            |  
|BASIC AND DILUTED WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING |  |                             | 49,293,005 |   |      |   | 49,189,672 |  
|                                                                      |  |                             |            |   |      |   |            |  

See notes to unaudited condensed consolidated financial statements.



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TRANSGENOMIC, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

Three Months Ended March 31, 2011

(Dollars in thousands except per share data)



|                                                    |  |                   |            |  |          |   |     |                          |  |   |                    |  |  |                                            |          |   |       |   |        |   |  |   |        |  
|--------------------------------------------------- |  | ----------------- | ---------- |  | -------- | - | --- | ------------------------ |  | - | ------------------ |  |  | ------------------------------------------ | -------- | - | ----- | - | ------ | - |  | - | ------ | -
|                                                    |  | Common Stock      |            |  |          |   |     |                          |  |   |                    |  |  |                                            |         
|                                                    |  | OutstandingShares |            |  | ParValue |   |     | AdditionalPaid-inCapital |  |   | AccumulatedDeficit |  |  | AccumulatedOtherComprehensiveIncome (Loss) |          |   | Total |  
|Balance, January 1, 2011                            |  |                   | 49,289,672 |  |          | $ | 498 |                          |  | $ | 139,730            |  |  | $                                          | (133,317 | ) |       | $ | 1,589  |   |  | $ | 8,500  |  
|Net loss                                            |  |                   |           |  |          |   |    |                          |  |   |                   |  |  |                                            | (2,888   | ) |       |   | (2,888 | ) |  |   | (2,888 | )
|Other comprehensive income (loss):                  |  |                   |            |  |          |   |     |                          |  |   |                    |  |  |                                            |          |   |       |   |        |   |  |   |        |  
|Foreign currency translation adjustment, net of tax |  |                   |           |  |          |   |    |                          |  |   |                   |  |  |                                            |         |   |       |   | 107    |   |  |   | 107    |  
|                                                    |  |                   |            |  |          |   |     |                          |  |   |                    |  |  |                                            |          |   |       |   |        |   |  |   |        |  
|Comprehensive loss                                  |  |                   |            |  |          |   |     |                          |  |   |                    |  |  |                                            |          |   |       |   | (2,781 | ) |  |   |        |  
|                                                    |  |                   |            |  |          |   |     |                          |  |   |                    |  |  |                                            |          |   |       |   |        |   |  |   |        |  
|Non-cash stock-based compensation                   |  |                   |           |  |          |   |    |                          |  |   | 9                  |  |  |                                            |         |   |       |   |       |   |  |   | 9      |  
|Issuance of shares for employee stock options       |  |                   | 10,000     |  |          |   |    |                          |  |   | 7                  |  |  |                                            |         |   |       |   |       |   |  |   | 7      |  
|Dividends on preferred stock                        |  |                   |           |  |          |   |    |                          |  |   |                   |  |  |                                            | (150     | ) |       |   |       |   |  |   | (150   | )
|                                                    |  |                   |            |  |          |   |     |                          |  |   |                    |  |  |                                            |          |   |       |   |        |   |  |   |        |  
|Balance, March 31, 2011                             |  |                   | 49,299,672 |  |          | $ | 498 |                          |  | $ | 139,746            |  |  | $                                          | (136,355 | ) |       | $ | 1,697  |   |  | $ | 5,586  |  
|                                                    |  |                   |            |  |          |   |     |                          |  |   |                    |  |  |                                            |          |   |       |   |        |   |  |   |        |  

See notes to unaudited condensed consolidated financial statements.



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TRANSGENOMIC, INC. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



|                                                                                                |  |                             |        |   |      |   |       |  
|----------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ----- | -
|                                                                                                |  | Three Months EndedMarch 31, |       
|                                                                                                |  | 2011                        |        |   | 2010 |  
|CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:                                          |  |                             |        |   |      |   |       |  
|Net loss                                                                                        |  | $                           | (2,778 | ) |      | $ | (324  | )
|Adjustments to reconcile net loss to net cash flows provided (used in) by operating activities: |  |                             |        |   |      |   |       |  
|Depreciation and amortization                                                                   |  |                             | 494    |   |      |   | 165   |  
|Non-cash, stock based compensation                                                              |  |                             | 9      |   |      |   | 1     |  
|Loss on sale assets                                                                             |  |                             |       |   |      |   | 1     |  
|Provision for losses on doubtful accounts                                                       |  |                             | 448    |   |      |   | (27   | )
|Provision for losses on inventory obsolescence                                                  |  |                             | 7      |   |      |   | (1    | )
|Preferred stock revaluation                                                                     |  |                             | 2,027  |   |      |   |      |  
|Changes in operating assets and liabilities:                                                    |  |                             |        |   |      |   |       |  
|Accounts receivable                                                                             |  |                             | (350   | ) |      |   | (56   | )
|Inventories                                                                                     |  |                             | 210    |   |      |   | (18   | )
|Prepaid expenses and other current assets                                                       |  |                             | 316    |   |      |   | (220  | )
|Accounts payable                                                                                |  |                             | (780   | ) |      |   | 247   |  
|Accrued liabilities                                                                             |  |                             | 471    |   |      |   | 684   |  
|Other long term liabilities                                                                     |  |                             | (29    | ) |      |   | (67   | )
|Long term deferred income taxes                                                                 |  |                             | 6      |   |      |   | 7     |  
|                                                                                                |  |                             |        |   |      |   |       |  
|Net cash flows provided by (used in) operating activities                                       |  |                             | 51     |   |      |   | 392   |  
|                                                                                                |  |                             |        |   |      |   |       |  
|CASH FLOWS USED IN INVESTING ACTIVITIES:                                                        |  |                             |        |   |      |   |       |  
|Purchase of property and equipment                                                              |  |                             | (86    | ) |      |   | (47   | )
|Change in other assets                                                                          |  |                             | (1     | ) |      |   |      |  
|                                                                                                |  |                             |        |   |      |   |       |  
|Net cash flows used in investing activities                                                     |  |                             | (87    | ) |      |   | (47   | )
|                                                                                                |  |                             |        |   |      |   |       |  
|CASH FLOWS USED IN FINANCING ACTIVITIES:                                                        |  |                             |        |   |      |   |       |  
|Principal payments on capital lease obligations                                                 |  |                             | (66    | ) |      |   |      |  
|Issuance of common stock                                                                        |  |                             | 7      |   |      |   |      |  
|Principal payment on note payable                                                               |  |                             | (248   | ) |      |   |      |  
|                                                                                                |  |                             |        |   |      |   |       |  
|Net cash flows used in financing activities                                                     |  |                             | (307   | ) |      |   |      |  
|                                                                                                |  |                             |        |   |      |   |       |  
|EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH                                        |  |                             | 59     |   |      |   | (89   | )
|                                                                                                |  |                             |        |   |      |   |       |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                         |  |                             | (284   | ) |      |   | 256   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                |  |                             | 3,454  |   |      |   | 5,642 |  
|                                                                                                |  |                             |        |   |      |   |       |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                      |  | $                           | 3,170  |   |      | $ | 5,898 |  
|                                                                                                |  |                             |        |   |      |   |       |  
|SUPPLEMENTAL CASH FLOW INFORMATION                                                              |  |                             |        |   |      |   |       |  
|Cash paid during the period for:                                                                |  |                             |        |   |      |   |       |  
|Interest                                                                                        |  | $                           | 238    |   |      | $ |      |  
|Income taxes, net                                                                               |  |                             | 13     |   |      |   | 1     |  
|SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION                                                 |  |                             |        |   |      |   |       |  
|Acquisition of equipment through capital leases                                                 |  | $                           | 147    |   |      | $ |      |  
|Dividends payable on preferred stock                                                            |  |                             | 150    |   |      |   |      |  

See notes to unaudited
condensed consolidated financial statements.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31, 2011 and 2010

A. BUSINESS DESCRIPTION

Business Description.

Transgenomic, Inc. is a global biotechnology company specializing in high sensitivity genetic variation and mutation analysis, providing
products and services in DNA mutation detection and discovery for clinical research, clinical molecular diagnostics and pharmacogenomics analyses.

Laboratory Services:



| |  |  | Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in genetic testing for oncology, hematology and
inherited disorders. Located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility 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.
This lab specializes in pharmacogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Instrument Related Business:



| |  |  | Bioinstruments. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base
of over 1,500 WAVE Systems as of March 31, 2011. We also distribute bioinstruments produced by other manufacturers (OEM Equipment) through our sales and distribution network. Service contracts to maintain installed systems are sold
and supported by technical support personnel.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Bioconsumables. The installed WAVE base and some OEM platforms generate a demand for consumables that are required for the continued operation of
the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.

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

Risks and Uncertainties.

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.



|1. | Use of Estimates.
|-- | -----------------

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the 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.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



|2. | Concentration of Revenue Risk.
|-- | ------------------------------

No customer accounted for more than 10% of consolidated net sales during the three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011 no customers made up more than
10% of the Laboratory Services revenue. For the three months ended March 31, 2010 one customer made up more than 10% of the Laboratory Services net sales. This customer represented 16% of the Laboratory Services net sales for the three months
ended March 31, 2010.

Fair Value.

Unless otherwise specified, book value approximates fair market value. The preferred stock conversion feature and warrant liability are recorded at fair value. See Footnote L

Basis of Presentation.

The condensed consolidated balance sheet as of December 31, 2010 was derived from our audited balance sheet as of that date. The
accompanying consolidated financial statements as of and for the three months ended March 31, 2011 and 2010 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, 2010 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.

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

Concentrations of Cash.

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 March 31, 2011.

Accounts Receivable.

The following is a summary of activity for the allowance for doubtful accounts during the three months ended March 31, 2011 and
2010:



|                                  |  |                      |     |  |           |   |     |            |  |   |               |   |  |   |     | 
|--------------------------------- |  | -------------------- | --- |  | --------- | - | --- | ---------- |  | - | ------------- | - |  | - | --- | 
|                                  |  | Dollars in Thousands |    
|                                  |  | BeginningBalance     |     |  | Provision |   |     | Write Offs |  |   | EndingBalance |  
|Three Months Ended March 31, 2011 |  | $                    | 334 |  |           | $ | 448 |            |  | $ | (66           | ) |  | $ | 716 | 
|Three Months Ended March 31, 2010 |  | $                    | 310 |  |           | $ | (27 | )          |  | $ | (4            | ) |  | $ | 279 | 

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
and shown net of allowance for doubtful accounts and contractual allowances. The estimate made for doubtful accounts is based on a review of all outstanding amounts on a quarterly basis. We determine the allowance for doubtful accounts and
contractual allowances 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.

Inventories are stated at the lower of cost or market net of 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, which approximates the first-in, first-out (FIFO) method.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



The following is a summary of activity for the allowance for obsolete inventory during
the three months ended March 31, 2011 and 2010:



|                                  |  |                      |     |  |           |   |    |            |  |   |               |   |  |   |     | 
|--------------------------------- |  | -------------------- | --- |  | --------- | - | -- | ---------- |  | - | ------------- | - |  | - | --- | 
|                                  |  | Dollars in Thousands |    
|                                  |  | BeginningBalance     |     |  | Provision |   |    | Write Offs |  |   | EndingBalance |  
|Three Months Ended March 31, 2011 |  | $                    | 518 |  |           | $ | 7  |            |  | $ | (5            | ) |  | $ | 520 | 
|Three Months Ended March 31, 2010 |  | $                    | 507 |  |           | $ | (1 | )          |  | $ | (28           | ) |  | $ | 478 | 

We determine the
allowance for obsolete inventory by evaluating quarterly the inventory for items deemed to be slow moving or obsolete. Included in our provision is the foreign currency impact of the consolidation of our subsidiary.

Property and Equipment.

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



|                                   |  |  |               | 
|---------------------------------- |  |  | ------------- | 
|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  | 

Depreciation expense
related to property and equipment during the three months ended March 31, 2011 and 2010 was $0.2 million and $0.1 million, respectively. Included in depreciation for the three months ended March 31, 2011 was less than $0.1 million related
to capital leases. We did not have any capital leases in the first quarter of 2010.

Goodwill.

Goodwill is the excess of the purchase price over fair value of assets acquired and is not amortized. Goodwill is tested for impairment
annually. We perform this impairment analysis during the fourth quarter of each year or when a significant event occurs which may impact goodwill. Impairment occurs when the carrying value is determined to be not recoverable thereby causing the
carrying value of the goodwill to exceed its fair value. If impaired, the assets carrying value is reduced to its fair value. We recorded no impairment charges related to goodwill as of December 31, 2010. No events have transpired in the
three months ended March 31, 2011 that would require revaluation of this conclusion.

Intangibles.

Intangibles include intellectual property, patents and acquired products.



|1. | Intellectual Property.
|-- | ----------------------

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.



|2. | Patents.
|-- | --------

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.



|3. | Acquired Products.
|-- | ------------------

As a
part of the FAMILION acquisition we acquired technology, in process technology, trademarks/tradenames and third party relationships. These costs will be amortized straight line over their estimated economic life of seven to eight years. See Footnote
E.



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



These assets are 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 quarterly review the carrying value of our long-lived assets to assess recoverability and impairment. We recorded no impairments as of
December 31, 2010. No events have transpired in the three months ended March 31, 2011 that would require a revaluation of this conclusion.

Other Long Term Assets.

Other long term assets include US security
deposits and deferred tax assets.

Stock Based Compensation.

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 March 31, 2011
had vesting periods of one or three years from date of grant. None of the stock options outstanding at March 31, 2011 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 three months ended March 31, 2011, we recorded compensation expense of less than $0.1 million within the selling, general
and administrative expense as a result of the vesting of options exercisable for the purchase of 1.4 million shares. During the three months ended March 31, 2010, we recorded compensation expenses of less than $0.1 million within selling,
general and administrative expense as a result of the vesting of options exercisable for the purchase of 1.7 million shares. As of March 31, 2011, there was $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.

The fair value of the
options granted during the quarter ended March 31, 2011 was estimated on their respective grant dates using the Black-Scholes option pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of
2.16% based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of six years, based on historical exercise activity behavior; and volatility of 107% 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. Forfeitures of 3.6% have been assumed.

There were no stock options granted during the quarter ended March 31, 2010.

Income Taxes.

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 Recognition.

Revenue is realized and earned when all of the
following criteria are met:



| |  |  | Persuasive evidence of an arrangement exists
| | - |  | --------------------------------------------



| |  |  | Delivery has occurred or services have been rendered
| | - |  | ----------------------------------------------------



| |  |  | The sellers price to the buyer is fixed or determinable, and
| | - |  | -------------------------------------------------------------



| |  |  | Collectability is reasonably assured.
| | - |  | -------------------------------------

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
sales associated with these contracts are deferred and recognized ratably over the service period. At March 31, 2011 and March 31, 2010, deferred net sales, mainly associated with our service contracts, included in the balance sheet in
other accrued expenses, was approximately $1.5 million and $1.4 million, respectively.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



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 contractual adjustments. 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 perform services on a 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 March 31, 2011 and 2010, deferred net sales associated with the pharmacogenomics research projects included in the balance sheet in other accrued liabilities, was $0.1 million and less than $0.1
million, respectively.

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.

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

Preferred Stock.

We
entered into a Series A Convertible Preferred Stock Purchase Agreement on December 29, 2010, as discussed in Note L, selling shares of preferred stock and issuing warrants to purchase a certain number of shares of Series A Preferred Stock. The
Series A Preferred Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported outside of equity. Preferred stock is accreted to its redemption
value. The warrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A Preferred Stock that meets the definition of a derivative. The preferred
stock, warrant liability and preferred stock conversion feature are all recorded separately and were initially recorded at fair value using the Black Scholes model. We are required to record these instruments at fair value at each reporting date and
changes will be recorded as an adjustment to earnings. The warrant liability and preferred stock conversion feature are considered level three financial instruments. See Footnote L.

Translation of Foreign Currency.

Our foreign subsidiary uses the local
currency of the country in which it is located as their functional currency. Its assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Cumulative translation gain of approximately $0.1
million is reported as accumulated other comprehensive gain on the accompanying consolidated balance sheet as of March 31, 2011. Cumulative translation gains of $0.2 million were reported as accumulated other comprehensive income for the three
months ended March 31, 2010. Revenues and expenses are translated at the average rates during the period. For transactions that are not denominated in the functional currency, we recognized a net gain of $0.1 million as foreign currency
transaction gain in the determination of net loss for the three months ending March 31, 2011 and a net loss of $0.1 million as foreign currency transaction loss in the determination of net loss for the three months ending March 31, 2010.

Other Income.

Other income consists primarily of interest income from cash and cash equivalents invested in overnight instruments. Other income in the three months ended March 31, 2011 includes an award of a
federal grant under the Qualifying Therapeutic Discovery Project related to COLD-PCR, Surveyor Scan kit development for key cancer pathway gene mutations and mtDNA damage assays. Other income related to this federal grant was $0.2 million, net of
consulting fees. Other income for the three months ending March 31, 2010 was less than $0.1 million.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



Comprehensive Income.

Accumulated other comprehensive income at March 31, 2011 and December 31, 2010 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.

Earnings Per Share.

Basic earnings per share 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. Options, warrants and conversion rights pertaining to 18,095,894 and 10,611,263 shares of our common stock have been excluded from the computation of diluted earnings per share at March 31, 2011 and 2010,
respectively. The options, warrants and conversion rights that were exercisable in 2011 and 2010 were not included because the effect would be anti-dilutive due to the net loss. As a result, none of our outstanding options, warrants or conversion
rights affect the calculation of diluted earnings per share.

Recently Issued Accounting Pronouncements.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC 605): Multiple-Deliverable Revenue Arrangements (a
consensus of the FASB Emerging Issues Task Force); effective for years beginning after June 15, 2010. 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 No. 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. Our adoption of ASU No. 2009-13 did not have a material impact on our consolidated
financial statements.

In October 2009, 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. 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. Our adoption of ASU No. 2009-14 did not have a material impact on our consolidated financial statements.

In January 2010, the FASB issued guidance to amend the disclosure requirements related to fair value measurements, effective for years beginning after December 15, 2010. The guidance requires the
disclosure of roll forward activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level Three fair value measurements). We adopted the new disclosure provisions with
the filing of our Form 10-Q for the three months ended March 31, 2011.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



|C. | RESTRUCTURING CHARGES
|-- | ---------------------

In the third quarter of 2010 we made a decision to consolidate our research and development activities in Omaha, Nebraska. We have
recognized expenses for restructuring, including but not limited to, severance, facility costs and costs to move equipment from Gaithersburg, Maryland to Omaha, Nebraska. The facility has been closed at March 31, 2011. These restructuring
charges are attributable to our Lab Services and Instrument Related Business.

Restructuring charges include:



|                            |  |                                                       |    |  |                                           |   |     |                      |  |   |     | 
|--------------------------- |  | ----------------------------------------------------- | -- |  | ----------------------------------------- | - | --- | -------------------- |  | - | --- | 
|                            |  | Dollars in Thousands                                  |   
|                            |  | Costs Incurred in 
theThree MonthsEndedMarch 31, 2011 |    |  | Cumulative CostsIncurred
atMarch 31, 2011 |   |     | TotalExpected 
Costs | 
|Severance and related costs |  | $                                                     |   |  |                                           | $ | 53  |                      |  | $ | 53  | 
|Facility closure costs      |  |                                                       | 14 |  |                                           |   | 59  |                      |  |   | 59  | 
|Other                       |  |                                                       | 10 |  |                                           |   | 50  |                      |  |   | 54  | 
|                            |  |                                                       |    |  |                                           |   |     |                      |  |   |     | 
|Restructuring charges       |  | $                                                     | 24 |  |                                           | $ | 162 |                      |  | $ | 166 | 
|                            |  |                                                       |    |  |                                           |   |     |                      |  |   |     | 



|D. | INVENTORIES
|-- | -----------

Inventories
(net of allowances for obsolescence) consisted of the following:



|                                  |  |                      |       |   |                  |   |       |  
|--------------------------------- |  | -------------------- | ----- | - | ---------------- | - | ----- | -
|                                  |  | Dollars in Thousands |      
|                                  |  | March 31,2011        |       |   | December 31,2010 |  
|Finished goods                    |  | $                    | 1,933 |   |                  | $ | 2,119 |  
|Raw materials and work in process |  |                      | 1,549 |   |                  |   | 1,531 |  
|Demonstration inventory           |  |                      | 201   |   |                  |   | 212   |  
|                                  |  |                      |       |   |                  |   |       |  
|                                  |  | $                    | 3,683 |   |                  | $ | 3,862 |  
|Less allowance for obsolescence   |  |                      | (520  | ) |                  |   | (518  | )
|                                  |  |                      |       |   |                  |   |       |  
|Total                             |  | $                    | 3,163 |   |                  | $ | 3,344 |  
|                                  |  |                      |       |   |                  |   |       |  



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



|E. | INTANGIBLES AND OTHER ASSETS
|-- | ----------------------------

Long Lived intangible assets and other assets consisted of the following:



|                                            |  |                      |       |  |                         |   |     |               |  |   |       |  |  |                         |       |  |               |   |     |  |  |   |       | 
|------------------------------------------- |  | -------------------- | ----- |  | ----------------------- | - | --- | ------------- |  | - | ----- |  |  | ----------------------- | ----- |  | ------------- | - | --- |  |  | - | ----- | 
|                                            |  | Dollars in Thousands |      
|                                            |  | March 31, 2011       |       |  | December 31, 2010       |  
|                                            |  | Cost                 |       |  | AccumulatedAmortization |   |     | Net BookValue |  |   | Cost  |  |  | AccumulatedAmortization |       |  | Net BookValue |  
|Intangiblesacquired technology             |  | $                    | 6,535 |  |                         | $ | 228 |               |  | $ | 6,307 |  |  | $                       | 6,535 |  |               | $ |    |  |  | $ | 6,535 | 
|Intangiblesassay royalties                 |  |                      | 1,434 |  |                         |   | 51  |               |  |   | 1,383 |  |  |                         | 1,434 |  |               |   |    |  |  |   | 1,434 | 
|Intangiblesthird party payor relationships |  |                      | 367   |  |                         |   |    |               |  |   | 367   |  |  |                         | 367   |  |               |   |    |  |  |   | 367   | 
|Intangiblestradenames and trademarks       |  |                      | 344   |  |                         |   | 12  |               |  |   | 332   |  |  |                         | 344   |  |               |   |    |  |  |   | 344   | 
|Patents                                     |  |                      | 511   |  |                         |   | 252 |               |  |   | 259   |  |  |                         | 511   |  |               |   | 245 |  |  |   | 266   | 
|Intellectual property                       |  |                      | 290   |  |                         |   | 274 |               |  |   | 16    |  |  |                         | 290   |  |               |   | 274 |  |  |   | 16    | 
|                                            |  |                      |       |  |                         |   |     |               |  |   |       |  |  |                         |       |  |               |   |     |  |  |   |       | 
|                                            |  | $                    | 9,481 |  |                         | $ | 817 |               |  | $ | 8,664 |  |  | $                       | 9,481 |  |               | $ | 519 |  |  | $ | 8,962 | 
|                                            |  |                      |       |  |                         |   |     |               |  |   |       |  |  |                         |       |  |               |   |     |  |  |   |       | 



|                                            |  |                       |  | 
|------------------------------------------- |  | --------------------- |  | 
|                                            |  | Estimated Useful Life
|Intellectual property                       |  | 10 years             
|Patents                                     |  | 7 years              
|Intangiblesacquired technology             |  | 7  8 years          
|Intangiblesthird party payor relationships |  | Indefinite           
|Intangiblesassay royalties                 |  | 7 years              
|Intangiblestradenames and trademarks       |  | 7 years              

Other
assets include US security deposits and deferred tax assets, net of applicable valuation allowances.

Amortization expense for
intangible assets was $0.3 million and $0.1 million during the three months ended March 31, 2011 and 2010, respectively. Amortization expense for intangible assets is expected to be $1.2 million in each of the years 2011 through 2017.



|F. | DEBT
|-- | ----



|                           |  |                      |       |  |                  |   |       | 
|-------------------------- |  | -------------------- | ----- |  | ---------------- | - | ----- | 
|                           |  | Dollars in Thousands |      
|                           |  | March 31,2011        |       |  | December 31,2010 |  
|PGxHealth note payable (1) |  | $                    | 8,640 |  |                  | $ | 8,640 | 
|PGxHealth note payable (2) |  |                      | 741   |  |                  |   | 989   | 
|                           |  |                      |       |  |                  |   |       | 
|                           |  | $                    | 9,381 |  |                  | $ | 9,629 | 
|                           |  |                      |       |  |                  |   |       | 



|(1) | The First Note is a three year senior secured promissory note to PGxHealth, LLC entered into on December 29, 2010 in conjunction with our acquisition of the
FAMILION family of genetic tests from PGxHealth. Interest is payable at 10% per year with quarterly interest payments through March 29, 2012. Thereafter, quarterly installments will include both principal and interest through
December 30, 2013.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



|(2) | The Second Note is a one year senior secured promissory note to PGxHealth, LLC entered into on December 31, 2010 for facility improvements made to the CLIA
certified laboratory in New Haven, Connecticut. Interest is payable at 6.5% per year with the principal and interest payable in twelve monthly installments with the final payment due on December 31, 2011.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The entire unpaid balance of the Notes will become immediately due and payable if: (i) we fail to make timely payments under the
Notes; (ii) we make an assignment for the benefit of creditors; (iii) we file for bankruptcy; or (iv) upon any event of default under the Security Agreement. Additionally, under the terms of the First Note, if we consummate an equity
financing that involves the receipt by us of net proceeds of not less than $6,000,000, then we shall, upon the consummation of such equity financing, pay to PGxHealth the lesser of: (i) 25% of the gross proceeds received from such financing;
and (ii) the then-outstanding balance under the First Note. Under the terms of the Second Note, in the event of a sale of all or substantially all of the assets of the Company, we shall pay PGxHealth the lesser of: (i) 100% of the
proceeds, less certain fees, received pursuant to such sale; and (ii) the then-outstanding balance under the Second Note.

The Notes are secured by the assets of Transgenomic.

The aggregate minimum principal maturities of the debt for each of the three fiscal years following December 31, 2010 are as follows:



|     |  |   |        | 
|---- |  | - | ------ | 
|2011 |  | $ | 741    | 
|2012 |  |   | 3,703  | 
|2013 |  |   | 4,937  | 
|     |  |   |        | 
|     |  |   | $9,381 | 
|     |  |   |        | 



|G. | CAPITAL LEASES
|-- | --------------

The
following is an analysis of the leased property under capital leases.



|                               |  |                      |     |   |                  |   |     |  
|------------------------------ |  | -------------------- | --- | - | ---------------- | - | --- | -
|                               |  | Dollars in Thousands |    
|                               |  | Asset Balances at    |    
|Classes of Property            |  | March 31,2011        |     |   | December 31,2010 |  
|Equipment                      |  | $                    | 541 |   |                  | $ | 394 |  
|Less: Accumulated amortization |  |                      | (39 | ) |                  |   | (13 | )
|                               |  |                      |     |   |                  |   |     |  
|Total                          |  | $                    | 502 |   |                  | $ | 381 |  
|                               |  |                      |     |   |                  |   |     |  

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 March 31, 2011.

Year ending December 31:



|                                            |  |                      |     |  
|------------------------------------------- |  | -------------------- | --- | -
|                                            |  | Dollars in Thousands |    
|2011                                        |  | $                    | 177 |  
|2012                                        |  |                      | 140 |  
|2013                                        |  |                      | 124 |  
|2014                                        |  |                      | 8   |  
|                                            |  |                      |     |  
|Total minimum lease payments                |  | $                    | 449 |  
|Less: Amount representing interest          |  |                      | (48 | )
|                                            |  |                      |     |  
|Present value of net minimum lease payments |  | $                    | 401 |  
|                                            |  |                      |     |  



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



|H. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------

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 2016. The future minimum lease payments required under these leases are approximately $0.9 million in 2011, $1.0 million in 2012, $0.4 million in 2013, $0.2
million in 2014 and $0.2 million in 2015. Rent expense for each of the three months ended March 31, 2011 and 2010 was $0.3 million and $0.2 million, respectively.

We have entered into an employment agreement with Craig J. Tuttle, our President and Chief Executive Officer. The current term of Mr. Tuttles employment agreement ends on July 12, 2011.
The employment agreement provides that Mr. Tuttle will be entitled to receive a severance payment from the Company if his employment is terminated involuntarily except if such termination is based on just cause, as that term is
defined in his employment agreement. The severance payment payable in the event of involuntary termination without just cause is equal to his annual base salary at the time of termination and will be paid over a twelve-month period. The employment
agreement provides that the severance payment provision will be honored if the Company is acquired by, or merged into, another company and 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.

At March 31, 2011, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others
totaled $0.1 million.



|I. | INCOME TAXES
|-- | ------------

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 through 2010. We have state income
tax returns subject to examination primarily for tax years 2007 through 2010. 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 2007
through 2010.

Income tax benefit for the three months ended March 31, 2011 was a benefit of 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. We believe the tax benefit recorded will be offset in future periods by a tax expense related to income reported
in financial statements of our subsidiary outside the U.S. Income tax benefit for the three months ended March 31, 2010 was less than $0.1 million. The effective tax rate for the three months ended March 31, 2011 is 1.0% which is primarily
the result of valuation allowances against the Net Operating Losses for the U.S. partially offset by permanent differences related to intercompany foreign currency exchange of our subsidiary outside the U.S.

During the three months ended March 31, 2011 and 2010, there were no material changes to the liability for uncertain tax positions.



|J. | EMPLOYEE BENEFIT PLAN
|-- | ---------------------

We maintain an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by
eligible employees. We match the employees contributions at the rate of 50% on the first 6% of contributions. We may, at the discretion of our Board of Directors, make additional contributions on behalf of the Plans participants.
Contributions to the 401(k) plan were less than $0.1 million for the three months ended March 31, 2010. No contributions were made in the three months ended March 31, 2011 due to cost saving initiatives.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



|K. | STOCKHOLDERS EQUITY
|-- | --------------------

Common
Stock.

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.

Common Stock Warrants.

No common stock warrants were issued or exercised during the three months ended March 31, 2011 or 2010. At March 31, 2011,
there were warrants outstanding which were exercisable to purchase 5,572,408 shares of common stock.



|                                      |  |            |      |  |                |  |      |                  |  |  |               |  |  |   |      | 
|------------------------------------- |  | ---------- | ---- |  | -------------- |  | ---- | ---------------- |  |  | ------------- |  |  | - | ---- | 
|Warrant Holder                        |  | Issue Year |      |  | ExpirationYear |  |      | UnderlyingShares |  |  | ExercisePrice | 
|Laurus Master Fund, Ltd. (1)          |  |            | 2004 |  |                |  | 2011 |                  |  |  | 400,000       |  |  | $ | 1.13 | 
|Affiliates of Third Security, LLC (2) |  |            | 2010 |  |                |  | 2015 |                  |  |  | 5,172,408     |  |  | $ | .58  | 
|                                      |  |            |      |  |                |  |      |                  |  |  |               |  |  |   |      | 
|Total                                 |  |            |      |  |                |  |      |                  |  |  | 5,572,408     |  |  |   |      | 
|                                      |  |            |      |  |                |  |      |                  |  |  |               |  |  |   |      | 



|(1) | 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, 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | These warrants were issued in conjunction with the Series A Convertible Preferred Stock financing (the Financing) with certain entities affiliated with
Third Security, LLC (the Investors). The number of shares shown reflects the post conversion shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Preferred
Stock.

The Companys Board of Directors is authorized to issue up to 15,000,000 shares of preferred stock in one or
more series, from time to time, with such designations, powers, preferences and rights and such qualifications, limitations and restrictions as may be provided in a resolution or resolutions adopted by the Board of Directors. The authority of the
Board of Directors includes, but is not limited to, the determination or fixing of the following with respect to shares of such class or any series thereof: (i) the number of shares; (ii) the dividend rate, whether dividends shall be
cumulative and, if so, from which date; (iii) whether shares are to be redeemable and, if so, the terms and amount of any sinking fund providing 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.

On December 29, 2010, we entered into a Series A Convertible Preferred Stock Purchase
Agreement (Series A Purchase Agreement) with Third Security, LLC pursuant to which we: (i) sold an aggregate of 2,586,205 shares of Series A Convertible Preferred Stock; and (ii) issued warrants to purchase up to an aggregate
of 1,293,102 shares of Series A Convertible Preferred Stock with an exercise price of $2.32 per share. The Warrants may be exercised at any time from December 29, 2010 until December 28, 2015 and contain a cashless exercise
feature. The shares of Series A Convertible Preferred Stock issuable pursuant to the Series A Purchase Agreement and upon exercise of the Warrants are initially convertible into shares of our common stock at a rate of 4-for-1, which conversion rate
is subject to further adjustment as set forth in the Certificate of Designation. The aggregate gross proceeds from the issuance were $6.0 million.

The Series A Convertible Preferred Stock meets the definition of mandatorily redeemable stock as it is preferred capital stock which is redeemable at the option of the holder and should be reported
outside of equity. Preferred stock is accreted to its redemption value. The warrants do not qualify to be treated as equity, and accordingly, are recorded as a liability. A preferred stock conversion feature is embedded within the Series A
Convertible Preferred Stock that meets the definition of a derivative.





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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



The costs to secure the preferred stock were taken against the preferred stock. For the
year ended December 31, 2010 these costs were $0.2 million.

We used the net proceeds from the financing to acquire the
FAMILION family of genetic tests from PGxHealth, a subsidiary of Clinical Data.

In connection with the Financing, we filed a
Certificate of Designation of Series A Convertible Preferred Stock with the Secretary of State of the State of Delaware, designating 3,879,307 shares of our Preferred Stock as Series A Convertible Preferred Stock. Certain rights of the holders of
the Series A Convertible Preferred Stock are senior to the rights of the holders of Common Stock. The Series A Convertible Preferred Stock has a liquidation preference equal to its original price per share, plus any accrued and unpaid dividends
thereon. The Series A Convertible Preferred Stock accrues cumulative dividends at the rate of 10.0% of the original price per share per annum.

Generally, the holders of the Series A Preferred Stock are entitled to vote together with the holders of Common Stock, as a single group, on an as-converted basis. However, the Certificate of Designation
provides that we shall not perform some activities, subject to certain exceptions, without the affirmative vote of a majority of the holders of the outstanding shares of Series A Convertible Preferred Stock. The holders of the Series A Convertible
Preferred Stock also are entitled to elect or appoint, as a single group, two (2) of the five (5) directors of the Company.

In connection with the Financing, we also entered into a registration rights agreement with the Investors (the Registration Rights Agreement). Pursuant to the terms of the Registration Rights
Agreement, the Company has granted the Investors certain demand, piggyback and S-3 registration rights covering the resale of the shares of Common Stock underlying the Series A Convertible Preferred Stock issued pursuant to the Series A
Purchase Agreement and issuable upon exercise of the Warrants and all shares of Common Stock issuable upon any dividend or other distribution with respect thereto. The holders of the Series A Convertible Preferred Stock are entitled to receive
quarterly dividends which will accrue whether or not declared, shall compound annually and shall be cumulative. In any calendar quarter we shall be required to pay from funds legally available a cash dividend in the amount of 50% of the
distributable cash flow or aggregate amount of dividends accrued on the Series A Convertible Preferred Stock. During the first quarter of 2011 we recorded $0.2 million in dividends payable which were not distributed.



|L. | FAIR VALUE
|-- | ----------

Financial
Accounting Standards Board (FASB) guidance on fair value measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements for our financial assets and
liabilities, as well as for other assets and liabilities that are carried at fair value on a recurring basis in our consolidated financial statements.

FASB guidance establishes a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The three levels of inputs used to measure fair value are as follows:

Level 1Unadjusted quoted prices in active markets for identical assets or liabilities,

Level 2Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities
in active markets or quoted prices for identical assets or liabilities in inactive markets, and

Level 3Unobservable inputs reflecting our own assumptions and best estimate of what inputs market participants would use in
pricing the asset or liability.

The preferred stock, warrant liability and preferred stock conversion feature are all
recorded separately and are recorded at fair value. We are required to record these instruments at fair value at each reporting date and changes are recorded as an adjustment to earnings. The warrant liability and preferred stock conversion feature
are considered Level 3 financial instruments which are valued using the Black Scholes call option pricing formula.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



During the three months ended March 31, 2011, the changes in the fair value of the
liabilities measured using significant unobservable inputs (Level 3) were comprised of the following:



|                               |  |                                          |       |  |          |   |        |       |  |   |       | 
|------------------------------ |  | ---------------------------------------- | ----- |  | -------- | - | ------ | ----- |  | - | ----- | 
|                               |  | Dollars in Thousands                     |      
|                               |  | For the three months endedMarch 31, 2011 |      
|                               |  | PreferredStockConversionFeature          |       |  | Warrants |   |        | Total | 
|Beginning balance at January 1 |  | $                                        | 1,983 |  |          | $ | 2,351  |       |  | $ | 4,334 | 
|Total gains or losses:         |  |                                          |       |  |          |   |        |       |  |   |       | 
|Recognized in earnings         |  |                                          | 3,095 |  |          |   | (1,068 | )     |  |   | 2,027 | 
|                               |  |                                          |       |  |          |   |        |       |  |   |       | 
|Balance at March 31            |  | $                                        | 5,078 |  |          | $ | 1,283  |       |  | $ | 6,361 | 
|                               |  |                                          |       |  |          |   |        |       |  |   |       | 

We had no Level 3 liabilities at March 31, 2010. There were no purchases, sales, issuances or
settlements in the three months ended March 31, 2011 and 2010. The gains or losses included in earnings are reported in other income (expense) in our Statement of Operations.



|M. | STOCK OPTIONS
|-- | -------------

The
following table summarizes stock option activity during the three months ended March 31, 2011:



|                              |  |                  |           |   |                                |   |       |  
|----------------------------- |  | ---------------- | --------- | - | ------------------------------ | - | ----- | -
|                              |  | Number ofOptions |           |   | Weighted AverageExercise Price |  
|Balance at January 1, 2011    |  |                  | 2,565,001 |   |                                | $ | 2.08  |  
|Granted                       |  |                  | 130,000   |   |                                |   | .74   |  
|Exercised                     |  |                  | (10,000   | ) |                                |   | (.70  | )
|Forfeited                     |  |                  | (219,668  | ) |                                |   | (2.48 | )
|                              |  |                  |           |   |                                |   |       |  
|Balance at March 31, 2011     |  |                  | 2,465,333 |   |                                | $ | 2.02  |  
|                              |  |                  |           |   |                                |   |       |  
|Exercisable at March 31, 2011 |  |                  | 2,178,666 |   |                                | $ | 2.20  |  
|                              |  |                  |           |   |                                |   |       |  



|N. | OPERATING SEGMENT AND GEOGRAPHIC INFORMATION
|-- | --------------------------------------------

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
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.

We have two reportable operating segments, Lab Services and Instrument Business.



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



Segment information for the three months ended March 31, 2011 and 2010 is as
follows:



|                               |  |                      |        |   |                    |   |       |       |  |   |             |   |  |                    |        |   |       |   |       |   |  |   |        |  
|------------------------------ |  | -------------------- | ------ | - | ------------------ | - | ----- | ----- |  | - | ----------- | - |  | ------------------ | ------ | - | ----- | - | ----- | - |  | - | ------ | -
|                               |  | Dollars in Thousands |       
|                               |  | 2011                 |        |   | 2010               |  
|                               |  | LabServices          |        |   | InstrumentBusiness |   |       | Total |  |   | LabServices |   |  | InstrumentBusiness |        |   | Total |  
|Net Sales                      |  | $                    | 3,757  |   |                    | $ | 3,723 |       |  | $ | 7,480       |   |  | $                  | 1,271  |   |       | $ | 4,171 |   |  | $ | 5,442  |  
|Gross Profit                   |  |                      | 1,787  |   |                    |   | 2,367 |       |  |   | 4,154       |   |  |                    | 483    |   |       |   | 2,401 |   |  |   | 2,884  |  
|Net Income/(Loss) before Taxes |  |                      | (3,536 | ) |                    |   | 752   |       |  |   | (2,784      | ) |  |                    | (613   | ) |       |   | 238   |   |  |   | (375   | )
|Income Tax Expense (Benefit)   |  |                      |       |   |                    |   | (6    | )     |  |   | (6          | ) |  |                    |       |   |       |   | (51   | ) |  |   | (51    | )
|                               |  |                      |        |   |                    |   |       |       |  |   |             |   |  |                    |        |   |       |   |       |   |  |   |        |  
|Net Income/(Loss)              |  | $                    | (3,536 | ) |                    | $ | 758   |       |  | $ | (2,778      | ) |  | $                  | (613   | ) |       | $ | 289   |   |  | $ | (324   | )
|                               |  |                      |        |   |                    |   |       |       |  |   |             |   |  |                    |        |   |       |   |       |   |  |   |        |  
|Depreciation/Amortization      |  |                      | 428    |   |                    |   | 49    |       |  |   | 477         |   |  |                    | 79     |   |       |   | 56    |   |  |   | 135    |  
|Restructure                    |  |                      |       |   |                    |   | 24    |       |  |   | 24          |   |  |                    |       |   |       |   |      |   |  |   |       |  
|Interest Income (Expense)      |  |                      | (233   | ) |                    |   | (5    | )     |  |   | (238        | ) |  |                    |       |   |       |   | 1     |   |  |   | 1      |  
|                               |  |                     
|                               |  | 3/31/2011            |        |   | 12/31/10           |  
|Total Assets                   |  | $                    | 21,817 |   |                    | $ | 9,581 |       |  | $ | 31,398      |   |  | $                  | 24,631 |   |       | $ | 7,396 |   |  | $ | 32,027 |  

Net sales by product
were as follows:



|                                        |  |                             |       |  |      |   |       | 
|--------------------------------------- |  | --------------------------- | ----- |  | ---- | - | ----- | 
|                                        |  | Dollars in Thousands        |      
|                                        |  | Three Months EndedMarch 31, |      
|                                        |  | 2011                        |       |  | 2010 |  
|Laboratory Services:                    |  |                             |       |  |      |   |       | 
|Molecular Clinical Reference Laboratory |  | $                           | 3,487 |  |      | $ | 942   | 
|Pharmacogenomics Research Services      |  |                             | 270   |  |      |   | 329   | 
|                                        |  |                             |       |  |      |   |       | 
|                                        |  |                             | 3,757 |  |      |   | 1,271 | 
|Instrument Related Business:            |  |                             |       |  |      |   |       | 
|Bioinstruments                          |  |                             | 1,837 |  |      |   | 2,352 | 
|Bioconsumables                          |  |                             | 1,886 |  |      |   | 1,819 | 
|                                        |  |                             |       |  |      |   |       | 
|                                        |  |                             | 3,723 |  |      |   | 4,171 | 
|                                        |  |                             |       |  |      |   |       | 
|Total Net Sales                         |  | $                           | 7,480 |  |      | $ | 5,442 | 
|                                        |  |                             |       |  |      |   |       | 

Net cost of goods sold was as follows:



|                                        |  |                             |       |  |      |   |       | 
|--------------------------------------- |  | --------------------------- | ----- |  | ---- | - | ----- | 
|                                        |  | Dollars in Thousands        |      
|                                        |  | Three Months EndedMarch 31, |      
|                                        |  | 2011                        |       |  | 2010 |  
|Laboratory Services:                    |  |                             |       |  |      |   |       | 
|Molecular Clinical Reference Laboratory |  | $                           | 1,587 |  |      | $ | 462   | 
|Pharmacogenomics Research Services      |  |                             | 383   |  |      |   | 326   | 
|                                        |  |                             |       |  |      |   |       | 
|                                        |  |                             | 1,970 |  |      |   | 788   | 
|Instrument Related Business:            |  |                             |       |  |      |   |       | 
|Bioinstruments                          |  |                             | 522   |  |      |   | 932   | 
|Bioconsumables                          |  |                             | 834   |  |      |   | 838   | 
|                                        |  |                             |       |  |      |   |       | 
|                                        |  |                             | 1,356 |  |      |   | 1,770 | 
|                                        |  |                             |       |  |      |   |       | 
|Total Cost of Goods Sold                |  | $                           | 3,326 |  |      | $ | 2,558 | 
|                                        |  |                             |       |  |      |   |       | 



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TRANSGENOMIC, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Three Months Ended March 31, 2011 and 2010



Net sales for the three months ended March 31, 2011 and 2010 by country were as
follows:



|                    |  |                              |       |  |      |   |       | 
|------------------- |  | ---------------------------- | ----- |  | ---- | - | ----- | 
|                    |  | Dollars in Thousands         |      
|                    |  | Three Months EndedMarch 
31, |      
|                    |  | 2011                         |       |  | 2010 |  
|United States       |  | $                            | 5,036 |  |      | $ | 2,330 | 
|Italy               |  |                              | 826   |  |      |   | 766   | 
|United Kingdom      |  |                              | 258   |  |      |   | 568   | 
|Germany             |  |                              | 211   |  |      |   | 560   | 
|All Other Countries |  |                              | 1,149 |  |      |   | 1,218 | 
|                    |  |                              |       |  |      |   |       | 
|Total               |  | $                            | 7,480 |  |      | $ | 5,442 | 
|                    |  |                              |       |  |      |   |       | 

No other country accounted for more than 5% of total net sales.

No customer accounted for more than 10% of consolidated net sales during the three months ended March 31, 2011 and 2010. For the
three months ended March 31, 2011 no customers made up more than 10% of Laboratory Services net sales. For the three months ended March 31, 2010 one customer made up more than 10% of the Laboratory Services net sales. This customer
represented 16% of the Laboratory Services net sales for the three months ended March 31, 2010.

More than 95% of our
long-lived assets are within the United States. Substantially all of the remaining long-lived assets are within Europe.



|O. | SUBSEQUENT EVENTS
|-- | -----------------

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. We have no material subsequent events to be disclosed.





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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Forward-Looking Information

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, 2010. Results
for the quarter ended March 31, 2011 are not necessarily indicative of results that may be attained in the future.

Overview

Transgenomic, Inc. is a global biotechnology company specializing in high sensitivity genetic variation and mutation
analysis, providing products and services in DNA mutation detection and discovery for clinical research, clinical molecular diagnostics and pharmacogenomics analyses.

Laboratory Services:



| |  |  | Molecular Clinical Reference Laboratory. The molecular clinical reference laboratory specializes in genetic testing for oncology, hematology and
inherited disorders. Located in New Haven, Connecticut and Omaha, Nebraska the molecular clinical reference laboratories are certified under the Clinical Laboratory Improvement Amendment (CLIA) as high complexity labs and our Omaha facility 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.
This lab specializes in pharmacogenomic, biomarker and mutation discovery research serving the pharmaceutical and biomedical industries world-wide for disease research, drug and diagnostic development and clinical trial support.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Instrument Related Business:



| |  |  | Bioinstruments. Our proprietary product is the WAVE® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base
of over 1,500 WAVE Systems as of December 31, 2010. We also distribute bioinstruments produced by other manufacturers (OEM Equipment) through our sales and distribution network. Service contracts to maintain installed systems are
sold and supported by our technical support personnel.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Bioconsumables. The installed WAVE base and some OEM platforms generate a demand for consumables that are required for the continued operation of
the bioinstruments. We develop, manufacture and sell these consumable products. In addition, we manufacture and sell consumable products that can be used on multiple, independent platforms. These products include SURVEYOR® Nuclease and a range of chromatography columns.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Executive Summary

Net
sales for the three months ended March 31, 2011 increased by $2.0 million or 37% compared to the same period in 2010. The first quarter of 2011 included the results of the FAMILION acquisition in our Laboratory Services segment. During the
three months ended March 31, 2011, net sales from Laboratory Services increased by $2.5 million compared to the same three month period in 2010. The Clinical Reference Laboratory increase is a result of the revenue of $2.7 million related to
the FAMILION acquisition. Net sales from Pharmacogenomics Research Services decreased by less than $0.1 million. Net sales in our Instrument Related Business were up 11% or $0.4 million for the three months ended March 31, 2011 compared to the
same period in 2010. Net sales from bioinstruments were down 22% and net sales of consumables were up 4% for the comparable three month periods. Our gross profit margin increased from 53% for the three months ended March 31, 2010 to 56% for the
same period in 2011. Laboratory Services gross margin increased from 38% in the three months ended March 31, 2010 to 48% for the same period in 2011. Loss from operations was $0.8 million for the three months ended March 31, 2011 compared
to $0.4 million for the three months ended March 31, 2010.

As of March 31, 2011, we had cash and cash equivalents
of $3.2 million.

Outlook

We continue to leverage our core instrument business for on-going instrument sales worldwide as well as employing our instrument technology and related expertise in our two laboratory services businesses.
We anticipate strengthening growth in both of our laboratory services businesses and we continue to seek out new assay technologies and tests to license or develop internally to expand our menu offerings for both of these service businesses. In
particular, we have substantially increased our footprint in the molecular diagnostics laboratory market through our recent acquisition of the Clinical Data FAMILION laboratory testing business. This acquisition brings us approximately $13.0 million
in new annual revenues and a much larger presence both with insurers and patients. This acquisition also provides us access to higher throughput technologies and an expert staff to aid us in growing our reference laboratory business as well as
consolidation opportunities for laboratory operations, billing and sales and marketing.

In our Pharmacogenomics Lab, we
continue to perform cancer pathway gene mutation projects for a number of high visibility pharmaceutical companies both for drug discovery and drug clinical trials. Employing our recently licensed ultra sensitive DNA mutation detection technology,
termed Cold-PCR, and a significant improvement to COLD-PCR termed Ice COLD-PCR, we have added the significant addition of utilizing blood as a mutation detection sample source rather than just testing patients tumors. This is a significant
achievement and should, we believe, lead to much faster expansion of our service testing for pharmaceutical partners as they adopt this novel approach for both drug and disease research. In addition to Ice Cold-PCR, which offers sensitivity
improvements as much as 10,000 times higher than routine DNA testing technology, we have recently discovered a technique to further improve mutation detection sensitivity of standard Sanger sequencing. We have termed this new discovery
BLOCker-Sequencing and we are combining this new discovery with our Ice Cold-PCR program to bring what we believe to be the most accurate and sensitive mutation detection technology available in the market today. We believe that this combination of
technologies will offer us the ability to develop tests for earlier cancer detection using blood or even saliva, to measure recurrence for a very early warning to better manage patients suffering from cancer as well as support earlier drug selection
or drug resistance determinations for these patients.

Although the WAVE System is a fully matured technology, and both it and
its corresponding consumable sales growth in our traditional markets are shrinking, we are expanding our opportunities by selling systems into new geographic areas, including the Middle East and Asia, to continue the revenue from our instrument
related business segment. We also continue to sell OEM instruments worldwide for pre-analytical karyotyping automation. We have launched our CE IVD labeled K-RAS mutation detection kit into Europe and the U.S. and have released two follow on
kits for detecting mutations in key cancer pathway genes BRAF and PIK3CA. These are key cancer pathway mutation assessment tools and, through our proprietary technologies, bring noteworthy improvements in sensitivity and cost efficiency to the
market compared to competing technologies. 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. We have also embarked on several academic collaborations to further validate our newest technologies and better determine how they can and will be used in clinical settings for patients undergoing treatment for cancer.



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Uncertainties

We have historically operated at a loss and have not consistently generated sufficient cash from operating activities to cover our operating and other cash expenses. While we have been able to
historically finance our operating losses through borrowings or from the issuance of additional equity, we may not be able to obtain such funding due to the tightened credit markets. At March 31, 2011 we had cash and cash equivalents of $3.2
million. We believe that existing sources of liquidity are sufficient to meet expected cash needs during 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 in the marketplace also may impact our sales.

We have revaluation risk which occurs when transactions are done in a currency other than the British Pound Sterling. These transactions 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. Fluctuations in the foreign exchange rates could cause our business to be impacted.

Results of Continuing Operations

Three Months Ended March 31, 2011 and 2010

Net Sales. Net
sales consisted of the following:



|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|--------------------------------------- |  | --------------------------- | ----- |  | ------ | - | ----- | - |  | - | ----- | - |  |  | --- | --
|                                        |  | Dollars in Thousands        |      
|                                        |  | Three Months EndedMarch 31, |       |  | Change |  
|                                        |  | 2011                        |       |  | 2010   |   |       | $ |  |   | %     |  
|Laboratory Services:                    |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|Molecular Clinical Reference Laboratory |  | $                           | 3,487 |  |        | $ | 942   |   |  | $ | 2,545 |   |  |  | 270 | % 
|Pharmacogenomics Research Services      |  |                             | 270   |  |        |   | 329   |   |  |   | (59   | ) |  |  | (18 | )%
|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|                                        |  |                             | 3,757 |  |        |   | 1,271 |   |  |   | 2,486 |   |  |  | 196 | % 
|Instrument Related Business:            |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|Bioinstruments                          |  |                             | 1,837 |  |        |   | 2,352 |   |  |   | (515  | ) |  |  | (22 | )%
|Bioconsumables                          |  |                             | 1,886 |  |        |   | 1,819 |   |  |   | 67    |   |  |  | 4   | % 
|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|                                        |  |                             | 3,723 |  |        |   | 4,171 |   |  |   | (448  | ) |  |  | (11 | )%
|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|Total Net sales                         |  | $                           | 7,480 |  |        | $ | 5,442 |   |  | $ | 2,038 |   |  |  | 37  | % 
|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   

Net sales of Laboratory Services increased $2.5 million during the three months ended March 31, 2011
compared to the same period in 2010. Laboratory Services sales includes both the Molecular Clinical Reference Laboratory Services and the Pharmacogenomics Research Services. The Molecular Clinical Reference Laboratory Services net sales were up $2.5
million compared to the three months ended March 31, 2010. The increase in Molecular Clinical Reference Laboratory revenue is due to our acquisition of the FAMILION family of genetic tests on December 29, 2010.

The Pharmacogenomics Research Services net sales of $0.3 million during the three months ended March 31, 2011 decreased $0.1 million
compared to the first quarter of 2010. We had three more customers in 2011 which was offset by lower average revenue per customer. The Pharmacogenomics Research Services net sales have peaks due to the nature of project related business. Each period
for Pharmacogenomics Research Services should be considered on a stand alone basis and is not indicative of future net sales.

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 additional customers.
Bioinstrument net sales decreased $0.5 million, or 22%, during the three months ended March 31, 2011 as compared to the same period in 2010. The decrease in bioinstrument net sales was due to fewer OEM instruments sold in the first quarter of
2011. There were two OEM instruments sold in 2011 compared to five in the first quarter of 2010 each of which was offset by a higher average sales price in the first quarter of 2011. We sold four WAVE instruments in the first quarter of 2011 and
2010. The average sales price was higher in 2011. Demand for WAVE Systems has been affected by significant competitive challenges from traditional (i.e. sequencing) and evolving technologies.



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Net sales of bioconsumables were up 4% or $0.1 million during the three months ended
March 31, 2011 compared to 2010. The volume sold in the United States increased by $0.3 million which was offset by lower volumes in Europe of $0.2 million.

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        |      
|                                        |  | Three Months EndedMarch 31, |       |  | Change |  
|                                        |  | 2011                        |       |  | 2010   |   |       | $ |  |   | %     |  
|Laboratory Services:                    |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|Molecular Clinical Reference Laboratory |  | $                           | 1,587 |  |        | $ | 462   |   |  | $ | 1,125 |   |  |  | 244 | % 
|Pharmacogenomics Research Services      |  |                             | 383   |  |        |   | 326   |   |  |   | 57    |   |  |  | (17 | )%
|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|                                        |  |                             | 1,970 |  |        |   | 788   |   |  |   | 1,182 |   |  |  | 150 | % 
|Instrument Related Business:            |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|Bioinstruments                          |  |                             | 522   |  |        |   | 932   |   |  |   | (410  | ) |  |  | (44 | )%
|Bioconsumables                          |  |                             | 834   |  |        |   | 838   |   |  |   | (4    | ) |  |  | 0   | % 
|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|                                        |  |                             | 1,356 |  |        |   | 1,770 |   |  |   | (414  | ) |  |  | (23 | )%
|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   
|Cost of goods sold                      |  | $                           | 3,326 |  |        | $ | 2,558 |   |  | $ | 768   |   |  |  | 30  | % 
|                                        |  |                             |       |  |        |   |       |   |  |   |       |   |  |  |     |   

Gross profit was $4.2 million or 56% of total net sales during the first quarter of 2011, compared to $2.9
million or 53% during the same period of 2010. During the three months ended March 31, 2011, the gross margin for the Laboratory Services was 48% as compared to 38% in the same period of 2010. The gross margin on the Clinical Reference
Laboratory was 54% for the first quarter of 2011 compared to 51% for the first quarter of 2010. The three months ended March 31, 2011 include the business acquired in the acquisition of the FAMILION family of genetic tests. Pharmacogenomics
gross margin decreased from 1% for the three months ended March 31, 2010 to negative 42% for the three months ended March 31, 2011. This decrease is due to staff added along with higher operating supplies cost. The bioinstrument margin
increased from 60% in the three months ended March 31, 2010 to 72% in the same period of 2011. This increase is primarily driven by the composition of products sold. Margins on bioconsumables increased from 54% to 56% in 2011.

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. Our selling, general and administrative costs increased $1.9 million from $2.4 million to $4.3 million
during the three month period ended March 31, 2011 compared to the same period in 2010. The primary increase in our selling, general and administrative costs is due to the acquisition of the FAMILION family of genetic tests. Foreign currency
revaluation gains for the three months ended March 31, 2011 were $0.1 million compared to $0.1 million in revaluation loss for the three months ended March 31, 2010.

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 first quarter of 2011 and 2010 these costs totaled $0.6 million and $0.8 million, respectively. Research and development expenses totaled 7% and 15% of net sales during the three months
ended March 31, 2011 and 2010, respectively. Decrease is due primarily to the consolidation of our research and development activities in Omaha, Nebraska.

Other Income (Expense).Other income for the three months ended March 31, 2011 includes an award of a federal grant under the Qualifying Therapeutic Discovery Project of $0.2 million, net of
consulting fees. The expense on preferred stock is due to the increase in fair value of the Preferred Stock conversion feature and warrants. This is a non-cash item.

Income Tax Expense (Benefit). Income tax benefit for the three months ended March 31, 2011 was a benefit of less than $0.1 million. This is the result of the change in deferred tax assets
and liabilities reported in the financial statements of our subsidiary outside the U.S. This tax benefit is partially offset by tax expense related to state and franchise taxes as well as reserves for uncertain income taxes. We believe the
tax benefit recorded will be offset in future periods by a tax expense, related to income reported in financial statements of our subsidiary outside the U.S. Income tax benefit for the three months ended March 31, 2010 was less than $0.1
million.



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Liquidity and Capital Resources

Our working capital positions at March 31, 2011 and December 31, 2010 were as follows:



|                                                                                        |  |                      |        |  |                  |   |        |        |  |   |      |  
|--------------------------------------------------------------------------------------- |  | -------------------- | ------ |  | ---------------- | - | ------ | ------ |  | - | ---- | -
|                                                                                        |  | Dollars in Thousands |       
|                                                                                        |  | March 31,2011        |        |  | December 31,2010 |   |        | Change | 
|Current assets (including cash and cash equivalents of $3,170 and $3,454, respectively) |  | $                    | 14,646 |  |                  | $ | 15,034 |        |  | $ | (388 | )
|Current liabilities                                                                     |  |                      | 8,340  |  |                  |   | 8,253  |        |  |   | (87  | )
|                                                                                        |  |                      |        |  |                  |   |        |        |  |   |      |  
|Working capital                                                                         |  | $                    | 6,306  |  |                  | $ | 6,781  |        |  | $ | (475 | )
|                                                                                        |  |                      |        |  |                  |   |        |        |  |   |      |  

The working capital decrease is primarily a result of increased accrued expenses and compensation at
March 31, 2011 compared to December 31, 2010.

We have historically operated at a loss and have not consistently
generated sufficient cash from operating activities to cover our operating and other cash expenses. While we have been able to historically finance our operating losses through borrowings or from the issuance of additional equity, we currently have
no borrowings and have no plans to issue additional equity securities for this purpose. At March 31, 2011 we had cash and cash equivalents of $3.2 million. We believe that existing sources of liquidity are sufficient to meet expected cash needs
during 2011, we will need to increase our net sales, and focus on the integration of the FAMILION acquisition to reduce our operating expenses in order to be assured of meeting our liquidity needs on a long-term basis. However, we cannot assure you
that we will be able to increase our 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. We continue to explore
additional sources of liquidity.

Analysis of Cash Flows

Three Months Ended March 31, 2011 and 2010

Net Change in Cash and
Cash Equivalents.Cash and cash equivalents decreased by $0.3 million during the three months ended March 31, 2011 compared to an increase of $0.3 million during the three months ended March 31, 2010. During the three months ended
March 31, 2011 we used cash in operating, investing and financing activities which was offset by foreign currency exchange revaluation. In 2010 net cash provided by operating activities was $0.4 million offset by less than $0.1 million of net
cash flow used in investing activities and $0.1 million impact of foreign currency exchange rates.

Cash Flows Provided by
Operating Activities. Cash flows provided by operating activities totaled $0.1 million during the three months ended March 31, 2011, compared to cash flows provided by operating activities of $0.4 million during the same period of 2010. The
cash flows provided by operating activities in 2011 include the net loss and decrease in accounts payable, offset by the non-cash items which include revaluation of the preferred stock conversion feature and warrant liability, depreciation and
amortization. The cash flows provided by operating activities in 2010 relate to the increase in accounts payable and accrued expenses of $0.9 million offset by the decrease in prepaid expenses of $0.2 million and the net loss of $0.3 million.

Cash Flows Used In Investing Activities. Cash flows used in investing activities totaled $0.1 million during the three
months ended March 31, 2011 compared to cash flows used in investing activities of less than $0.1 million during the same period of 2010. Cash flows used in investing activities in 2011 and 2010 consisted primarily of purchases of property and
equipment.

Cash Flows Used in Financing Activities. Cash flows used in financing activities were $0.3 million for the
three months ended March 31, 2011. Cash flows used in financing activities were for payments on debt and capital lease obligations offset by the issuance of common stock due to the exercise of stock options for 10,000 shares during the first
quarter of 2011. There were no cash flows provided by or used in financing activities for the three months ended March 31, 2010.



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Off-Balance Sheet Arrangements

At March 31, 2011 and December 31, 2010, we did not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

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, 2010.

Recently Issued
Accounting Pronouncements

Please refer to our annual report on Form 10-K for the fiscal year ended December 31,
2010. There have been no changes to those accounting pronouncements listed except as noted in note B to the financial statements contained in this report.

Impact of Inflation

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.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Management performed, with the participation of our Chief Executive Officer and Chief Financial Officer, an evaluation of the effectiveness of our
disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the 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 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 Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, the Companys Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2011,
Transgenomics disclosure controls and procedures were effective.

We have evaluated the changes in our internal control
over financial reporting that occurred during the three months ended March 31, 2011 and concluded that there have not been any changes that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.





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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

We
are subject to a number of 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.



|Item 1A. | Risk Factors
|-------- | ------------

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, 2010 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.

Note Regarding Risk Factors

The risk factors presented above and in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 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.



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|Item 6. | Exhibits
|------- | --------



|(a) | Exhibits
|--- | --------



|     |  |                                                                                                                                                                                                                                                                                                                                                                  
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|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)                                                                                                                                                                                                  
|     | 
|3.3  |  | Certificate of Designation of Series A Convertible Preferred Stock dated as of December 28, 2010 (incorporated by reference to Exhibit 3.1 to Registrants Report on Form 8-K
(Registration No. 000-30975) filed on January 4, 2011)                                                                                                                             
|     | 
|4.1  |  | 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)                                                                                                                                                                         
|     | 
|4.2  |  | Series A convertible Preferred Stock Purchase Agreement, dated December 29, 2010, by and among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, Third Security Staff 2010
LLC, and Third Security Incentive 2010 LLC (incorporated by reference to Exhibit 4.1 to Registrants Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)
|     | 
|4.3  |  | Form of Warrant (incorporated by reference to Exhibit 4.2 to Registrants Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)                                                                                                                                                                                                              
|     | 
|4.4  |  | Registration Rights Agreement, dated December 29, 2010, by and among Transgenomic, Inc., Third Security Senior Staff 2008 LLC, Third Security Staff 2010 LLC, and Third Security
Incentive 2010 LLC (incorporated by reference to Exhibit 4.3 to Registrants Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)                          
|     | 
|4.5  |  | Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc. in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.4 to Registrants Report on Form
8-K (Registration No. 000-30975) filed on January 4, 2011)                                                                                                                           
|     | 
|4.6  |  | Secured Promissory Note, issued December 29, 2010 by Transgenomic, Inc. in favor of PGxHealth, LLC (incorporated by reference to Exhibit 4.5 to Registrants Report on Form
8-K (Registration No. 000-30975) filed on January 4, 2011)                                                                                                                           
|     | 
|10.1 |  | Sublease Agreement, dated December 29, 2010, by and between Transgenomic, Inc. and Clinical Data, Inc. (incorporated by reference to Exhibit 10.1 to Registrants Report on
Form 8-K (Registration No. 000-30975) filed on January 4, 2011)                                                                                                                      
|     | 
|10.2 |  | Noncompetition and Nonsolicitation Agreement, dated December 29, 2010 by and among PGxHealth, LLC, Clinical Data, Inc. and Transgenomic, Inc. (incorporated by reference to
Exhibit 10.2 to Registrants Report on Form 8-K (Registration No. 000-30975) filed on January 4, 2011)                                                                               
|     | 
|10.3 |  | Security Agreement, dated December 29, 2010, by and between PGxHealth, LLC and Transgenomic, Inc. (incorporated by reference to Exhibit 10.3 to Registrants Report on Form
8-K (Registration No. 000-30975) filed on January 4, 2011)                                                                                                                           
|     | 
|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                                                                                                                                                                                                                                                                                         



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SIGNATURES

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.



|      |  |              |  |  |  |                    |  |                                                      
|----- |  | ------------ |  |  |  | ------------------ |  | -----------------------------------------------------
|      |  |              |  |  |  | TRANSGENOMIC, INC.
|      |  |              |  | 
|Date: |  | May 13, 2011 |  |  |  | By:                |  | /S/ CRAIG J. TUTTLE                                  
|      |  |              |  |  |  |                    |  | Craig J. Tuttle President and Chief Executive Officer



30