10-Q

QuickLinks -- Click here to rapidly navigate through this document

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2002

Or

o 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 (State or other jurisdiction of incorporation or organization)	911789357 (I.R.S. Employer Identification No.)
12325 Emmet Street, Omaha, Nebraska (Address of principal executive offices)	68164 (Zip Code)

(402) 452-5400
(Registrant's telephone number, including area code)

        Indicate 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  Yes ý    No o

        As of August 5, 2002, the number of shares of common stock outstanding was 23,478,727 consisting of 23,973,331 shares issued less 494,604 shares of Treasury Stock.

TRANSGENOMIC INC.

INDEX

		Page No.
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001	1
	Consolidated Statements of Operations for the Three Months ended and Six Months ended June 30, 2002 and 2001	2
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2002 and 2001	3
	Notes to Consolidated Financial Statements	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
PART II.	OTHER INFORMATION	20
Item 1.	Legal Proceedings	20
Item 2.	Changes in Securities and Use of Proceeds	20
Item 4.	Submission of Matters to a Vote of Securities Holders	20
Item 6.	Exhibits and Reports on Form 8-K	21
Signatures		22

PART I    FINANCIAL INFORMATION

Item 1.    Financial Statements

Transgenomic, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands except share and per share data)

				June 30, 2002			December 31, 2001
ASSETS
Current Assets
	Cash and cash equivalents			$	6,358		$	19,613
	Short term investments				18,691			23,913
	Accounts receivable—net				10,992			11,248
	Inventories				11,899			5,829
	Notes receivable				1,885			—
	Prepaid expenses and other current assets				2,422			2,273
		Total current assets			52,247			62,876
Property & Equipment
	Building & equipment				14,787			10,459
	Furniture & fixtures				3,260			3,004
		Total property & equipment			18,047			13,463
	Less: accumulated depreciation				7,121			5,278
		Net property & equipment			10,926			8,185
Goodwill					15,275			15,345
Intangible and other assets					5,076			2,880
Total Assets				$	83,524		$	89,286
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
	Accounts payable			$	3,828		$	2,664
	Accrued expenses and other liabilities				3,579			3,306
	Accrued compensation				940			1,212
		Total current liabilities			8,347			7,182
Commitments and contingencies
Stockholders' Equity
	Preferred stock $.01 par value, 15,000,000 shares authorized, none outstanding				—			—
	Common stock $.01 par value, 60,000,000 shares authorized, 23,973,331 and 23,867,907 issued in 2002 and 2001, respectively				240			239
	Additional paid-in capital				113,838			113,260
	Unearned compensation				(149	)		(158	)
	Accumulated other comprehensive income (loss)				181			(81	)
	Accumulated deficit				(35,746	)		(28,406	)
					78,364			84,854
	Less: Treasury stock, at cost, 494,604 shares				(3,187	)		(2,750	)
		Total stockholders' equity			75,177			82,104
			Total liabilities and stockholders' equity	$	83,524		$	89,286

The accompanying notes are an integral part of these financial statements.

1

Transgenomic, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(In thousands except share and per share data)

		Three Months Ended June 30,						Six Months Ended June 30,
		2002			2001			2002			2001
Net sales		$	9,424		$	9,545		$	19,255		$	17,475
Cost of goods sold			4,562			4,137			9,285			7,804
	Gross profit		4,862			5,408			9,970			9,671
Operating expenses:
	Selling, general and administrative		5,923			5,406			11,822			9,559
	Research and development		2,964			2,176			5,736			4,266
	Stock based compensation expense		35			52			60			85
			8,922			7,634			17,618			13,910
Loss from operations			(4,060	)		(2,226	)		(7,648	)		(4,239	)
Interest income			171			659			423			1,546
Interest expense			(10	)		(72	)		(10	)		(72	)
Other income (expense), net			(6	)		(2	)		(8	)		5
			155			585			405			1,479
Loss before income taxes			(3,905	)		(1,641	)		(7,243	)		(2,760	)
Income tax expense			76			7			97			16
	Net loss	$	(3,981	)	$	(1,648	)	$	(7,340	)	$	(2,776	)
Basic and diluted weighted average shares outstanding			23,699,047			22,504,309			23,673,084			21,861,060
Net loss per common share—basic and diluted		$	(0.17	)	$	(0.07	)	$	(0.31	)	$	(0.13	)

The accompanying notes are an integral part of these financial statements.

2

Transgenomic, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
(In thousands)

			Six Months Ended June 30,
			2002			2001
Cash Flows from Operating Activities
	Net loss		$	(7,340	)	$	(2,776	)
	Adjustments to reconcile net loss to net cash flows from operating activities:
		Depreciation and amortization		1,803			1,376
		Non-cash compensation expense		60			85
		Other		—			(9	)
	Changes in operating assets and liabilities net of acquisitions:
		Accounts receivable		580			(2,428	)
		Inventories		(5,560	)		(1,095	)
		Prepaid expenses and other current assets		(822	)		34
		Accounts payable		1,015			943
		Accrued expenses		(122	)		(38	)
	Net cash flows from operating activities			(10,386	)		(3,908	)
Cash Flows from Investing Activities
	Purchase of property and equipment			(4,461	)		(2,748	)
	Proceeds from asset sales			—			21
	Proceeds from the maturities and sale of available for sale securities			24,285			—
	Purchase of available for sale securities			(19,088	)		(21,668	)
	Purchase of business, net of cash acquired			—			(1,854	)
	Increase in Notes receivable			(1,885	)		—
	Increase in other assets			(2,193	)		(321	)
	Net cash flows from investing activities			(3,342	)		(26,570	)
Cash Flows from Financing Activities
	Issuance of common stock and common stock warrants			528			366
	Purchase of treasury stock			(437	)		—
	Repayment of acquired businesses debt			—			(458	)
	Net cash flows from financing activities			91			(92	)
Effect of foreign currency exchange rates on cash				382			13
Net change in cash and cash equivalents				(13,255	)		(30,557	)
Cash and cash equivalents at beginning of period				19,613			38,193
Cash and cash equivalents at end of period			$	6,358		$	7,636
Non-cash financing activity:
	Issuance of common stock as acquisition consideration			—		$	13,084

The accompanying notes are an integral part of these financial statements.

3

Transgenomic, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (Unaudited)
(In thousands except share and per share data)

A.    CONSOLIDATED FINANCIAL STATEMENTS

        The accompanying unaudited consolidated financial statements of Transgenomic, Inc. and Subsidiaries (the "Company") have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. In the opinion of management of the Company, all adjustments (consisting of only normal and recurring accruals) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the consolidated financial statements for the period ended December 31, 2001 that are included in the Company's Annual Report on Form 10-K.

        New Accounting Pronouncements    In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS No. 142 establishes new guidelines for accounting for goodwill and other intangible assets and provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be evaluated for impairment annually. The Company adopted SFAS No. 142 beginning January 1, 2002. The provisions of SFAS No. 142 also require the completion of a transitional impairment test within six months of adoption, with any impairment treated as a cumulative effect of a change in accounting principle. The Company has performed the transitional goodwill impairment tests and has determined that no impairment exists at the time of adoption of SFAS No. 142. A reconciliation of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill amortization follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Reported Net Income	$	(3,981	)	$	(1,648	)	$	(7,340	)	$	(2,776	)
ADD: Goodwill Amortization		—			268			—			300
Adjusted Net Income	$	(3,981	)	$	(1,380	)	$	(7,340	)	$	(2,476	)
Earnings Per Share:
As Reported	$	(0.17	)	$	(0.07	)	$	(0.31	)	$	(0.13	)
Adjusted	$	(0.17	)	$	(0.06	)	$	(0.31	)	$	(0.11	)

        Amortization expense for intangible assets was $78 during the six months ended June 30, 2002. The Company expects amortization expense for intangible assets to be $400 for the remainder of fiscal 2002 and approximately $800 in fiscal 2003, $750 in fiscal 2004, $475 in fiscal 2005, $200 in fiscal 2006 and $200 in fiscal 2007.

        In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective for the

4

Company's fiscal year beginning January 1, 2003. The Company has not quantified the impact resulting from the adoption of this standard.

        In October 2001, FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets". The standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. There was no financial statement impact as a result of the Company's adoption of SFAS No. 144 on January 1, 2002.

        In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The standard updates and simplifies the existing accounting pronouncements. SFAS No. 145 is effective for Company's fiscal year beginning January 1, 2003. The Company has not quantified the impact resulting from the adoption of this standard.

        In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard addresses accounting and reporting associated with exit or disposal activities. SFAS No. 146 is effective for the Company's fiscal year beginning January 1, 2003. The Company has not quantified the impact resulting from the adoption of this standard.

B.    SHORT TERM INVESTMENTS

        At June 30, 2002 and December 31, 2001, short-term investments consisted of the following:

June 30, 2002	Amortized		Gross Unrealized Gains		Gross Unrealized Gains		Fair Value
Commercial paper	$	8,037	$	5	$	—	$	8,042
U.S. government agencies		4,392		—		—		4,392
Corporate debt		6,255		2		—		6,257
Total securities available-for-sale	$	18,684	$	7	$	—	$	18,691

December 31, 2001	Amortized		Gross Unrealized Gains		Gross Unrealized Gains		Fair Value
Commercial paper	$	8,782	$	10	$	—	$	8,792
U.S. government agencies		5,774		—		—		5,774
Corporate debt		9,322		25		—		9,347
Total securities available-for-sale	$	23,878	$	35	$	—	$	23,913

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

5

C.    INVENTORIES

        At June 30, 2002 and December 31, 2001, inventories consist of the following:

	2002			2001
Finished goods	$	5,334		$	2,335
Raw materials and work in progress		6,279			3,248
Demonstration inventory		536			496
		12,149			6,079
Less long-term demonstration inventory		(250	)		(250	)
	$	11,899		$	5,829

D.    NOTES RECEIVABLE

        In February 2002, pursuant to a Term Loan Agreement, the Company loaned $1.5 million to GenOdyssee, S.A., a French limited company located near Paris. The loan proceeds are to be used by GenOdyssee for general corporate purposes. The loan carries an annual interest rate of 5% and all accrued interest and principal are due on the earlier of January 31, 2003, or the first closing date of a "qualified offering" defined as the issuance of new voting equity securities in GenOdyssee pursuant to a private or public offering that raises gross proceeds of not less than $5 million. GenOdyssee may prepay this debt in whole or in part at anytime. GenOdyssee may make repayment of the principal and accrued interest in one of the following forms:

•

Shares of GenOdyssee issued as the same type and class and under the same terms and conditions, including share price, as shares issued in a "qualified offering".



•

Shares of GenOdyssee issued based on an independent third party appraisal in the event that a "qualified offering" is not consummated prior to January 31, 2003, or



•

Cash.

        In April 2002, pursuant to a Loan and Security Agreement, the Company loaned $0.35 million to Trivera Biotechnology, LLC, located in Ann Arbor, Michigan. The loan proceeds are to be used by Trivera for general corporate purposes. The loan carries an annual interest rate of 6%. The initial term of the loan is 12 months with automatic renewals for successive 6 month terms through April 30, 2007 unless the Company provides written notice of intent not to renew 15 days prior to the end of the initial or any renewal term. All accrued interest is payable in cash and due at the end of the initial term and any subsequent renewal term. The outstanding principal balance is due at the end of the initial term or the last renewal term. Trivera may make repayment of the principal in one of the following forms:

•

Cash,



•

At the sole election of the Company, voting securities of Trivera equal to 19.9% of the total ownership shares after issuance, or



•

A combination of cash and voting securities.

6

E.    STOCKHOLDERS' EQUITY AND STOCK OPTIONS

        Other Comprehensive Income.    Results of operations for the Company's foreign subsidiary are translated using the average exchange rates during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. These translation adjustments, along with unrealized gains and losses on available-for-sale securities, are the Company's only components of other comprehensive income.

	Three Months Ended June 30,						Six Months Ended June 30,
	2002			2001			2002			2001
Net loss	$	(3,981	)	$	(1,648	)	$	(7,340	)	$	(2,776	)
Unrealized gain (loss) on available for sale securities		18			24			(25	)		61
Currency translation adjustments		380			(24	)		288			(170	)
Total comprehensive loss	$	(3,583	)	$	(1,648	)	$	(7,077	)	$	(2,885	)

        Stock Options.    During the six months ended June 30, 2002, the Company granted 306,000 options with exercise prices ranging from $6.16 to $9.63 per share. Of the total granted during the first six months, 20,000 options were granted to non-employees under consulting and other service agreements and compensation expense of approximately $51 was recorded associated with these grants. These expense amounts were calculated using the Black-Scholes option pricing model with the following assumptions: no common stock dividends, risk-free interest rate of 3.10%, volatility of 85%, and an expected option life of 1.5 years.

        The following table summarizes activity under the 1997 Stock Option Plan during the six months ended June 30, 2002.

		Number of Options	Weighted Average Exercise Price
Balance at December 31, 2001		5,133,831	$	6.90
	Granted	306,000	$	7.67
	Exercised	81,900	$	5.00
	Canceled	269,800	$	7.95
Balance at June 30, 2002		5,088,131	$	6.92
Exercisable at June 30, 2002		2,769,198	$	6.18

        The weighted average fair value of options granted during the first six months of fiscal 2002 was $4.27 per share. At June 30, 2002, the weighted average remaining contractual life of options outstanding was 7.0 years. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in the first six months of fiscal 2002: no common stock dividends; risk-free interest rates of 5.07%; 85% volatility; and an expected option life of 3 years.

7

        Pro forma net loss and loss per share for the six months ended June 30, 2002 and 2001, assuming compensation expense for the Stock Option Plan had been determined under SFAS 123, is as follows:

		Six Months Ended June 30, 2002			Six Months Ended June 30, 2001
Net Loss:
	As reported	$	(7,340	)	$	(2,776	)
	Pro forma	$	(8,438	)	$	(3,548	)
Basic and diluted loss per share:
	As reported	$	(0.31	)	$	(0.13	)
	Pro forma	$	(0.36	)	$	(0.16	)

F.    INCOME TAXES

        Due to the Company's cumulative losses in recent years, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company has not provided for an income tax benefit during the three months or six months ended June 30, 2002, based on management's determination that it was more likely than not that such benefits would not be realized. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. During the three months and six months ended June 30, 2002, the Company recorded current tax expense related to its Japan branch operations.

        As of June 30, 2002, and December 31, 2001, the Company's deferred tax assets were offset by a valuation allowance of approximately $17.5 million and $14.7 million, respectively, due to the Company's cumulative losses in recent years, expected losses in future years and inability to utilize any additional losses as carrybacks.

G.    ACQUISITIONS AND SALE OF ASSETS

        Effective May 1, 2001, the Company acquired Annovis, Inc, a privately held company, for approximately $16.9 million through the issuance of approximately 1.9 million shares of Transgenomic, Inc. common stock, the payment of approximately $0.6 million in cash in lieu of common stock to certain Annovis stockholders, and the payment of approximately $3.2 million of direct acquisition-related expenses. The acquisition was structured as a merger of Annovis with a subsidiary of the Company and resulted in Annovis becoming a wholly-owned subsidiary of the Company. Included in the total purchase price are costs related to the Company's plan to close the Aston, Pennsylvania, facility and consolidate those operations in Omaha, Nebraska. The anticipated costs to consolidate these operations total $.45 million and consist of employee severance payments, relocation expenses, fixed asset write-offs and other facility closure costs. Annovis is a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid based products and service for the life sciences industry. Annovis's results of operations have been included in the accompanying financial statements beginning on May 1, 2001.

        The Company accounted for this transaction as a purchase. The Company has allocated the excess of the purchase price over the net assets acquired to goodwill. The costs assigned to intangible assets

8

are being amortized on a straight-line basis over a period averaging 10 years. As of June 30, 2002, all identifiable tangible and intangible assets acquired and liabilities assumed have been allocated a portion of the cost equal to their estimated fair values based upon an appraisal from an independent appraiser as follows:

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

        The costs assigned to goodwill have been amortized through December 31 2001, on a straight-line basis over a period of 10 years. On January 1, 2002, the Company implemented Statement of Financial Accounting Standard No. 142. Under these new guidelines goodwill is no longer amortized. The Company's unaudited pro forma results of operations for the six months ended June 30, 2001, assuming the acquisition of Annovis, Inc. occurred as of the beginning of the periods presented are as follows:

	Six Months Ended June 30, 2001
Net Sales	$	21,589
Net Loss		(3,138	)
Basic and diluted loss per share	$	(0.14	)

        The unaudited pro forma results of operations are not necessarily indicative of the actual results of operations had the acquisition occurred on the dates indicated nor are they indicative of the results of operations for future periods.

9

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

        The following discussion should be read in conjunction with our consolidated financial statements and notes included elsewhere in this filing.

Overview

        We provide innovative solutions for the synthesis, purification and analysis of nucleic acids. Our solutions include automated instrument systems, associated consumables and chemical building blocks for nucleic acid synthesis. Our technologies center around three core competencies: separation chemistries, enzymology and nucleic acid chemistries. We develop, assemble, manufacture and market our products to the life sciences industry to be used in research focused on molecular genetics of humans and other organisms. Such research could lead to development of new diagnostics and therapeutics. Our products can be used to analyze DNA or RNA at the molecular level, amplify, separate and isolate nucleic acid fragments of particular interest and synthesize conventional or chemically-modified nucleic acid molecules. These capabilities are central to research seeking to discover and understand variations in the genetic code, the relationship of these variations to disease and, ultimately, to develop diagnostics and therapeutics based on this understanding. Our business plan is to participate in the value chain associated with these activities by providing key technology, tools, consumables and biochemical reagents to those entities engaged in basic biomedical research and the development of diagnostics and therapeutic agents.

        Revenues are generated from the sale of our principal products, the WAVE System and our consumable products. Since the WAVE System product introduction in 1997 we have sold over 830 instruments to customers in over 30 countries. Revenues from the sale of consumable products increased significantly during the second quarter of 2002, due largely to our acquisition of Annovis, Inc. discussed below, and represented approximately 55% of our net sales as compared to approximately 37% in 2001.

        Before July 1, 1997, we manufactured and sold instruments and other products used in the non-life sciences instrumentation industry through our predecessor company, CETAC Holding Company, Inc. and its subsidiaries. On July 1, 1997, we merged these companies into Transgenomic, Inc., a new Delaware corporation, for the purpose of developing, manufacturing and selling our new life sciences product line in addition to continuing to manufacture and market our existing non-life sciences products. In 1999, we decided to focus our resources on our life sciences product line. Accordingly, during the second quarter of 2000 we sold the assets related to our non-life sciences instrument products. These assets consisted of inventory, property, plant and equipment, patents, other intellectual property rights and a lease deposit. Financial information for periods ending before the effective date of the sale, April 1, 2000, includes the results of our non-life sciences instrument product line. On July 21, 2000, we completed our initial public offering, selling 5,152,000 shares of common stock at $15.00 per share for net proceeds of approximately $69.9 million. In May 2001, we acquired Annovis, Inc., a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid-based products and services for the life science industry, for a total purchase price of approximately $16.9 million.

        We have incurred significant losses resulting principally from costs incurred in research and development and selling, general and administrative costs associated with our operations. At June 30, 2002, we had an accumulated deficit of $35.7 million. Although we expect to continue to incur substantial research and development and selling, general and administrative costs as we continue to expand our operations we also expect these costs as a percentage of sales to decline.

10

Accounting Policies

        Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Our judgements and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgements and estimates from time to time as circumstances change. Actual financial results based on judgment or estimates may vary under different assumptions or circumstances. The following are accounting policies that may involve the use of judgment or estimates.

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

•

the age of the accounts receivable,



•

customer credit history,



•

customer financial information,



•

reasons for non-payment, and



•

our knowledge of the customer.

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

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

        Depreciation and Amortization of Long-Lived Assets    The Company's long-lived assets consist primarily of property, plant and equipment, goodwill, patents, intellectual property and capitalized software development costs. We believe the useful lives we assigned to these assets are reasonable. If our assumptions about these assets change as a result of events or circumstances and we believe the assets may have declined in value we may record impairment charges resulting in lower profits. Property and equipment are carried at cost. Depreciation and amortization are computed by the straight-line and accelerated methods over the estimated useful lives of the related assets ranging from 3 to 7 years. The Company capitalizes the external and in-house legal costs and filing fees associated with obtaining patents on its new discoveries and amortizes these costs using the straight-line method over the shorter of the legal life of the patent or its economic life, generally 17 years, beginning on the date the patent is issued. Intellectual property, which is purchased technology, is recorded at cost and is amortized over its estimated useful life of between 5 and 10 years.

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

11

assumptions about these assets were to change as a result of events or circumstances, the Company may be required to record an impairment loss. No impairment loss has been recognized to date.

        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. A valuation allowance has been provided for our remaining deferred tax assets due to the Company's cumulative losses in recent years, expected losses in future years and an inability to utilize any additional losses as carrybacks. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time.

        Revenue Recognition    Revenue on the sales of products is recognized in accordance with the terms of the sales arrangement, which is generally based on receipt of an unconditional customer order and shipment of product. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our research instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument.

Results of Operations

Three Months Ended June 30, 2002 and 2001

        Net Sales.    Net sales decreased 1%, from $9.5 million in 2001 to $9.4 million in 2002. The decrease was the result of decreased sales of our WAVE systems offset by increased sales of consumable products. Total consumable sales increased 44%, from $3.6 million in 2001 to $5.2 million in 2002. Sales of consumables increased largely due to sales of specialty chemical products added through the acquisition of Annovis in May, 2001. Specialty chemical product revenues increased 55% from $2.4 million in 2001 to $3.7 million in 2002. Total revenues from sales of WAVE Systems decreased 29%, from $5.9 million in 2001 to $4.2 million in 2002. The decrease in WAVE system sales was seen mainly in our North American customer base and our commercial and industrial customer base. Systems sold to our North American customers accounted for approximately 22% of system placements during the quarter as compared to between 40% to 50% of systems placements in fiscal years 2000 and 2001. Our commercial and industrial customers accounted for approximately 2% of our system placements during the quarter as compared to between 25% to 35% of system placements in fiscal years 2000 and 2001.

        Cost of Goods Sold.    Cost of goods sold increased 10% from $4.1 million in 2001 to $4.6 million in 2002. Cost of goods sold represented 43% of net sales in 2001, as compared to 48% in 2002. Both total cost of goods sold and cost of goods sold as a percent of sales increased year over year due to the mix of products sold. Currently our specialty chemical consumable products, which have become a larger component of our total revenues, are sold at lower margins as compared to our WAVE systems. Our WAVE systems cost of goods sold represented 38% of net sales in 2001 as compared to 36% in 2002. WAVE systems cost of goods sold as a percent of sales decreased year over year due to increased sales of our higher margin high throughput system along with the recognition of deferred revenue. Our consumables cost of goods sold represented 52% of net sales in 2001 as compared to 59% in 2002. Our specialty chemical consumable product margins are lower as compared to the prior year mainly due to the following factors, (1) bulk sales pricing to large customers under supply contracts and (2) increased raw material prices. We continue to expand our production capabilities in order to leverage our fixed costs into higher production volumes. We anticipate that this percentage will improve in the future as

12

we refine our systems configurations potentially reducing material costs, as we move to larger scale production of our specialty chemicals and as consumable sales increase thereby spreading our fixed production costs over a larger revenue base.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased 9%, from $5.4 million in 2001 to $5.9 million in 2002. The increase is the result of higher personnel and personnel-related expenses, depreciation and bad debt expense offset by a reduction in goodwill amortization, professional services and foreign currency exchange rate gains. Combined these items accounted for over 90% of the total increase.    Direct personnel and personnel related expenses increased as a result of our expanded employee base. Our employee base has increased largely due to the acquisition of Annovis. Depreciation expense has increased due to the acquisition of Annovis and investments in corporate infrastructure assets. Bad debt expense increased as management felt it was appropriate to increase the allowance for bad debt given the Company's increased level of accounts receivable. The decrease in goodwill amortization is the result of the Company adopting Statement of Financial Accounting Standards (SFAS) No.142, Goodwill and Other Intangible Assets. Selling, general and administrative expenses as a percent of net sales was approximately 57% in 2001 and 63% in 2002. While we anticipate selling, general and administrative expenses to increase, in absolute dollars, over the next several years to support our growing marketing, sales and business activities we expect that these expenses will decline as a percentage of sales.

        Research and Development Expenses.    Research and development expenses increased 36%, from $2.2 million in 2001 to $3.0 million in 2002. The increase in these expenses is attributable to increased personnel and personnel related expenses, depreciation and professional service fees. Direct personnel expenses accounted for approximately 77% of the total increase and were due to our expanded employee base. Professional service fees increased as the Company has engaged consultants and collaborators to supplement the activities of our internal research and development personnel. Other increases were attributable to the costs associated with the expanded activities of the staff and the Annovis operations and were offset by amounts capitalized related to the development of software to be used to operate our WAVE systems. During the quarter we capitalized approximately $460,000 in costs related mainly to the development of WAVE Navigator software which reached technological feasibility in the prior year. Research and development expenses represented approximately 23% of net sales in 2001 and approximately 32% of net sales in 2002. While we expect research and development spending to increase, in absolute dollars, over the next several years as we expand our development efforts we expect that these expenses will decline as a percentage of sales.

        Stock Based Compensation.    Stock based compensation expense was $52,000 in 2001 and $35,000 in 2002. This expense reflects the amortization of deferred compensation related to stock options issued.

        Other Income.    Other income, which consists of net interest income and other expense, declined from $585,000 in 2001 to $155,000 in 2002. Interest income for the quarter was $161,000 as compared to $610,000 in 2001. The decrease in interest income is a result of declining interest rates on investments and reductions in our short term investments balances.

        Income Taxes.    No income tax benefit was recorded in 2002 or 2001. No further tax benefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. During the three months ended June 30, 2002, the Company recorded current tax expense related to its Japan branch operations and wrote off certain state tax credits that are no longer collectible. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such

13

valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized.

Six Months Ended June 30, 2002 and 2001

        Net Sales.    Net sales increased 10%, from $17.5 million in 2001 to $19.3 million in 2002. The increase was the result of increased sales of consumable products offset by decreased sales of our WAVE system. Total consumable sales increased 106%, from $4.9 million in 2001 to $10.1 million in 2002. Sales of consumables increased largely due to sales of specialty chemical products added through the acquisition of Annovis in May, 2001. Specialty chemical product revenues increased 204% from $2.4 million in 2001 to $7.3 million in 2002. Total revenues from sales of WAVE Systems decreased 27%, from $12.6 million in 2001 to $9.1 million in 2002. The decrease in WAVE system sales was seen mainly in our North American customer base and our commercial and industrial customer base. Systems sold to our North American customers accounted for approximately 27% of system placements during the first six months as compared to between 40% to 50% of systems placements in fiscal years 2000 and 2001. Our commercial and industrial customers accounted for approximately 5% of our system placements during the first six months as compared to between 25% to 35% of system placements in fiscal years 2000 and 2001.

        Cost of Goods Sold.    Cost of goods sold increased 19% from $7.8 million in 2001 to $9.3 million in 2002. Cost of goods sold represented 45% of net sales in 2001, as compared to 48% in 2002. Both total cost of goods sold and cost of goods sold as a percent of sales increased year over year due to the mix of products sold. Currently our specialty chemical consumable products, which have become a larger component of our total revenues, are sold at lower margins as compared to our WAVE systems. Our WAVE systems cost of goods sold represented 42% of net sales in 2001 as compared to 36% in 2002. WAVE systems cost of goods sold as a percent of sales decreased year over year due to increased sales of our higher margin high throughput system along with the recognition of deferred revenue. Our consumables cost of goods sold represented 52% of net sales in 2001 as compared to 59% in 2002. Our specialty chemical consumable product margins are lower as compared to the prior year mainly due to the following factors, (1) bulk sales pricing to large customers under supply contracts and (2) increased raw material prices. We continue to expand our production capabilities in order to leverage our fixed costs into higher production volumes. We anticipate that this percentage will improve in the future as we refine our systems configurations potentially reducing material costs, as we move to larger scale production of our specialty chemicals and as consumable sales increase thereby spreading our fixed production costs over a larger revenue base.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased 24%, from $9.6 million in 2001 to $11.8 million in 2002. The increase is the result of higher personnel and personnel-related expenses, depreciation and bad debt expense offset by a reduction in goodwill amortization, professional services and foreign currency exchange rate gains. Combined these items accounted for over 90% of the total increase.    Direct personnel and personnel related expenses increased as a result of our expanded employee base. Our employee base has increased largely due to the acquisition of Annovis. Depreciation expense has increased due to the acquisition of Annovis and investments in corporate infrastructure assets. Bad debt expense increased as management felt it was appropriate to increase the allowance for bad debt given the Company's increased level of accounts receivable. The decrease in goodwill amortization is the result of the Company adopting Statement of Financial Accounting Standards (SFAS) No.142, Goodwill and Other Intangible Assets. Selling, general and administrative expenses as a percent of net sales was approximately 55% in 2001 and 61% in 2002. While we anticipate selling, general and administrative expenses to increase, in absolute dollars, over the next several years to support our growing marketing, sales and business activities we expect that these expenses will decline as a percentage of sales.

14

        Research and Development Expenses.    Research and development expenses increased 35%, from $4.3 million in 2001 to $5.7 million in 2002. The increase in these expenses is attributable to increased personnel and personnel related expenses, depreciation and professional service fees. Direct personnel expenses accounted for approximately 85% of the total increase and were due to our expanded employee base. Professional service fees increased as the Company has engaged consultants and collaborators to supplement the activities of our internal research and development personnel. Other increases were attributable to the costs associated with the expanded activities of the staff and the Annovis operations and were offset by amounts capitalized related to the development of software to be used to operate our WAVE systems. During the first half of 2002 we capitalized approximately $990,000 in costs related mainly to the development of WAVE Navigator software which reached technological feasibility in the prior year. Research and development expenses represented approximately 24% of net sales in 2001 and approximately 30% of net sales in 2002. While we expect research and development spending to increase, in absolute dollars, over the next several years as we expand our development efforts we expect that these expenses will decline as a percentage of sales.

        Stock Based Compensation.    Stock based compensation expense was $85,000 in 2001 and $60,000 in 2002. This expense reflects the amortization of deferred compensation related to stock options issued.

        Other Income.    Other income, which consists of net interest income and other expense, declined from $1.5 million in 2001 to $405,000 in 2002. Interest income for the first six months of 2002 was $423,000 as compared to $1.5 million in 2001. The decrease in interest income is a result of declining interest rates on investments and reductions in our short term investments balances.

        Income Taxes.    No income tax benefit was recorded in 2002 or 2001. No further tax benefits are being recorded due to our cumulative losses in recent years, expected losses in future years and the uncertainty as to whether we will be able to utilize any additional losses as carrybacks. During the six months ended June 30, 2002, the Company recorded current tax expense related to its Japan branch operations and wrote off certain state tax credits that are no longer collectible. We will continue to assess the recoverability of deferred tax assets and the related valuation allowance. We expect to continue to incur losses and expect to continue to provide valuation allowances against deferred tax assets. To the extent we begin to generate income in future years and it is determined that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized.

Liquidity and Capital Resources

        We have experienced net losses and negative cash flows from operations during the past three years. As a result, we had an accumulated deficit of $35.7 million as of June 30, 2002. On July 21, 2000, we issued 5,152,000 shares of common stock in our initial public offering at $15.00 per share. After payment of the underwriters' discounts and commissions and other expenses, we received net proceeds of approximately $69.9 million from this offering. In addition, warrants and options to purchase shares of common stock have been exercised at various times since our initial public offering providing us with approximately $5.7 million in additional cash. As of June 30, 2002 and December 31, 2001, we had approximately $6.4 million and $19.6 million, respectively, in cash and cash equivalents. In addition, as of June 30, 2002 and December 31, 2001, we had approximately $18.7 million and $23.9 million, respectively, in short-term investments for total cash and short-term investments of approximately $25.0 million and $43.5 million, respectively.

        Our operating activities in the first six months resulted in net cash outflows of $10.4 million in 2002 as compared to $3.9 million in 2001. The operating cash outflows for these periods resulted mainly from our operating losses. Significant investments in research and development and sales and marketing contributed to the operating losses. Additionally, inventory balances increased as raw

15

materials, work in process and finished goods inventory related to our specialty chemicals consumable products were increased as we continue to expand production capabilities and plan for production needs to fulfill long-term supply contracts.

        Net cash used in investing activities in the first six months was $3.3 million in 2002 compared to $26.6 million in 2001. The cash used in investing activities in 2002 was due primarily to our investment in property, plant and equipment, increased notes receivable and our increase in short-term investments. Property, plant and equipment increased in part due to the purchase of a production facility in Glasgow, Scotland, as discussed below. Notes receivable increased primarily as we entered into a convertible note agreement with Genodyssee S.A.. During the remainder of 2002 and 2003 we expect to continue to make significant investments in property, plant and equipment. Our capital expenditures budget for 2002 is approximately $13.0 to $15.0 million which includes $8.0 to $10.0 million for our synthetic nucleic acid product facility expansion project. Plans and budgets for our synthetic nucleic acid product production facility expansion project are being finalized and we currently expect the capital expenditures on this project to be in the $15.0 to $25.0 million range over the next 2 to 3 years. The facility expansion is being planned in anticipation of the expected growth in our synthetic nucleic acid products business.

        Net cash provided by financing activities in the first six months was $91,000 in 2002 compared to net cash used of $92,000 in 2001. The financing cash inflows in 2002 were the result of the sale of common stock through the exercise of stock options, offset by the purchase of treasury stock. In June, 2002, our Board of Directors approved a program to repurchase up to one million shares of our common stock in the open market or in privately negotiated transactions for an aggregate cost of up to $5.0 million, subject to the restrictions of Rule 10b-18 under the Securities Exchange Act of 1934, as amended, and other applicable securities laws. As part of that program, in an unsolicited private transaction on June 26, 2002, we purchased 232,700 shares of our common stock for approximately $437,000. We have entered into this program because we believe our current market valuation is below the Company's intrinsic value and growth prospects going forward. We have no set plan or formula governing when we may purchase additional shares. We will evaluate buying opportunities on a case-by-case basis.

        On May 21, 2002, as part of our synthetic nucleic acid production expansion project, we purchased a 45,000 square foot production facility in Glasgow, Scotland, for approximately $1.8 million in cash. In July, 2002, our Board of Directors authorized us to enter into a financing arrangement with a financial institution secured by the newly-purchased facility. The arrangement, which we expect to close in the near future, would provide us approximately $1.5 million and would bear a fixed annual interest rate of approximately 7%. It would be repayable in monthly installments over a 15 year term.

        Additionally, we are party to a number of lease agreements mainly for office, research and development and production facilities. Such lease agreements expire at various dates through 2007 with annual lease payments of approximately $2.0 million.

        In February 2002, pursuant to a Term Loan Agreement, the Company loaned $1.5 million to Genodyssee, S.A., a French limited company located near Paris. Genodyssee is a European genomics company that operates in two main divisions, one that is developing drug targets based on genetic variability and one that provides custom research services. The loan proceeds are to be used by Genodyssee for general corporate purposes. The loan carries an annual interest rate of 5% and all accrued interest and principal are due on the earlier of January 31, 2003, or the first closing date of a "qualified offering" defined as the issuance of new voting equity securities in Genodyssee pursuant to a private or public offering that raises gross proceeds of not less than $5 million. Genodyssee may prepay

16

this debt in whole or in part at anytime. Genodyssee may make repayment of the principal and accrued interest in one of the following forms:

•

Shares of Genodyssee issued as the same type and class and under the same terms and conditions, including share price, as shares issued in a "qualified offering",



•

Shares of Genodyssee issued based on an independent third party appraisal in the event that a "qualified offering" is not consummated prior to January 31, 2003, or



•

Cash.

        Genodyssee has been a customer of Transgenomic since July of 2000 purchasing multiple WAVE systems, system upgrades and consumable products. In addition, in December 2001, the Company and Genodyssee entered into a Service Provider Agreement. The Service Provider Agreement is a strategic alliance between Transgenomic and Genodyssee whereby Transgenomic will perform sales and marketing activities in the United States, Europe and Japan for certain analytical services related to nucleic acids which will be performed by Genodyssee. The Service Provider Agreement has an initial term of 3 years and automatically renews for successive 1 year periods until cancelled under the terms of the Agreement. In conjunction with the Service Provider Agreement, the Company entered into a $1.0 Million Revolving Line of Credit Agreement with Genodyssee. Genodyssee will utilize the Line of Credit in managing its cash flows and working capital needs to perform services under the Service Provider Agreement. The outstanding balance of the Line of Credit is not to exceed the lesser of $1.0 million or 25% of the total amount currently due to Genodyssee under customer contracts entered into under the Service Provider Agreement. The Line of Credit carries an annual interest rate of 5% and the same term as the Service Provider Agreement. As of June 30, 2002, there was no balance outstanding on the Line of Credit.

        In May 2001, we acquired Annovis, Inc., a specialty chemicals company that develops, manufactures and markets a wide variety of nucleic acid-based products and services for the life science industry, for a total purchase price of approximately $16.9 million. As part of the purchase price we issued approximately 1.9 million shares of common stock valued at $13.1 million. The remaining purchase price is made up of direct acquisition related expenses of approximately $3.2 million and cash paid in lieu of shares to certain Annovis stockholders of approximately $0.6 million.

        We expect to devote substantial capital resources to continue our research and development efforts, to expand our marketing and sales and customer support activities, and for other general corporate activities. Our capital requirements depend on a number of factors, including the level of our research and development activities, market acceptance of our products, the resources we devote to developing and supporting our products, and other factors. Given the current interest rate environment and the expected costs of our planned synthetic nucleic acid production expansion, we are currently investigating various financing vehicles for the project, including a mortgage for the purchase of the building, as described earlier. Even if we complete our facility expansion using existing cash, we believe that our current cash balances will be sufficient to fund operations through at least fiscal year 2003. During or after this period, if our existing cash and short-term investments and cash generated by operations is insufficient to satisfy our liquidity requirement, we may need to sell additional equity or debt securities, or obtain additional credit arrangements. We cannot assure you that any financing arrangement will be available in amounts or on terms acceptable to us.

Impact of Inflation

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

17

Recent Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. SFAS No. 142 establishes new guidelines for accounting for goodwill and other intangible assets and provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be evaluated for impairment annually. The Company adopted SFAS No. 142 beginning January 1, 2002. The provisions of SFAS No. 142 also require the completion of a transitional impairment test within six months of adoption, with any impairments treated as a cumulative effect of a change in accounting principle. The Company has performed the transitional impairment tests and has determined that no impairment exists at the time of adoption of SFAS No. 142.

        In August 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective for the Company's fiscal year beginning January 1, 2003. The Company has not quantified the impact resulting from the adoption of this standard.

        In October 2001, FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets". The standard addresses financial accounting and reporting for the impairment or disposal of long-lived assets. There was no financial statement impact as a result of the Company's adoption of SFAS No. 144 on January 1, 2002.

        In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The standard updates and simplifies the existing accounting pronouncements. SFAS No. 145 is effective for Company's fiscal year beginning January 1, 2003. The Company has not quantified the impact resulting from the adoption of this standard.

        In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard addresses accounting and reporting associated with exit or disposal activities. SFAS No. 146 is effective for the Company's fiscal year beginning January 1, 2003. The Company has not quantified the impact resulting from the adoption of this standard.

Foreign Currency Rate Fluctuations

        Historically approximately 50% of our net sales have been to customers outside the United States. Most of these sales are completed by our wholly-owned subsidiaries, Transgenomic, Ltd. and Cruachem, Ltd., and are made in their operating currency British pounds sterling, or the Euro. Results of operations for the Company's foreign subsidiaries are translated using the average exchange rate during the period. Assets and liabilities are translated at the exchange rate in effect on the balance sheet dates. To further limit our exposure to exchange rate risk all sales quotes issued by Transgenomic, Ltd. are based upon the United States dollar pricing converted at prevailing exchange rates at the time of the quote. Additionally, such quotes have short expiration dates. As a result, although we are subject to exchange rate risk, management feels we do not have a material exposure to foreign currency rate fluctuations at this time.

Forward-looking information

        This report contains a number of "forward-looking statements" as that term is defined in the Private Securities Litigation Reform Act of 1995. Many of these forward-looking statements refer to our plans, objective, expectations and intentions, as well as our future financial results. You can identify

18

these forward-looking statements by forward-looking words such as "expects," anticipates," "intends," "plans," "may," "will," "believes," "seeks," "estimates," and similar expressions. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results to differ materially from those expressed or implied by these forward-looking statements. Such factors would include the growth of the markets for DNA analysis technology and consumable products, the acceptance of our technology, our ability to continue to improve our products and expand production capacity, the development of competing technologies, and our ability to protect our intellectual property rights.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the market value of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities. The average duration of all of our investments in 2002 was less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is presented.

19

PART II    OTHER INFORMATION

Item 1.    Legal Proceedings

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

Item 2.    Changes in Securities and Use of Proceeds

d)

The amount of net proceeds from our initial public offering was approximately $69.9 million. Approximately $3.5 million of these net offering proceeds was used to repay outstanding indebtedness and approximately $4.6 million was used to acquire notes evidencing loans made by a bank to the Company owned by one of our directors that purchased the assets of our non-life sciences product line in May 2000. We used approximately $3.1 million of the net proceeds for capital expenditures during 2000, an additional $5.7 million during 2001 and an additional $4.5 million in the first six months of 2002. We expect to apply up to an additional $9.0 to $11.0 million of the net proceeds of this offering for capital expenditures during 2002. Such expenditures were made for, and are expected to be made for, general infrastructure investments (i.e. computer equipment, software and leasehold improvements) and production facility improvements and expansion. At June 30, 2002, approximately $23.4 million was invested in cash equivalent investments and in short-term, investment-grade, interest-bearing securities. We expect to use the remaining amount of the net offering proceeds for general working capital needs, including research and development and sales and marketing expenses. The amounts actually expended for each purpose may vary significantly depending upon many factors, including future sales growth, the progress of our product development efforts and the amount of cash generated or used by our operations.

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

        Our annual shareholder's meeting was held on May 22, 2002 for the purpose of electing a Class II director, and ratifying the appointment of Deloitte & Touche LLP as our independent accountants for the fiscal year ending December 31, 2002.

        A total of 23,671,821 shares of our common stock were entitled to vote at the meeting and a total of 20,766,246 shares (87.73%) were represented at the meeting, in person or by proxy. The following sets for the results of the voting at the annual meeting:

1.

Election of Directors

Dr. Jeffrey Sklar            For—20,702,914            Withheld—63,332

2.

Ratification of the appointment of Deloitte & Touche LLP as independent auditors for the year ended December 31, 2002

For—20,418,881        Against—314,874        Abstain—32,491        Broker non-vote—0

        Further information regarding these matters is contained in our Proxy Statement dated April 19, 2002.

20

Item 6.    Exhibits and Reports on Form 8-K

(a)

Exhibits

(2.1	)	Asset Purchase Agreement, dated May 16, 2000 between the Registrant and SD Acquisition Inc. (incorporated by reference to Exhibit 2 to Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on May 17, 2000)
(2.2	)	Agreement and Plan of Merger, dated as of April 30, 2001 among Transgenomic, Inc., TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.1 to Report on Form 8-K (Registration No. 000-30975) as filed on May 31, 2001)
(2.3	)	Addendum to Agreement and Plan of Merger, dated as of May 18, 2001 among Transgenomic, Inc., TBIO Nebraska, Inc., TBIO, Inc. and Annovis, Inc. (incorporated by reference to Exhibit 2.2 to Report on Form 8-K (Registration No. 000-30975) as filed on May 31, 2001)
(3.1	)	Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 2 to Amendment No. 1 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on May 17, 2000)
(3.2	)	Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on March 10, 2000)
(4)		Form of Certificate of the Registrant's Common Stock (incorporated by reference to Exhibit 4 to Registration Statement on Form S-1 (Registration No. 333-32174) as filed on March 10, 2000)
(10.1	)	Missives, dated May 17, 2002, between Cruachem Limited (a wholly-owned subsidiary of the Registrant) and Robinson Nugent (Scotland) Limited

(b)

Reports on Form 8-K

        The Registrant did not file a Report on Form 8-K during the quarter ended June 30, 2002.

21

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.
August 14, 2002	By:	/s/  Gregory J. Duman Gregory J. Duman, Chief Financial Officer (authorized officer and principal financial officer)

22

QuickLinks

INDEX
PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited)
Notes to the Consolidated Financial Statements (Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk

PART II OTHER INFORMATION

Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

EX-10.1

                                                                    EXHIBIT 10.1

                                MISSIVES between
                              CRUACHEM LIMITED and
                           ROBINSON NUGENT (SCOTLAND)
                                     LIMITED
                        re. 4 Fountain Avenue, Inchinnan
                            Business Park, Inchinnan



        McGRIGOR DONALD (letterhead)

        Solicitors

        Pacific House            Tel: +44 (0) 141 248 6677

        70 Wellington Street     Fax: +44 (0) 141 221 1390

        Glasgow G2 6SB           www.mcgrigors.com

        DX GW 135

Messrs McClure Naismith            Our Ref: MMM/LAC/TNF/CRO972.000954
Solicitors
DXGW64                             Your Ref:
GLASGOW
                                   E-mail Address: morag.mclintock@mcgrigors.com

                                   Direct Dial Number: 0141 5679358

17 May 2002

Dear Sirs

On behalf of and as instructed by our client Cruachem Limited ("the Purchaser")
we hereby accept the terms of your qualified acceptance dated 17th May 2002 on
behalf of your clients Robinson Nugent (Scotland) Limited ("the Seller") which
accepts subject to qualifications our offer dated l7th May 2002 on behalf of the
Purchaser to purchase from the Seller 4 Fountain Avenue, Inchinnan and now hold
the missives to be concluded.

Yours faithfully,
/s/ illegible



                          MCCLURE NAISMITH (LETTERHEAD)
                              The Determinin Factor

Our Ref:       WMBB PG 1687.9                  292 St Vincent Street
Your Ref:      MMM/LAC/TNF/CR0972.000954       Glasgow G2 5TQ
Date:          17 May 2002
                                               DX: GW64 Glasgow

                                               Tel: 0141 2042700
McGrigor Donald                                Fax: 0141 2483998
Solicitors                                     Email: glasgow
Pacific House                                  @McClureNaismith.com
70 Wellington Street
GLASGOW
G2 6SB

Dear Sirs

On behalf of and as instructed by our clients, Robinson Nugent (Scotland)
Limited, incorporated under the Companies Acts and having their Registered
Office at Johnstone Avenue, Hillington Industrial Estate, Glasgow ("the Seller")
we hereby accept the terms of your Offer, dated 17 May 2002, on behalf of your
client, Cruachem Limited ("the Purchaser") to purchase from the Seller ALL and
WHOLE the subjects known as and forming 4 Fountain Avenue, Inchinnan Business
Park, Inchinnan and that on the following qualification:- .

1    The number "14" where it appears on the fourth line of Condition 4(i) of
     your said Offer shall be deleted and shall be replaced by the number "13".

2    This Qualified Acceptance, unless sooner withdrawn, is open for
     acceptance in writing to reach us here no later than 5pm on 20 May 2002,
     failing which it shall be deemed to have been withdrawn.

Yours faithfully,
/s/ illegible



        McGRIGOR DONALD (letterhead)

        Solicitors

        Pacific House            Tel: +44 (0) 141 248 6677

        70 Wellington Street     Fax: +44 (0) 141 221 1390

        Glasgow G2 6SB           www.mcgrigors.com
        DX GW 135

Messrs McClure Naismith              Our Ref: TNF/CR0972.000954
Solicitors
DXGW64                               Your Ref: FAO Michael Brown
GLASGOW

17 May 2002

Dear Sirs

On behalf of our client, Cruachem Limited, having its registered office at Todd
Campus, West of Scotland Business Park, Glasgow (the "Purchaser"), we hereby
offer to purchase from your client, (the "Seller") ALL and WHOLE those subjects
known as and forming 4 Fountain Avenue, Inchinnan Business Park, Inchinnan;
Together with (One) the whole buildings and the whole heritable fixtures and
fittings therein and thereon, (Two) free ish and entry therefrom and thereto,
(Three) the parts, privileges and pertinents thereof, (Four) the whole rights,
common, mutual and exclusive effeiring thereto specified or referred to in Feu
Disposition by Scottish Enterprise in favour of Robinson Nugent (Scotland)
Limited dated 4th December 1999 and in the process of being registered in the
Land Register of Scotland under Title Number REN 100891 and (Five) the
Additional Items referred to in Part 3 of the Schedule aftermentioned (all
hereinafter referred to as the "Subjects") and that on the following terms and
conditions:-

1         DEFINITIONS AND INTERPRETATION

1.1       Definitions

          In this offer and in the Missives, unless the context requires
          otherwise:-

          "Date of Entry" means 21st May 2002 or such other date as may be
          mutually agreed in writing;

          "Date of Settlement" means the date on which settlement actually takes
          place whether that is the Date of Entry or some other date;

          "Disposition" has the meaning given to it in Clause 4 (Title and
          Settlement);



          "Missives" means the missives constituted by this offer and the
          acceptance or acceptances following thereon in conclusion of a binding
          contract;

          "Price" has the meaning given to it in Clause 2 (PRICE, ENTRY AND
          INTEREST);

          "Purchaser" has the meaning given to it in the preamble;

          "Schedule" means the schedule in 3 parts docketed and signed as
          relative to this offer;

          "Seller" has the meaning given to it in the preamble;

          "Seller's Solicitors' Letter of Obligation" means a Letter of
          Obligation in usual form to be issued by the Seller's Solicitors;

          "Subjects" has the meaning given to it in the preamble;

          "Title Deeds " includes any Land Certificate;

          "Working Day" means a day which is not a Saturday, a Sunday or a
          public or bank holiday in Edinburgh, Glasgow or London; and

1.2       Interpretation and construction

          In this offer and in the Missives, save to the extent that the context
          or the express provisions of the Missives require otherwise:-

          (a)  words importing the singular shall include the plural and
               VICE VERSA;

          (b)  words importing any gender shall include all other genders;

          (c)  any reference to a preamble, Clause, the Schedule or Part of
               the Schedule is to the relevant preamble, Clause, Schedule or
               Part of the Schedule of or to this offer; and

          (d)  any reference to a statute or statutory provision (including
               any subordinate legislation) includes any statute or statutory
               provision which amends, extends, consolidates or replaces the
               same, or which has been an1ended, extended, consolidated or
               replaced by the same, and shall include any orders, regulations,
               instruments or other subordinate legislation made under the
               relevant statute or statutory provision.

1.3       Headings



          The headings in this offer are included for convenience only and shall
          be ignored in construing this offer and the Missives.

1.4       Whole contract

          The Missives (including the annexations thereto) shall, as at the date
          of conclusion thereof, represent and express the full and complete
          agreement between the Seller and the Purchaser relating to the sale of
          the Subjects and shall supersede any previous agreements,
          representations or others between the Seller and the Purchaser
          relating thereto.

2         PRICE, ENTRY AND INTEREST

2.1       Price

          The purchase price (the "Price") shall be ONE MILLION TWO HUNDRED AND
          TEN THOUSAND POUNDS (L1,210,000) STERLING in addition to which
          the Purchaser shall in exchange for a valid Value Added Tax invoice
          pay all (if any) Value Added Tax due thereon.

2.2       Entry

          Entry, with vacant possession to every part of the Subjects, shall be
          given on the Date of Entry, when the Price, together with all Value
          Added Tax due thereon shall be payable and settlement shall take
          place.

2.3       Interest and late settlement by the Purchaser

2.3.1     If the Price or any part thereof remains unpaid on the Date of
          Entry, interest shall run thereon at the rate of 3% per annum above
          the base rate for the time being of The Royal Bank of Scotland plc
          from the Date of Entry until actual payment regardless of consignation
          or of the fact that entry may not have been taken.

2.3.2     Failure to pay the Price and interest as aforesaid in full by
          the date 21 days after the Date of Entry will constitute a material
          breach of contract entitling the Seller to terminate the Missives by
          giving written notice to that effect to the Purchaser.

2.3.3     Termination of the Missives in terms of Clause 2.3.2 shall be
          without prejudice to all claims for damages, interest or otherwise
          competent to the Seller against the Purchaser as a result of a breach
          of the Missives on the part of the Purchaser. The Purchaser shall, in
          the event of and notwithstanding such termination, pay interest to the
          Seller on the Price at the rate specified in Clause 2.3.1 in respect
          of the period from the Date of Entry to the date of such termination
          and that without prejudice to the generality of the first sentence of
          this Clause 2.3.3.



2.3.4     In computing such interest and such period of 21 days, there
          shall be disregarded any period or periods of delay arising from a
          failure on the part of the Seller to implement its obligations in
          terms of the Missives.

3         VALUE ADDED TAX

          The Price shall be exclusive of any Value Added Tax which may now be
          or may at any time become chargeable thereon or on any part thereof.
          The Seller shall exhibit to the Purchaser not less than 5 working days
          prior to the Date of Entry (i) adequate evidence satisfactory to the
          Purchaser, acting reasonably that the Seller is registered for Value
          Added Tax purposes and (ii) adequate evidence satisfactory to the
          Purchaser acting reasonably that such Value Added Tax is properly
          chargeable (including where such tax is chargeable by reason of an
          election to waive exemption, an acknowledgement from Customs & Excise
          of such election).

4         TITLE AND SETTLEMENT

          At the Date of Settlement and in exchange for the Price the Seller
          shall:-

          (a)  deliver a valid Disposition (the "Disposition") of the
               Subjects in favour of the Purchaser or its nominee;

          (b)  deliver or exhibit to the Purchaser either:-

               (i)  a valid marketable title with a Form 10 Report brought down
                    to a date as near as practicable to the Date of Settlement
                    and showing no entries adverse to the Seller's interest (the
                    cost (if any) of the said Report being the responsibility of
                    the Seller), and, in addition, the Seller, both before and
                    after the Date of Entry and at its expense, shall deliver to
                    the Purchaser such documents and evidence as the Keeper may
                    require to enable the Keeper to issue a Land Certificate in
                    name of the Purchaser or its nominee as the registered
                    proprietor of the whole of the Subjects and containing no
                    exclusion of indemnity in terms of Section 12(2) of the Land
                    Registration (Scotland) Act 1979. Such documents shall
                    include (unless the Subjects only comprise part of a
                    tenement or flatted building) a plan or bounding description
                    sufficient to enable the Subjects to be identified on the
                    Ordnance Survey Map and evidence (such as a Form P16 Report)
                    that the description of the Subjects as contained in the
                    title deeds is habile to include the whole of the occupied
                    extent. The Land Certificate will disclose no entry, deed or
                    diligence prejudicial to the Purchaser's or its nominee's
                    interest other than such as are created by or against the
                    Purchaser or its nominee, or have been disclosed to and
                    accepted by the Purchaser prior to the Date of Settlement;
                    or

               (ii) a Land Certificate (containing no exclusion of indemnity
                    under Section 12(2) of the Land Registration (Scotland) Act,
                    1979) and all necessary



                    links in title evidencing the Seller's exclusive ownership
                    of the Subjects and a Form 12 Report brought down as near as
                    practicable to the Date of Settlement and showing no entries
                    adverse to the Seller's interest, the cost (if any) of the
                    said Report being the responsibility of the Seller. In
                    addition, the Seller, shall deliver to the Purchaser such
                    documents and evidence as the Keeper may require to enable
                    the interest of the Purchaser or its nominee to be
                    registered in the Land Register without exclusion of
                    indemnity under the said Section 12(2). The Land Certificate
                    to be issued to the Purchaser or its nominee will disclose
                    no entry, deed or diligence prejudicial to the Purchaser's
                    or its nominee's interest other than such as are created by
                    or against the Purchaser or its nominee, or have been
                    disclosed to and accepted by the Purchaser prior to the Date
                    of Settlement;

          (c)  deliver the Company File Reports, any Certificates of
               Non-crystallisation and the Warranty to be delivered in terms of
               Clause 5.I(a) (SEARCH AGAINST THE SELLER);

          (d)  deliver Valid Discharges of any outstanding Standard
               Securities affecting the Subjects with duly signed Warrants for
               Registration and Registers of Scotland or Land Register forms and
               cheques for recording or registration, all as appropriate;

          (e)  deliver the Seller's Solicitors' Letter of Obligation;

          (f)  deliver the Title Deeds to the Subjects;

          (g)  deliver all the keys for the Subjects;

          (h)  deliver any Value Added Tax invoice and other items to be
               delivered in terms of Clause 3 (VALUE ADDED TAX); and

          (i)  without prejudice to the Seller's obligation timeously to
               exhibit the same, deliver the items which the Seller is obliged
               to exhibit in terms of Clause 5.2 (SEARCHES AGAINST OTHER
               PARTIES), Clause 6 (TITLE MATTERS), Clause 8 (PLANNING AND OTHER
               CONSENTS), and Clause 14 (GENERAL AND MISCELLANEOUS).

5         CHARGES SEARCHES

5.1       Search against the Seller

          The Seller shall deliver to the Purchaser:-

          (a)  at the Date of Settlement (i) a Report on the Seller's File
               (including the Register of Charges) kept with the Registrar of
               Companies as at a date as near as practicable to the Date of
               Settlement disclosing no adverse entries which would prevent the
               Purchaser or its nominee obtaining a valid and unencumbered title
               to the Subjects



               (and if such Report reveals any Floating Charges affecting the
               Subjects, the Seller shall procure that the holders of such
               Floating Charges shall grant Certificates of Non-crystallisation
               in a form satisfactory to and approved by the Purchaser, such
               Certificates to be delivered to the Purchaser at the Date of
               Settlement); and (ii) a Warranty granted by the signatories of
               the Disposition in terms of the wording contained in Part 1 of
               the Schedule; and

          (b)  within six weeks after the Date of Settlement a further Report on
               the Seller's File brought down to a date not earlier than twenty
               two clear days after the date of registration of the Disposition
               and disclosing no adverse entries as aforesaid provided the
               Disposition is presented for registration within 14 days of the
               Date of Settlement.

5.2       Searches against other parties

          The Seller shall exhibit to the Purchaser at or prior to the Date of
          Settlement a clear Report in the Company File (including the Register
          of Charges) kept with the Registrar of Companies in relation to any
          Company incorporated under the Companies Acts having an interest in
          the Subjects during the previous ten years brought down to a date not
          earlier than twenty two clear days after such Company ceased to be
          interested in the Subjects.

6         TITLE MATTERS

6.1       Minerals

6.1.1     The minerals are included in the purchase only insofar as the Seller
          has right thereto.

6.2       Titles

          The title deeds of the Subjects have been exhibited and by conclusion
          of Missives the Purchaser is deemed to have accepted the same and to
          be satisfied as to their extent and the terms and conditions thereof.

6.3       Title conditions

          The Seller warrants and undertakes that, as at the date of conclusion
          of the Missives and as at the Date of Settlement a11 the obligations
          in such Title Deeds, except insofar as they are of a continuing nature
          (to which extent they are and will be being observed), will have been
          duly implemented in all material respects;

6.4       Third party rights

          The Seller warrants and undertakes that, to the best of its la1owledge
          and belief as at the date of conclusion of the Missives and as at the
          Date of Settlement, there will be no servitudes, wayleaves, rights of
          way, overriding interests or other rights in favour of third



          parties (except as disclosed in the Title Deeds of the Subjects or
          otherwise) adversely affect the peaceful possession and enjoyment of
          the Subjects.

7         LOCAL AUTHORITY AND OTHER STATUTORY MATTERS

7.1       Statutory Notices

          Any Statutory Notices which may be issued by the Local or any other
          authority prior to the Date of Settlement will be the responsibility
          of the Seller who shall be obliged to take all necessary steps at its
          own cost to implement or comply with the same and will indemnify the
          Purchaser in respect thereof. Liability for compliance with any such
          Statutory Notices shall not be avoided by the issue of a fresh Notice.
          Without prejudice to the foregoing, if any such Statutory Notices are
          issued prior to the Date of Settlement and materially adversely affect
          the Subjects, the Purchaser will be entitled to resile without penalty
          from the Missives by written notice to that effect from it or its
          Solicitors to the Seller or its Solicitors.

7.2       Fire Regulations

          A Fire Certificate has been exhibited and the Purchaser is deemed to
          be satisfied as to the position in relation to the Fire Precautions
          Acts and the requirements of the Fire Master under them.

8         PLANNING AND OTHER CONSENTS

8.1       All necessary consents

          Save as disclosed prior to conclusion of Missives, the Seller warrants
          that all Local Authority and other necessary planning and building
          permissions, consents, warrants arid completion certificates have been
          duly obtained in respect of any alterations or additions to the
          Subjects, the use thereof for their current use and any alterations or
          additions thereto and that none of the said permissions and others
          were granted subject to unduly onerous conditions or were personal in
          nature or limited in time.

8.2       No Current or intended applications

          The Seller warrants that it has not made/does not have outstanding any
          current planning applications in respect of the Subjects.

9         RATES AND OTHER OUTGOINGS

9.1       Rateable Value

          The Seller warrants that the rateable value of the Subjects is as
          shown in the current Valuation Roll and that there are no subsisting
          appeals against such rateable assessment.



9.2       Apportionments

          The rates and other outgoings will be apportioned as at the Date of
          Settlement.

9.3       Notification to Local Authority

          On the Date of Settlement, the Seller shall notify the Local Authority
          of the change of ownership.

10        RISK AND INSURANCE

10.1      MAINTENANCE AND INSURANCE

          Risk of damage to or destruction of the Subjects or any part thereof
          shall remain with the Seller until the Date of Settlement. The Seller
          shall at its own expense execute, or procure the execution of, any
          repairs necessary to maintain the Subjects and any common parts
          pertaining thereto in their present condition (fair wear and tear
          excepted) until the Date of Settlement. The Seller shall at its own
          expense, procure that the Subjects are insured and kept insured with a
          reputable insurance company until the Date of Settlement against
          comprehensive risks for not less than their full reinstatement value
          and shall procure that the policy of insurance is endorsed to disclose
          the Purchaser's interest as purchaser, price unpaid, up to the Date of
          Settlement. If the Subjects are materially damaged or destroyed by
          whatever cause prior to the Date of Settlement, the Purchaser or
          Seller shall have the option of resiling without penalty from the
          Missives by notice from it or its Solicitors to that effect to the
          Seller or the P1.D"chaser (as the case may be) or its Solicitors prior
          to the Date of Settlement.

10.2      ACCOUNTS AND LIABILITIES

          The Seller shall pay and so free and relieve the Purchaser of:-

          (a)  all outstanding accounts for repairs or improvements instructed
               or due by the Seller in respect of the Subjects or any common
               parts pertaining thereto in respect of the period prior to the
               Date of Settlement; and

          (b)  any debts, obligations, contracts or liabilities due in respect
               of the Subjects or any such common parts (including for the
               supply of electricity, gas or other services) in respect of the
               period prior to the Date of Settlement.

11        ENVIRONMENTAL MATTERS

          The Seller warrants that no orders, enforcement notices, prohibition
          notices, other notices or directions have been served on it (nor, as
          far as the Seller is aware have they been issued) under any
          environmental legislation or regulations with regard to the Subjects
          and/or any activities, processes or substances thereon.



12        APPLIANCES

12.1      CONDITION

          The Purchaser will accept all mechanical, electrical and other plant,
          equipment and apparatus situated within or serving the Subjects
          (including the Additional Items in relation to which Clause 12.3 also
          applies) and associated fittings and all mains services in their
          present condition fair wear and tear excepted. The Seller shall
          maintain such plant equipment and apparatus in such condition until
          the Date of Settlement.

12.2      Title

          The Seller warrants that no part of any plant, equipment, apparatus,
          fittings and services or of the Additional Items is subject to any
          lease; hire purchase, credit sale or similar agreement or any other
          matter which would prevent the Seller passing a good title.

12.3      The Seller gives no warranty as to the present condition or state
          of any of the Additional Items as to their fitness for any purpose
          whatsoever and the Purchaser shall be deemed to accept them as they
          find them at the Date of Settlement.

13        GENERAL AND MISCELLANEOUS

13.1      Confidentiality

          The Seller undertakes to the Purchaser and the Purchaser similarly
          undertakes to the Seller that no details of the transaction
          constituted or to be constituted by the Missives will be published or
          otherwise disclosed to third parties (other than the Seller's agents
          or as may be required by law or a relevant authority regulatory or
          otherwise) without the prior written consent of the other.

13.2      Trust clause

          A clause in the terms contained in Part 2 of the Schedule will, at the
          Purchaser's option, be included in the Disposition.

13.3      Supersession

          The Missives shall cease to have effect two years after the Date of
          Settlement save (a) for the obligations contained in Clause 4 (TITLE
          AND SETTLEMENT) which shall continue in full force and effect until
          satisfied in full; and (b) to the extent founded upon in any court
          proceedings commenced within such period of two years.

13.4      Further assurance



          The Seller and the Purchaser shall, so far as it lies within their
          power respectively to do so, each do such acts and things and execute
          such deeds and documents as may be necessary to give full effect to
          the provisions, spirit and intent of the Missives.

13.5      Joint and several liability

          Where the Purchaser or the Seller, as the case may be, is a party
          comprising two or more persons, the obligations and liabilities under
          the Missives of that party shall be joint and several obligations and
          liabilities of those persons.

13.6      Time limit for acceptance

          This offer, unless sooner withdrawn, is open for acceptance in writing
          reaching us at this office not later than 5 p.m. on 20th May 2002,
          failing which it will be deemed to have been withdrawn.


Yours faithfully,
/s/ illegible



                THIS IS THE SCHEDULE REFERRED TO IN THE FOREGOING
        OFFER BY MCGRIGOR DONALD TO MCCLURE NAISMITH DATED 17TH MAY 2002

                                     PART 1

                                    WARRANTY

We, [NAMES AND ADDRESSES TO BE INSERTED] [(Directors of/respectively a Director
and the Secretary of)] [NAME AND ADDRESS OF THE SELLER] (hereinafter called "the
Company"), hereby certify and warrant after due and diligent enquiry (i) that no
deeds of any kind which are capable of being recorded in the Register of Sasines
or registered in the Land Register (as appropriate) in respect of or affecting
the subjects [DESCRIPTION OF THE SUBJECTS] have been granted by the Company
other than as are disclosed in the Search (including Interim Reports Search) in
the Sasine Register or FORM 10/11 or Form 12/13 Reports (as appropriate)
exhibited to the Solicitors acting for [NAME AND ADDRESS OF THE PURCHASER OR ITS
NOMINEE] (hereinafter called the "Purchaser"); (ii) that no Floating Charge,
Debenture or other security document which is capable of being registered in the
Companies Charges Register has been granted by the Company other than as
disclosed in the Search (including Interim Reports on Search) in the Companies
Register exhibited to the said Solicitors; and (iii) that the Company is solvent
and no steps have been or are about to be taken by us to commence liquidation
proceedings which would prejudice the validity of the Disposition of the said
subjects now being granted to the Purchaser or to appoint a Receiver or
otherwise place the Company in a position whereby it cannot execute and deliver
to the Purchaser a valid and unobjectionable title.



                                     PART 2

                                  TRUST CLAUSE

"And considering that we, [THE SELLER] have sold the said subjects hereby
disponed to [THE PURCHASER OR ITS NOMINEE] and have received payment of the
whole price in exchange for delivery of this Disposition, therefore we do hereby
confirm and declare that in as much as we remain infeft in the said subjects
hereby disponed, we hold the same as Trustees in an irrevocable and binding
trust for the said [THE PURCHASER OR ITS NOMINEE] and its successors and subject
to its directions until this Disposition is recorded in the appropriate Division
of the General Register of Sasines/registered in the Land Register of Scotland.



                                     PART 3

                                ADDITIONAL ITEMS



APPENDIX 2
ADDITIONAL ITEMS

          COMPRESSED AIR EQUIPMENT
          Two ECOAIR D50 5hp 22Ocfm and One compare Broomwade 75hp 430cfm
          compressors supply the compressed air ring main to the production area
          at a nominal 8 Bar pressure via a 5000 Itr air receiver. The
          compressors are controlled by a CPA Loadmaster Control unit and have
          air-drying and oil and water separators fitted to the system.

          PLATING ROOM AREA
          A Specialist clean cell area with independent sprinkler fire
          protection system and security access system.

          BUNDS
          Inside the Plating room area are two bunded structures (independent of
          the floor slab) the larger one housed the Gold Plating line and was
          used to collect spillages from the process equipment. The smaller of
          the two was used for cleaning process equipment.

          TREATMENT PLANT AREA
          An extension to the main factory unit housed the water treatment/
          effluent plant which will be removed, decontaminated and disposed of
          as part of the environmental clean up, as will the extra ductwork, wet
          scrubber and fan units.

          PRODUCTION AREA
          TOOLROOM
          Located in comer of the building as indicated on drawing RN-02-001. An
          L-shaped room of Komfort stud partition construction partially glazed
          approximately 15m X 6m X 2.6m high with double door access.

          MAINTENANCE WORKSHOP
          Located near to Toolroom constructed of single skin metal partitioning
          partially glazed approximately 7.3m X 6m X 2.4m high with double door
          access.



APPENDIX 2
ADDITIONAL ITEMS

          COMPRESSED AIR EQUIPMENT
          Two ECOAIR D50 5hp 22Ocfm and One compare Broomwade 75hp 430cfm
          compressors supply the compressed air ring main to the production area
          at a nominal 8 Bar pressure via a 5000 Itr air receiver. The
          compressors are controlled by a CPA Loadmaster Control unit and have
          air-drying and oil and water separators fitted to the system.

          PLATING ROOM AREA
          A Specialist clean cell area with independent sprinkler fire
          protection system and security access system.

          BUNDS
          Inside the Plating room area are two bunded structures (independent of
          the floor slab) the larger one housed the Gold Plating line and was
          used to collect spillages from the process equipment. The smaller of
          the two was used for cleaning process equipment.

          TREATMENT PLANT AREA
          An extension to the main factory unit housed the water treatment/
          effluent plant which will be removed, decontaminated and disposed of
          as part of the environmental clean up, as will the extra ductwork, wet
          scrubber and fan units.

          PRODUCTION AREA
          TOOLROOM
          Located in comer of the building as indicated on drawing RN-02-001. An
          L-shaped room of Komfort stud partition construction partially glazed
          approximately 15m X 6m X 2.6m high with double door access.

          MAINTENANCE WORKSHOP
          Located near to Toolroom constructed of single skin metal partitioning
          partially glazed approximately 7.3m X 6m X 2.4m high with double door
          access.

          STORES OFFICE
          Located near to main roller shutter doors of Komfort stud partition
          construction partially glazed approximately 6.5rh X 2.8i11 X 2.3m high
          with two single doors for access.

          PRODUCTION OFFICES
          Similar construction to Stores office two offices in one block,
          smaller one is approximately 2.8m X 2.7m .X 2.3m high with window and
          door to front. The larger office is approximately 5.6m X 2.7m X 2.3m
          high with single door access and windows to the front.

          PRODUCTION MANGAER / ENGINEERING OFFICES



          Same construction as above offices located adjacent to plating room.
          An L-shape consisting of two offices in one block, smaller one is
          approximately 3.0m X 3.7m X 2.6m high with windows to the front and
          side and door to front with air extract to outside. The larger office
          is approximately 5.0m X 6.0m X 2.6m high with double doors and windows
          to the front and in internal single door to above office with air
          extract to outside.

          CLIPSHELL/MOULDING MANAGER/PLATING LABORATORY/STORES AREAS
          Consisting generally of eight rooms approximately 295 sq m in area of
          Komfort stud partition construction as shown on drawing RN-O2-001.
          There are five rooms adjacent to and part of the plating area wall
          including plating office, laboratory area, QA area and two storage
          rooms. The remaining three rooms consist of a production workshop,
          general storage area and the Moulding Manager's office, which measures
          approximately 3.5m X 3.0m X 2.6m high. There is extract to outside in
          these rooms.

          All the above have suspended ceilings, lighting, power, data and
          communication cabling installed.

          FIRST AID ROOM
          Stud partitioned room attached to main offices located at the front of
          the building.

          STORES AREA
          Various assortment of racking and shelving including 9 bays of Welco
          Racking and approximately 75m of Welconstruct weldmesh partitioning as
          seen.



INCHINNAN TWO

ITEMS TO BE RETAINED
(In addition to Appendix in Heads of Terms Agreement)

a.   Fire Alarm System

b.   Fire fighting equipment (extinguishers etc.)

c.   All storage shelving / access steps etc.

d.   Telephone system, complete with telephones and including lines (to be
     transferred)

e.   Loudspeaker system

f.   Key Card security system

g.   Lockers/cages etc.

h.   CCTV System