10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2007

Or

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

For the transition period from              to             

Commission file number: 000-30975

TRANSGENOMIC, INC.

(Exact name of registrant as specified in its charter)

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

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

(402) 452-5400

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)    Yes  ¨    No  x

As of August 14, 2007, the number of shares of common stock outstanding was 49,189,672.

TRANSGENOMIC, INC.

INDEX

		Page No.
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006	4
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2007	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II. OTHER INFORMATION		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 4.	Submission of Matters to a Vote of Security Holders	23
Item 6.	Exhibits	23
Signatures		24

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TRANSGENOMIC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

	June 30, 2007 (unaudited)			December 31, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	7,883		$	5,868
Accounts receivable (net of allowances for doubtful accounts of $476 and $444, respectively)		6,474			6,525
Inventories		3,243			2,672
Prepaid expenses and other current assets		571			540
Current assets of discontinued operations		4			—
Total current assets		18,175			15,605
PROPERTY AND EQUIPMENT:
Equipment		10,416			10,345
Furniture and fixtures		3,822			3,820
		14,238			14,165
Less: Accumulated depreciation		13,008			12,667
		1,230			1,498
OTHER ASSETS:
Goodwill		638			638
Other assets		733			853
Non-current assets of discontinued operations		—			2,773
	$	20,776		$	21,367
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1,386		$	1,558
Other accrued expenses		3,454			2,898
Accrued compensation		491			689
Current liabilities of discontinued operations		176			184
Total current liabilities		5,507			5,329
Other long-term liabilities		129			—
Total liabilities		5,636			5,329
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value, 15,000,000 shares authorized, none outstanding		—			—
Common stock, $0.01 par value, 100,000,000 shares authorized, 49,189,672 shares outstanding		497			497
Additional paid-in capital		139,012			138,966
Accumulated other comprehensive income		2,255			2,100
Accumulated deficit		(126,624	)		(125,525	)
Total stockholders’ equity		15,140			16,038
	$	20,776		$	21,367

See notes to unaudited condensed consolidated financial statements.

3

TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
NET SALES	$	6,272		$	6,189		$	11,494		$	12,686
COST OF GOODS SOLD		2,859			3,140			5,373			6,654
Gross profit		3,413			3,049			6,121			6,032
OPERATING EXPENSES:
Selling, general and administrative		3,067			2,820			6,047			5,529
Research and development		492			531			1,550			1,135
Restructuring costs		624			—			624			—
		4,183			3,351			8,221			6,664
LOSS FROM OPERATIONS		(770	)		(302	)		(2,100	)		(632	)
OTHER INCOME (EXPENSE):
Interest income, net of interest expense		79			44			141			88
Other, net		—			—			4			—
Gain on sale of investment		938			—			938			—
		1,017			44			1,083			88
INCOME (LOSS) BEFORE INCOME TAXES		247			(258	)		(1,017	)		(544	)
INCOME TAX EXPENSE		14			—			19			17
INCOME (LOSS) FROM CONTINUING OPERATIONS		233			(258	)		(1,036	)		(561	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX		(7	)		(125	)		66			(139	)
NET INCOME (LOSS)	$	226		$	(383	)	$	(970	)	$	(700	)
BASIC AND DILUTED LOSS PER SHARE:
From continuing operations	$	0.00		$	(0.01	)	$	(0.02	)	$	(0.01	)
From discontinued operations		0.00			0.00			0.00			0.00
	$	0.00		$	(0.01	)	$	(0.02	)	$	(0.01	)
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING		49,189,672			49,189,672			49,189,672			49,187,211
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING		62,141,863			49,189,672			49,189,672			49,187,211

See notes to unaudited condensed consolidated financial statements.

4

TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2007

(Dollars in thousands except per share data)

	Common Stock
	Outstanding Shares	Par Value		Additional Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2006	49,189,672	$	497	$	138,966	$	(125,525	)	$	2,100		$	16,038
Cumulative effect of adoption of FIN 48 (Note H)	—		—		—		(129	)		—			(129	)
Balance, January 1, 2007	49,189,672	$	497	$	138,966	$	(125,654	)	$	2,100		$	15,909
Net loss	—		—		—		(970	)		(970	)		(970	)
Other comprehensive loss:
Foreign currency translation adjustment	—		—		—		—			155			155
Comprehensive loss	—		—		—		—			(815	)		—
Stock-based compensation	—		—		46		—			—			46
Balance, June 30, 2007	49,189,672	$	497	$	139,012	$	(126,624	)	$	2,255		$	15,140

See notes to unaudited condensed consolidated financial statements.

5

TRANSGENOMIC, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Six Months Ended June 30,
	2007			2006
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss	$	(970	)	$	(700	)
Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities:
Depreciation and amortization		742			956
Non-cash, stock-based compensation		46			—
(Gain) Loss on sale of investment and assets		(1,034	)		7
Changes in operating assets and liabilities:
Accounts receivable		149			1,131
Inventories		(567	)		785
Prepaid expenses and other current assets		(28	)		(90	)
Accounts payable		(216	)		(477	)
Accrued expenses		314			(947	)
Net cash flows provided by (used in) operating activities		(1,564	)		665
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment		(181	)		(178	)
Change in other assets		(119	)		(41	)
Proceeds from asset sales		3,872			40
Net cash flows provided by (used in) investing activities		3,572			(179	)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Issuance of common stock		—			5
Net cash flows provided by financing activities		—			5
EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH		7			135
NET CHANGE IN CASH AND CASH EQUIVALENTS		2,015			626
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		5,868			6,736
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	7,883		$	7,362
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	5		$	—
Income taxes, net		19			17

See notes to unaudited condensed consolidated financial statements.

6

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

A. BUSINESS DESCRIPTION

Business Description.

Transgenomic, Inc. (the “Company”) provides innovative products for the synthesis, purification and analysis of nucleic acids used in the life sciences industry for research focused on molecular genetics and diagnostics. The Company also provides genetic variation analytical services to the medical research, clinical and pharmaceutical markets. Net sales are categorized as bioinstruments, bioconsumables and discovery services.

• Bioinstruments. The Company’s flagship product is the WAVE^® System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,375 WAVE Systems as of June 30, 2007. The Company also distributes bioinstruments produced by other manufacturers through its sales and distribution network. Service contracts to maintain installed systems are sold and supported by technical support personnel.

• Bioconsumables. The installed WAVE base and some third-party installed platforms generate a demand for consumables that are required for the system’s continued operation. The Company develops, manufactures and sells these products. In addition, the Company manufactures and sells consumable products that can be used on multiple, independent platforms. These products include SURVEYOR^® Nuclease and a range of HPLC separation columns.

• Discovery Services. The Company provides various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska. The lab in Omaha operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment. The services provided by the Company’s laboratories primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics, and (2) molecular-based testing for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.

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

Although the Company has experienced declining sales and recurring net losses (resulting in an accumulated deficit of $127 million at June 30, 2007), management believes existing sources of liquidity, including cash and cash equivalents of $7.9 million, are sufficient to meet expected cash needs through 2007. The Company will need to increase net sales and further reduce operating expenses in order to meet its liquidity needs for the existing business on a long-term basis. The Company has announced consolidation plans which are underway and will help reduce operating costs. There is no assurance that the Company will be able to increase net sales or further reduce expenses and, accordingly, the Company may not have sufficient sources of liquidity to continue operations indefinitely. If necessary, management believes they can further reduce costs and expenses to conserve working capital. However, such cost and expense reductions could have an adverse impact on the Company’s new product pipeline and ultimately net sales. The Company could also pursue additional financing, but ultimately, the Company must achieve sufficient net sales to consistently generate net income and cash flows from operations.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.

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

Use of Estimates.

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

7

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

financial statements and the reported amounts of net sales and expenses during the reporting period. In addition, estimates and assumptions associated with the determination of the fair value of certain assets and related impairments and the determination of goodwill impairments require considerable judgment by management. Actual results could differ from the estimates and assumptions used in preparing these financial statements.

Cash and Cash Equivalents.

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

Accounts Receivable.

Accounts receivable are shown net of allowance for doubtful accounts. The following is a summary of activity for the allowance for doubtful accounts during the three and six months ended June 30, 2007 and 2006:

	Three Months Ended						Six Months Ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Beginning balance	$	420		$	581		$	444		$	615
Charges to income		57			(75	)		33			(45	)
Deductions from reserves		(1	)		(128	)		(1	)		(192	)
Ending balance	$	476		$	378		$	476		$	378

While payment terms are generally 30 days, the Company has also provided extended payment terms of up to 90 days in certain cases. The Company reviews accounts receivables on a quarterly basis and adjusts its bad debt reserve accordingly.

Inventories.

Inventories are stated at the lower of cost or market. Cost is computed using standard costs for finished goods and average or latest actual cost for raw materials and work in process.

Equipment, Furniture and Fixtures.

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

Leasehold improvements	3 to 10 years
Furniture and fixtures	5 to 7 years
Production equipment	5 to 7 years
Computer equipment	3 to 5 years
Research and development equipment	3 to 5 years
Demonstration equipment	3 to 5 years

Depreciation and amortization during the three months ended June 30, 2007 and 2006, respectively, included $218 and $350, respectively, related to depreciation of property and equipment. Depreciation and amortization during the six months ended June 30, 2007 and 2006, respectively, included $463 and $721, respectively, related to depreciation of property and equipment.

Goodwill

Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, provides that goodwill will not be amortized, but will be tested for impairment annually. The Company performs this impairment analysis during the fourth quarter of each year. Impairment occurs when the carrying value is determined to be not recoverable thereby causing the fair value of the goodwill to exceed the carrying value. If impaired, the asset’s carrying value is reduced to its fair value.

8

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

Other Assets.

Long-Lived Assets

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144) which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of Operations, for a disposal of a segment of a business. The Company periodically reviews the carrying value of its long-lived assets to assess recoverability and impairment. The Company recorded no impairments during the three and six months ended June 30, 2007 or 2006.

Other assets include intellectual property, patents, other intangible assets, and other long-term assets.

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

Patents. The Company capitalizes external and in-house legal costs, filing fees and other expenses 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.

Other Intangible Assets. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and tested for impairment as events or changes in circumstances indicate the carrying amount of the asset may be impaired.

Other Long-Term Assets. Other long-term assets consist primarily of demonstration inventory that has been at customer or prospective customer sites for greater than one year and security deposits on leased facilities. Long-term demonstration inventory is stated at the lower of cost or market.

Stock Based Compensation.

All stock options awarded to date have exercise prices equal to the market price of the Company’s common stock on the date of grant and have ten-year contractual terms. Unvested options as of June 30, 2007 had vesting periods of three years from date of grant. None of the stock options outstanding at June 30, 2007 are subject to performance or market-based vesting conditions.

The Company adopted Financial Accounting Standards Board (FASB) Statement No. 123(R), Share-Based Payment (“FAS 123(R)”), on January 1, 2006. FAS 123(R) requires the Company to measure and recognize compensation expense for all stock-based awards made to employees and directors, including stock options. Compensation expense is based on the calculated fair value of the awards as measured at the grant date and is expensed ratably over the service period of the awards (generally the vesting period).

On December 28, 2005, the Company’s Directors approved a plan to accelerate the vesting of all outstanding stock options. Aside from the acceleration of the vesting date, the terms and the conditions of the stock option award agreements governing the underlying stock option grants remained unchanged. As a result of this plan, options to purchase approximately 1,081,845 shares became immediately exercisable. All such options were out-of-the-money and, accordingly, the accelerated vesting resulted in no compensation expense since there was no intrinsic value associated with these fixed awards at the date of modification. Accelerating the vesting of these options allowed the Company to avoid recognition of compensation expense associated with these options in future periods.

During the six months ended June 30, 2007 and 2006, the Company recorded compensation expense of $46 and $0, respectively, within the general administrative expense related to the vesting of 685,000 and 0 options, respectively during these periods. The fair value of the options was estimated on their respective grant dates using the Black-Scholes option pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 4.71% to 5.08%, based on the U.S.

9

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 2 to 10 years, based on historical exercise activity behavior; and volatility of 89.14% and 79.10% for grants issued for the three months ended March 31, 2007 and June 30, 2007, respectively, based on the historical volatility of our stock over a time that is consistent with the expected life of the option. As of June 30, 2007, there was $272 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of nearly three years.

Income Taxes.

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

Revenue Recognition.

Revenue (referred to as “net sales”) on the sales of products is recognized in accordance with the terms of the sales arrangement. Such recognition is based on receipt of an unconditional customer order and transfer of title and risk of ownership to the customer, typically upon shipment of the product under a purchase order. The Company’s sales terms do not provide for the right of return unless the product is damaged or defective. Net sales from certain services associated with the Company’s analytical instruments, to be performed subsequent to shipment of the products, is deferred and recognized when the services are provided. Such services, mainly limited to installation and training services that are not essential to the functionality of the instruments, typically are performed in a timely manner subsequent to shipment of the instrument. The Company also enters into various service contracts that cover installed instruments. These contracts cover specific time periods and net sales associated with these contracts are deferred and recognized over the service period. At June 30, 2007 and December 31, 2006, deferred revenue mainly associated with the Company’s service contracts, included in the Company’s balance sheet in other accrued expenses, was approximately $2,047 and $1,591, respectively.

Research and Development.

Research and development costs are charged to expense when incurred.

Translation of Foreign Currency.

Financial statements of subsidiaries outside the U.S. are measured using the local currency as the functional currency. The adjustments to translate those amounts into U.S. dollars are accumulated in a separate account in stockholders’ equity and are included in accumulated other comprehensive income. Foreign currency transaction gains or losses resulting from changes in currency exchange rates are included in the determination of net income. Foreign currency transaction adjustments from continuing operations increased/decreased net income (loss) by $69 and $99 during the three and six months ended June 30, 2007, respectively, and reduced net loss by $72 and $180 during the three and six months ended June 30, 2006, respectively.

Comprehensive Income.

Accumulated other comprehensive income at June 30, 2007 and December 31, 2006 consisted of foreign currency translation adjustments, net of applicable tax of zero. The Company deems its foreign investments to be permanent in nature and does not provide for taxes on currency translation adjustments arising from converting its investments in a foreign currency to U.S. dollars.

Earnings Per Share.

Basic earnings per share is calculated based on the weighted-average number of common shares outstanding during each period. Diluted earnings per share include shares issuable upon exercise of outstanding stock options, warrants or conversion rights that have exercise or conversion prices below the market value of the Company’s common stock. Options, warrants and conversion rights pertaining to 12,175,141 and 13,538,841 shares of the Company’s common stock have been excluded from the computation of diluted earnings per share at June 30, 2007 and 2006, respectively, because the exercise or conversion price of these instruments exceeded the market price of the Company’s common stock on those dates.

10

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

Recently Issued Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. The Company adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurement (“FAS 157”). While this Statement does not require new fair value measurements, it provides guidance on applying fair value and expands required disclosures. FAS 157 is effective for the Company beginning in the first quarter of 2008. The Company is currently assessing the impact FAS 157 may have on its Consolidated Financial Statements.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). This Statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value. FAS 159 will become effective for the Company beginning with the first quarter of 2008. The Company is currently assessing the impact FAS 159 may have on its Consolidated Financial Statements.

C. DISCONTINUED OPERATIONS

In the fourth quarter of 2005, the Company implemented a plan to exit its Nucleic Acids operating segment. Accordingly, the Company now reflects the results related to this operating segment as discontinued operations for all periods presented. Expenses that are not directly identified to the Nucleic Acids operating segment or that are considered corporate overhead have not been allocated in arriving at the loss from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
NET SALES	$	—		$	581		$	—		$	1,135
COST OF GOODS SOLD		—			463			—			843
Gross profit		—			118			—			292
OPERATING EXPENSES		7			244			(66	)		433
INCOME (LOSS) FROM OPERATIONS		(7	)		(126	)		66			(141	)
OTHER INCOME		—			1			—			2
INCOME (LOSS) BEFORE INCOME TAXES		(7	)		(125	)		66			(139	)
INCOME TAX		—			—			—			—
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	$	(7	)	$	(125	)	$	66		$	(139	)

Assets associated with the Nucleic Acids segment consisted principally of the Company’s facility in Glasgow, Scotland. During the six months ended June 30, 2007, the Company completed the sale of the Glasgow facility and the associated equipment for $2.9 million, net of selling expenses, which resulted in a gain of $0.1 million. The gain is reflected in the operating expenses of discontinued operations during the period.

11

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

The assets and liabilities of the former Nucleic Acids operating segment were as follows:

	June 30, 2007		December 31, 2006
Accounts receivable (net of allowances for doubtful accounts of $173 and $169, respectively)	$	—	$	—
Prepaid expenses and other current assets		4		—
Current assets of discontinued operations	$	4	$	—
Property and equipment, net	$	—	$	2,773
Non-current assets of discontinued operations	$	—	$	2,773
Accounts payable	$	34	$	45
Other accrued expenses		142		139
Current liabilities of discontinued operations	$	176	$	184

Liabilities are related to expenses to be paid during 2007 for final closing costs of the Glasgow facility.

D. RESTRUCTURING CHARGES

The Company recorded restructuring charges totaling $624,000 and $624,000 for the three and six months ended June 30, 2007. The restructuring charges were comprised of severance totaling $364,000 and facility closure costs totaling $260,000. Restructuring charges related to three events: A restructuring plan completed in the second quarter of 2007, which resulted from the termination of 4 employees in Omaha, Nebraska; facility closure activities to close the Cramlington, England production facility and consolidate production in the Omaha, Nebraska facility; and facility closure activities to close an administrative office outside Paris, France, with those functions performed elsewhere in the organization.

E. INVENTORIES

Inventories consisted of the following:

	June 30, 2007		December 31, 2006
Finished goods	$	2,128	$	2,146
Raw materials and work in process		1,101		443
Demonstration inventory		14		83
	$	3,243	$	2,672

F. OTHER ASSETS

Finite lived intangible assets and other assets consisted of the following:

	June 30, 2007						December 31, 2006
	Cost		Accumulated Amortization		Net Book Value		Cost		Accumulated Amortization		Net Book Value
Intellectual property	$	865	$	692	$	173	$	765	$	677	$	88
Patents		643		177		466		676		155		521
Other		302		208		94		705		461		244
Total	$	1,810	$	1,077	$	733	$	2,146	$	1,293	$	853

Amortization expense for intangible assets was $24 and $133 during the three months ended June 30, 2007 and 2006, respectively, and $46 and $150 during the six months ended June 30, 2007 and 2006, respectively. Amortization expense for intangible assets is expected to be approximately $46 for the remainder of 2007, $86 in 2008, $75 in 2009, $50 in 2010, $38 in 2011, and $32 in 2012 and 2013.

12

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

G. COMMITMENTS AND CONTINGENCIES

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

The Company leases certain equipment, vehicles and operating facilities under non-cancellable operating leases that expire on various dates through 2014. The future minimum lease payments required under these leases are approximately $541 for the remainder of 2007, $863 in 2008, $770 in 2009, $657 in 2010, $500 in 2011, $226 in 2012, and $98 thereafter. Rent expense for continuing operations related all to operating leases for the three months ended June 30, 2007 and 2006 was approximately $246 and $303, respectively, and for the six months ended June 30, 2007 and 2006 was approximately $527 and $596, respectively.

At June 30, 2007, firm commitments to vendors to purchase components used in WAVE Systems and instruments manufactured by others totaled $1,254. The Company expects to satisfy these purchase commitments during 2007.

H. INCOME TAXES

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. The Company adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more than likely not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

Upon adoption of FIN 48 on January 1, 2007, the Company recognized a $129 increase in the liability for unrecognized tax benefits. This increase in the liability was offset by an increase to the January 1, 2007 balance in the accumulated deficit. The gross amount of unrecognized tax benefits as of the date of adoption was $129, all of which would affect the effective tax rate if recognized. Included in this amount is an aggregate of $72 of interest and penalties. The Company’s policy is to recognize interest and penalties directly related to income taxes as part of income tax expense.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. The Company has statutes of limitation open for Federal income tax returns related to tax years 2004 through 2006. The Company has state income tax returns subject to examination primarily for tax years 2003 through 2006. Open tax years related to foreign jurisdictions remain subject to examination. The Company’s primary foreign jurisdiction is the United Kingdom which has open tax years for 2005 through 2006. The Company is not currently under examination in any jurisdiction.

During the three and six months ended June 30, 2007, there were no material changes to the liability for uncertain tax positions.

I. EMPLOYEE BENEFIT PLAN

The Company maintains an employee 401(k) retirement savings plan that allows for voluntary contributions into designated investment funds by eligible employees. The Company matches the employees’ contributions at the rate of 50% on the first 6% of contributions. The Company may, at the discretion of its Board of Directors, make additional contributions on behalf of the Plan’s participants. Company contributions to the 401(k) plan were $39 and $41 for the three months ended June 30, 2007 and 2006, respectively, and $81 and $83 for the six months ended June 30, 2007 and 2006, respectively.

J. STOCKHOLDERS’ EQUITY

Common Stock Warrants.

No common stock warrants were issued during the three and six months ended June 30, 2007 or 2006. At June 30, 2007, the Company had 8,062,577 common stock warrants outstanding.

13

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

Warrant Holder	Issue Year	Expiration Year	Underlying Shares	Exercise Price
Various Institutional Holders (1)	2005	2010	6,903,156	$	1.20
Laurus Master Fund, Ltd. (2)	2003	2010	200,000	$	1.92
Laurus Master Fund, Ltd. (2)	2003	2010	200,000	$	2.07
Laurus Master Fund, Ltd. (2)	2003	2010	150,000	$	2.35
Laurus Master Fund, Ltd. (2)	2004	2011	125,000	$	2.57
Laurus Master Fund, Ltd. (2)	2004	2011	400,000	$	1.18
TN Capital Equities, Ltd. (2)	2003	2008	45,918	$	2.94
TN Capital Equities, Ltd. (2)	2004	2009	15,566	$	3.18
GE Capital (3)	2002	2007	13,762	$	3.27
GE Capital (3)	2003	2008	9,175	$	3.27
Total			8,062,577

(1) These warrants were issued in conjunction with a private placement of common stock in October 2005 (the “2005 Private Placement”).

(2) These warrants were issued in conjunction with two loans that had been made by Laurus Master Fund, Ltd. to the Company (the “Laurus Loans”), and subsequent modifications of these loans. In conjunction with the 2005 Private Placement, the exercise prices of these warrants were adjusted according to repricing provisions contained in the original warrant agreements. While the Laurus Loans have been terminated, the warrants remain outstanding.

(3) These warrants were issued in conjunction with operating leases with GE Capital. While the leases have since been terminated, the warrants remain outstanding.

K. STOCK OPTIONS

The following table summarizes stock option activity during the six months ended June 30, 2007:

	Number of Options		Weighted Average Exercise Price
Balance at January 1, 2007	5,467,664		$	4.07
Granted	345,000			0.73
Exercised	—			—
Forfeited	(1,700,100	)		4.23
Balance at June 30, 2007	4,112,564		$	3.72
Exercisable at June 30, 2007	3,442,564		$	4.32

During the six months ended June 30, 2007, the Company granted 345,000 stock options at a weighted average exercise price of $0.73 under its 2006 Equity Incentive Plan (formerly, the 1997 Stock Option Plan). The weighted average grant date fair value per share of options granted during the six months ended June 30, 2007 was $0.56.

During the six months ended June 30, 2007 and 2006, the Company recorded compensation expense of $46 and $0, respectively, within the general administrative expense related to the vesting of 685,000 and 0 options, respectively during these periods. The fair value of the options was estimated on their respective grant dates using the Black-Scholes option pricing model. The Black-Scholes model was used with the following assumptions: risk-free interest rates of 4.71% to 5.08%, based on the U.S. Treasury yield in effect at the time of grant; dividend yields of zero percent; expected lives of 2 to 10 years, based on historical exercise activity behavior; and volatility of 89.14% and 79.10% for grants issued for the three months ended March 31, 2007 and June 30, 2007, respectively, based on the historical volatility of our stock over a time that is consistent with the expected life of the option. As of June 30, 2007, there was $272 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted average period of nearly three years.

14

TRANSGENOMIC, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2007 and 2006

(Dollars in thousands except per share data and as noted)

L. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

The Company has one reportable operating segment. Although net sales are analyzed by type, net financial results are analyzed as one segment due to the integrated nature of the products. Net sales by product were as follows:

	Three Months Ended				Six Months Ended
	June 30, 2007		June 30, 2006		June 30, 2007		June 30, 2006
Bioinstruments	$	3,383	$	3,743	$	6,006	$	7,784
Bioconsumables		2,218		2,296		4,448		4,540
Discovery Services		671		150		1,040		362
	$	6,272	$	6,189	$	11,494	$	12,686

Net cost of goods sold was as follows:

	Three Months Ended				Six Months Ended
	June 30, 2007		June 30, 2006		June 30, 2007		June 30, 2006
Bioinstruments	$	1,368	$	1,492	$	2,359	$	3,252
Bioconsumables		1,013		1,222		2,078		2,495
Discovery Services		478		426		936		907
	$	2,859	$	3,140	$	5,373	$	6,654

Net sales by geographic region were as follows:

	Three Months Ended				Six Months Ended
	June 30, 2007		June 30, 2006		June 30, 2007		June 30, 2006
United States	$	2,365	$	1,454	$	3,658	$	3,284
Europe		3,411		4,042		6,650		7,782
Pacific Rim		326		492		641		910
Other		170		201		545		710
	$	6,272	$	6,189	$	11,494	$	12,686

No customer accounted for more than 10% of consolidated net sales during the three and six months ended June 30, 2007 and 2006.

Substantially, all the Company’s long-lived assets are within the United States.

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

Overview

We develop, assemble, manufacture and market versatile products for the synthesis, purification and analysis of nucleic acids used in life sciences industry for research focused on molecular genetics and diagnostics. We also provide analytical services to the medical research, clinical and pharmaceutical markets for use in genetic variation analysis. Products and services are sold through a direct sales force in the United States and throughout much of Western Europe. For the rest of the world, products and services are sold through more than 35 dealers and distributors located in those local markets. Net sales are categorized as bioinstruments, bioconsumables and discovery services.

• Bioinstruments. Our flagship product is the WAVE System which has broad applicability to genetic variation detection in both molecular genetic research and molecular diagnostics. There is a worldwide installed base of over 1,375 WAVE Systems as of June 30, 2007. We also sell a number of complementary equipment platforms manufactured by others (“OEM Instruments”). Service contracts to maintain installed systems are sold and supported by technical support personnel.

• Bioconsumables. The installed WAVE base and some third-party installed platforms generate a demand for consumables that are required for the system’s continued operation. We develop, manufacture and sell these products. In addition, we manufacture and sell consumable products that can be used on a number of equipment platforms manufactured by others. These products include SURVEYOR Nuclease and a range of HPLC separation columns.

• Discovery Services. We provide various genetic laboratory services through a contract research lab in Gaithersburg, Maryland and a second laboratory in Omaha, Nebraska. The lab in Omaha operates in a Good Laboratory Practices (“GLP”) compliant environment and is certified under the Clinical Laboratory Improvement Amendment (“CLIA”). The services provided by our labs primarily include (1) genomic biomarker analysis services to pharmaceutical and biopharmaceutical companies to support preclinical and clinical development of targeted therapeutics, and (2) molecular-based medical testing services for hematology, oncology and certain inherited diseases for physicians and third-party laboratories.

Historically, we operated a segment (the “Nucleic Acids operating segment”) that developed, manufactured and marketed chemical building blocks for nucleic acid synthesis to biotechnology, pharmaceutical and oligonucleotide synthesis companies and research institutions throughout the world. In the fourth quarter of 2005, we implemented a plan to exit this operating segment. Accordingly, results of this operating segment are reflected as discontinued operations for all periods presented in this filing. In the first quarter of 2007, the Company completed the sale of the remaining assets associated with the segment.

Executive Summary

Net sales for the three months ended June 30, 2007 increased by 1%, compared to the same period in 2006. The increase is all attributable to our Discovery Services products. Net sales from bioinstruments were down 10%. Fewer WAVE sales were the cause of this decrease. Net sales from bioconsumables were down by 3%. Net sales from Discovery Services grew more than 300%, or $521,000, compared to the same quarter in 2006. The majority of the increase was related to the CLIA laboratory services. We also had strong sequential quarter over quarter growth in sales of CLIA laboratory services of 82%, or $300,000 in net sales. We continue to see improvement in gross margins. Our gross profit margins improved from 49% in the second quarter of 2006 to 54% in the current quarter ended June 30, 2007. The largest contributor to this increase is our Discovery Services product line which went from a negative gross profit in both the second quarter of 2006 and the first quarter of 2007 to a positive gross profit margin of 29% in the quarter ended June 30, 2007. Overall operating expenses included $624,000 of restructuring charges, primarily related to closings in France and the United Kingdom. Net profit was $226,000 for the second quarter ended June 30, 2007. This included two non-recurring items. First, we completed the sale of an investment in equity securities realizing a gain of $937,500. The second item noted above was the $624,000 of restructuring charges. As of the end of the second quarter ended June 30, 2007, we had cash and cash equivalents of $7.9 million and believe we will have sufficient liquidity to meet our operating needs throughout the year.

Outlook

We continue to work toward our objective of generating income from continuing operations and positive cash flows from continuing operations. To accomplish these goals, we must generate growth in net sales and continue to control manufacturing and other operating expenses. Sales of bioinstruments, including both our WAVE System and instruments we

16

sell for other manufacturers, continue to be affected by competition from other technologies. In addition, ongoing changes in the marketplace and the funding arrangements of our customers have led to sporadic sales in some markets. We continue to work to develop new applications for our WAVE System in an attempt to expand its market and sales. Sales of our OEM instruments continue to be a priority. We are also focusing increased efforts to expand our Discovery Services sales. In particular, the growth in our CLIA laboratory services has been promising and we believe we will continue to see ongoing growth from this business. We recently announced further cost reduction initiatives, including the closing of facilities in Europe. While the effects of these efforts have not been realized in the first half of 2007, we expect to see a more noticeable impact in the second half of the year.

Results of Continuing Operations

Three Months Ended June 30, 2007 and 2006

Net Sales. Net sales consisted of the following (dollars in thousands):

	Three Months Ended June 30,				Change
	2007		2006		$			%
Bioinstruments	$	3,383	$	3,743	$	(360	)	(10	)%
Bioconsumables		2,218		2,296		(78	)	(3	)%
Discovery Services		671		150		521		347	%
Net sales	$	6,272	$	6,189	$	83		1	%

The bioinstrument net sales decrease of 10% was due to fewer WAVE Systems being sold. Sixteen WAVE Systems were sold during the three months ended June 30, 2007, compared to 24 during the same period of 2006. WAVE sales in each period include sales of refurbished WAVEs. This decrease resulted from lower demand primarily in our largest markets throughout Western Europe. The sale of OEM instruments increased from 2 in the three months ended June 30, 2006 to 3 in the same period in 2007. There are significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. Net sales of consumables related to our WAVE Systems and other third-party instruments were down slightly year over year, primarily related to our separations product. The largest growth was in our discovery services net sales. The 347% increase was all attributable to CLIA laboratory services.

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

	Three Months Ended June 30,				Change
	2007		2006		$			%
Bioinstruments	$	1,368	$	1,492	$	(124	)	(8	)%
Bioconsumables		1,013		1,222		(209	)	(17	)%
Discovery Services		478		426		52		12	%
Cost of goods sold	$	2,859	$	3,140	$	(281	)	(9	)%

Gross profit was $3.4 million or 54% of total net sales during the three months ended June 30, 2007, compared to $3.0 million or 49% during the same period of 2006. Although net sales declined, gross profits as percentage of net sales increased due to lower consumable material and manufacturing costs and also due to the leverage of the discovery services costs. Some of the decrease in manufacturing costs was due to a shifting of personnel to research and development efforts. The Company continues to have a large fixed expense base outside of direct material costs. Discovery services costs have a large fixed component, so increases in net sales drive gross profit improvement.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $3.1 million during the three months ended June 30, 2007, compared to $2.8 million during the same period of 2006, an increase of $0.3 million or 11%. This increase was primarily due to increased compensation expense associated with personnel reassigned from Nucleic Acids production. These expenses are consistent with the third and fourth quarters of 2006 which we believe is a better comparison as all three quarters are comparable with no realignment of expenses between areas.

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Research and Development Expenses. Research and development expenses primarily include personnel costs, outside services, supplies, and facility costs and are expensed in the period in which they are incurred. These costs remained flat and totaled $0.5 million during the three months ended June 30, 2007, compared to $0.5 million during the same period of 2006.

Research and development expenses totaled 8% and 9% of net sales during the three months ended June 30, 2007 and 2006, respectively.

Restructuring Charges. Restructuring charges consist of costs related to a reduction in force at our Omaha, Nebraska facility, ongoing activities to close a production facility in Cramlington, England, and ongoing activities to close an administrative office outside of Paris, France.

Other Income (Expense). Other income during the three months ended June 30, 2007 was $1.0 million as compared to less than $0.1 million for the three months ended June 30, 2006. The increase was attributable to the sale of an investment in equity securities. On May 10, 2007, the Company sold 250,000 shares of stock in Pinnacle Pharmaceuticals, Inc. at a price of $3.75 per share. Gross proceeds realized from the sale were $937,500 which resulted in a gain of $937,500 and is reflected in other income during the period. Remaining other income consisted primarily of interest income from cash and cash equivalents invested in overnight instruments.

Income Tax Expense. In July 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. We adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.

Six Months Ended June 30, 2007 and 2006

Net Sales. Net sales consisted of the following (dollars in thousands):

	Six Months Ended June 30,				Change
	2007		2006		$			%
Bioinstruments	$	6,006	$	7,784	$	(1,778	)	(23	)%
Bioconsumables		4,448		4,540		(92	)	(2	)%
Discovery Services		1,040		362		678		187	%
Net sales	$	11,494	$	12,686	$	(1,192	)	(9	)%

The bioinstrument net sales decrease of 23% was due to fewer WAVE Systems and OEM instruments being sold. Thirty WAVE Systems were sold during the six months ended June 30, 2007, compared to 47 during the same period of 2006. There were 5 OEM instruments sold during the six months ended June 30, 2007 compared to 8 during the same period in 2006. WAVE sales in each period include sales of refurbished WAVEs. This decrease resulted from lower demand in all major geographic markets and among both research and diagnostic users, particularly in our largest markets throughout Western Europe. There are significant competitive challenges from traditional (i.e. sequencing) and evolving technologies. Net sales of consumables related to our WAVE Systems and other third-party instruments were relatively flat year over year. The largest growth, an increase of 187%, was in discovery services, and all attributable to our CLIA laboratory services.

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

	Six Months Ended June 30,				Change
	2007		2006		$			%
Bioinstruments	$	2,359	$	3,252	$	(893	)	(27	)%
Bioconsumables		2,078		2,495		(417	)	(17	)%
Discovery Services		936		907		29		3	%
Cost of goods sold	$	5,373	$	6,654	$	(1,281	)	(19	)%

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Gross profit was $6.1 million or 53% of total net sales during the six months ended June 30, 2007 compared to $6.0 million or 48% during the same period of 2006. Although net sales declined, gross profits as percentage of net sales increased due to lower costs for refurbished WAVE Systems, the mix of instruments sold, lower consumable material and manufacturing costs and the leverage related to the discovery services net sales. Some of the decrease in manufacturing costs was due to a shifting of personnel to research and development efforts. The Company continues to have a large fixed expense base outside of direct material costs. Discovery Services costs have a large fixed component, so increases in net sales drive gross profit improvement.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $6.0 million during the six months ended June 30, 2007, compared to $5.5 million during the same period of 2006, an increase of $0.5 million or 9%. This increase was primarily due to increased compensation expense associated with personnel reassigned from Nucleic Acids production. These expenses are consistent with the third and fourth quarters of 2006 which we believe is a better comparison as all three quarters are comparable with no realignment of expenses between areas.

Research and Development Expenses. Research and development expenses primarily include personnel costs, outside services, supplies, and facility costs and are expensed in the period in which they are incurred. These costs totaled $1.6 million during the six months ended June 30, 2007, compared to $1.1 million during the same period of 2006, an increase of $0.5 million, primarily from collaboration expense on new WAVE applications, increased compensation costs associated with personnel reassigned from Nucleic Acid production and patent costs for discovery services.

Research and development expenses totaled 13% and 9% of net sales during the six months ended June 30, 2007 and 2006, respectively.

Restructuring Charges. Restructuring charges consist of costs related to a reduction in force at our Omaha, Nebraska facility, ongoing activities to close a production facility in Cramlington, England, and ongoing activities to close an administrative office outside of Paris, France.

Other Income (Expense). Other income during the six months ended June 30, 2007 and 2006 was $1.1 million and $0.1 million, respectively. The increase was attributable to the sale of an investment in equity securities. On May 10, 2007, the Company sold 250,000 shares of stock in Pinnacle Pharmaceuticals, Inc. at a price of $3.75 per share. Gross proceeds realized from the sale were $937,500 which resulted in a gain of $937,500 and is reflected in other income during the period. Remaining other income consisted primarily of interest income from cash and cash equivalents invested in overnight instruments.

Income Tax Expense. In July 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. FIN 48 applies to all tax positions within the scope of Statement 109 and clarifies when and how to recognize tax benefits in the financial statements with a two-step approach of recognition and measurement. We adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more likely than not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards.

Results of Discontinued Operations

Three Months Ended June 30, 2007 and 2006

In the fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids operating segment. Accordingly, we now reflect the related results as discontinued operations for all periods presented. Expenses that are not directly identified to the Nucleic Acids operating segment or that are considered corporate overhead have not been allocated in arriving at the loss from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows (in thousands):

19

	Three Months Ended June 30,
	2007			2006
NET SALES	$	—		$	581
COST OF GOODS SOLD		—			463
Gross profit		—			118
OPERATING EXPENSES		7			244
INCOME (LOSS) FROM OPERATIONS		(7	)		(126	)
OTHER INCOME		—			1
INCOME (LOSS) BEFORE INCOME TAXES		(7	)		(125	)
INCOME TAX		—			—
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	$	(7	)	$	(125	)

Six Months Ended June 30, 2007 and 2006

In the fourth quarter of 2005, we implemented a plan to exit the Nucleic Acids operating segment. Accordingly, we now reflect the related results as discontinued operations for all periods presented. Expenses that are not directly identified to the Nucleic Acids operating segment or that are considered corporate overhead have not been allocated in arriving at the loss from discontinued operations. Summary results of operations of the former Nucleic Acids operating segment were as follows (in thousands):

	Six Months Ended June 30,
	2007			2006
NET SALES	$	—		$	1,135
COST OF GOODS SOLD		—			843
Gross profit		—			292
OPERATING EXPENSES		(66	)		433
INCOME (LOSS) FROM OPERATIONS		66			(141	)
OTHER INCOME		—			2
INCOME (LOSS) BEFORE INCOME TAXES		66			(139	)
INCOME TAX		—			—
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	$	66		$	(139	)

Assets associated with the Nucleic Acids segment consisted principally of the Company’s facility in Glasgow, Scotland. During the six months ended June 30, 2007, the Company completed the sale of the Glasgow facility and the associated equipment for $2.9 million, net of selling expenses, which resulted in a gain of $0.1 million. The gain is reflected in the operating expenses of discontinued operations during the period.

Liquidity and Capital Resources

Our working capital positions at June 30, 2007 and December 31, 2006 were as follows (in thousands):

	June 30, 2007		December 31, 2006		Change
Current assets (including cash and cash equivalents of $7,883 and $5,868, respectively)	$	18,175	$	15,605	$	2,570
Current liabilities		5,507		5,329		(178	)
Working capital	$	12,668	$	10,276	$	2,392

20

The increase in working capital was largely driven by the proceeds from the sale of the Glasgow facility and related equipment for $2.9 million and the sale of an investment in equity securities of $0.9 million, offset by the net loss for the six months ended June 30, 2007.

Although we have experienced declining sales and recurring net losses (resulting in an accumulated deficit of $127 million at June 30, 2007), management believes existing sources of liquidity, including cash and cash equivalents of $7.9 million, are sufficient to meet expected cash needs through 2007. We will need to increase our net sales and further reduce operating expenses in order to meet our liquidity needs for the existing business on a long-term basis. We cannot assure you that we will be able to increase net sales or further reduce our expenses and, accordingly, we may not have sufficient sources of liquidity to continue operations of the Company indefinitely. If necessary, management believes they can further reduce costs and expenses to conserve working capital. However, such cost and expense reductions could have an adverse impact on the Company’s new product pipeline and ultimately net sales. The Company could also pursue additional financing, but ultimately, the Company must achieve sufficient net sales to consistently generate net income and cash flows.

Analysis of Cash Flows

Six Months Ended June 30, 2007 and 2006

Net Change in Cash and Cash Equivalents. Cash and cash equivalents increased $2.0 million during the six months ended June 30, 2007 compared to an increase of $0.6 million during the six months ended June 30, 2006. The 2007 increase was the result of net cash provided by investing activities of $3.6 million, offset by net cash used by operating activities of $1.6 million. These were minimally offset from foreign currency exchange rates. The 2006 increase was similarly the result of net cash provided by operating activities of $0.7 million and the effect of foreign currency exchange rates of $0.1 million offset by net cash used in investing activities of $0.2 million.

Cash Flows used in Operating Activities. Cash flows used in operating activities totaled $1.6 million during the six months ended June 30, 2007, compared to cash flows generated from operating activities of $0.7 million during the same period of 2006. The use of cash flows in 2007 related primarily to the gain on sale of an investment in equity securities of $0.9 million, as well as higher inventory levels of $0.6 million related to the OEM instruments.

Cash flows generated from operating activities in 2006 related primarily to a net loss of $0.7 million offset by non-cash charges of $1.0 million. Non-cash charges consisted of depreciation and amortization. Working capital and other adjustments increased cash flows from operating activities by $0.4 million.

Cash Flows from Investing Activities. Cash flows provided by investing activities totaled $3.6 million during the six months ended June 30, 2007 compared to cash flows used in investing activities of $0.2 million during the same period of 2006. Cash flows provided by investing activities in 2007 consisted primarily of sales proceeds from our Glasgow facility and equipment of $2.9 million and sales proceeds of an investment in equity securities of $0.9 million. Cash flows used by investing activities in 2006 consisted of purchases of property and equipment and patent costs.

Cash Flows from Financing Activities. Cash flows from financing activities were minimal during the six months ended June 30, 2007 and June 30, 2006.

Obligations and Commitments

The following identifies material obligations and commitments as of June 30, 2007:

	Payments Due by Period
Contractual Obligations													After
Millions of dollars	Total		2007		2008		2009		2010		2011		2011
Operating leases (a)	$	3.75	$	0.54	$	0.86	$	0.77	$	0.66	$	0.50	$	0.42
Purchase obligations (b)		1.25		1.25		—		—		—		—		—
Total contractual obligations	$	5.00	$	1.79	$	0.86	$	0.77	$	0.66	$	0.50	$	0.42

(a) Operating leases include facility, automobile and other equipment leases.

(b) Purchase obligations include purchase commitments for components used in WAVE Systems and OEM instruments.

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Off-Balance Sheet Arrangements

At June 30, 2007 and December 31, 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Accounting policies used in the preparation of the consolidated financial statements may involve the use of management judgments and estimates. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial statements and they require significant or complex judgments on the part of management. Our judgments and estimates are based on experience and assumptions that we believe are reasonable under the circumstances. Further, we evaluate our judgments and estimates from time to time as circumstances change. Actual financial results based on judgments or estimates may vary under different assumptions or circumstances. Our critical accounting policies are discussed in our annual report on Form 10-K for the fiscal year ended December 31, 2006. There have been no significant changes with respect to these estimates during the six months ended June 30, 2007, except for the treatment of the contingency accruals.

Effective January 1, 2007, we began to measure and record tax contingency accruals in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is more than likely not to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. For additional information on the adoption of FIN 48, see Note H in Part I, Item 1 of this report.

Recently Issued Accounting Pronouncements

Please refer to our annual report on Form 10-K for the fiscal year ended December 31, 2006. There have been no changes to those listed except as noted in Note B.

Impact of Inflation

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Translation Risk. During the six months ended June 30, 2007 and 2006, our international sales represented more than 68% of our net sales. These sales of products in foreign countries are mainly completed in either British Pounds Sterling or the Euro. Additionally, we have two wholly-owned subsidiaries, Transgenomic Limited, and Cruachem Limited, whose operating currencies are British Pounds Sterling and the Euro. Results of operations for our 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. As a result we are subject to exchange rate risk. The operational expenses of our foreign subsidiaries help to reduce the currency exposure we have based on our sales denominated in foreign currencies by converting foreign currencies directly into goods and services. As such, we feel we do not have a material exposure to foreign currency rate fluctuations at this time.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. A review and evaluation was performed by our President, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that review and evaluation, the CEO and CFO concluded that the Corporation’s disclosure controls and procedures, as designed and implemented, were effective in assuring that information required to be disclosed is recorded, processed, summarized and reported in the reports we submit under the Securities Exchange Act of 1934.

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in our risk factors from those described in Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2006.

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

We held our Annual Meeting of Stockholders on May 23, 2007 in Omaha, Nebraska for the purpose of electing two Class I directors (for terms to expire in 2010) and one Class III director (for a term to expire in 2009). The following sets forth the results of the voting at the Annual Meeting:

Director Nominee	Class/Term Ending	Votes For	Votes Withheld
Craig J. Tuttle	Class I /2010	30,063,591	816,802
Frank R. Witney, Ph.D.	Class I /2010	30,809,567	70,826
Rodney S. Markin, M.D., Ph.D.	Class III /2009	30,809,567	70,826

Accordingly, Messrs. Tuttle, Witney and Markin were re-elected to the Board of Directors at the Annual Meeting. Each of our other directors, Gregory T. Sloma, Jeffrey L. Sklar, M.D., Ph.D., and Gregory J. Duman, continued in office as a director after the Annual Meeting.

Item 6. Exhibits

(a) Exhibits

3.1	Third Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registrant’s Report on Form 10-Q (Registration No. 000-30975) filed on November 14, 2005
3.2	Amended and Restated Bylaws of the Registrant filed on May 25, 2007
4	Form of Certificate of the Registrant’s Common Stock (incorporated by reference to Exhibit 4 to Registration Statement on Form S-1 (Registration No. 333-32174) filed on March 10, 2000
10.1	Stock Purchase Agreement, dated May 10, 2007, between the Registrant and New River Management IV, LP
31	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

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

	TRANSGENOMIC, INC.
Date: August 14, 2007	By:	/s/ CRAIG J. TUTTLE
		Craig J. Tuttle President and Chief Executive Officer

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EX-3.2

Exhibit 3.2

AMENDED AND RESTATED

BYLAWS OF

TRANSGENOMIC, INC.

TABLE OF CONTENTS

		Page
ARTICLE I
STOCKHOLDERS
Section 1.	Time and Place of Meetings	1
Section 2.	Annual Meetings	1
Section 3.	Special Meetings	1
Section 4.	Notice of Meetings	1
Section 5.	Quorum and Adjournment	2
Section 6.	Voting	2
Section 7.	Stockholder Proposals and Nominations of Directors	2
Section 8.	Inspectors of Elections	3
Section 9.	Opening and Closing of Polls	3
Section 10.	Participation in Meetings by Conference Telephone	4
ARTICLE II
DIRECTORS
Section 1.	General Powers	4
Section 2.	Number of Directors; Removal; Qualifications	4
Section 3.	Vacancies	4
Section 4.	Regular Meetings	5
Section 5.	Special Meetings	5
Section 6.	Quorum	5
Section 7.	Written Action	5
Section 8.	Participation in Meetings by Conference Telephone	5
Section 9.	Committees	5
Section 10.	Compensation	6
Section 11.	Regulations; Manner of Acting	6
ARTICLE III
NOTICES
Section 1.	Generally	6
Section 2.	Waivers	7

1

ARTICLE IV
OFFICERS
Section 1.	Generally	7
Section 2.	Compensation	7
Section 3.	Election	7
Section 4.	Authority and Duties	7
Section 5.	Removal and Resignation; Vacancies	7
Section 6.	Chairman	8
Section 7.	President/Chief Executive Officer	8
Section 7A.	Chief Operating Officer	8
Section 8.	Execution of Documents and Action With Respect to Securities of Other Corporations	8
Section 9.	Vice President	8
Section 10.	Secretary and Assistant Secretaries	8
Section 11.	Treasurer and Assistant Treasurers	9
ARTICLE V
INDEMNIFICATION
Section 1.	Right to Indemnification	9
Section 2.	Right of Indemnitee To Bring Suit	10
Section 3.	Nonexclusivity of Rights	10
Section 4.	Insurance	11
Section 5.	Indemnification of Agents of the Corporation	11
Section 6.	Indemnification Contracts	11
Section 7.	Effect of Amendment	11
ARTICLE VI
STOCK
Section 1.	Certificates	11
Section 2.	Transfer	11
Section 3.	Lost, Stolen or Destroyed Certificates	12
Section 4.	Record Date	12

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ARTICLE VII
GENERAL PROVISIONS
Section 1.	Fiscal Year	12
Section 2.	Corporate Seal	12
Section 3.	Reliance Upon Books, Reports and Records	12
Section 4.	Time Periods	13
Section 5.	Dividends	13
ARTICLE VIII
AMENDMENT OF BYLAWS		13

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BYLAWS

ARTICLE I

STOCKHOLDERS

Section 1. Time and Place of Meetings. All meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, within or without the State of Delaware, as may be designated by the Board of Directors, or by the Chairman of the Board, the Chief Executive Officer, the President or the Secretary in the absence of a designation by the Board of Directors, and stated in the notice of the meeting or in a duly executed waiver of notice thereof. [Sections 211(a), (b).]¹

Section 2. Annual Meetings. An annual meeting of the stockholders shall be held on such date and at such time as shall be designated by the Board of Directors, at which meeting the stockholders shall elect by a plurality vote the directors to succeed those whose terms expire at that meeting and shall transact such other business as may properly be brought before the meeting.

Section 3. Special Meetings. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may only be called (i) by the Chairman of the Board, (ii) by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors or (iii) by the Chief Executive Officer, if one is appointed, otherwise the President. [Section 211(d).]

Section 4. Notice of Meetings. Written notice of every meeting of the stockholders, stating the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting, except as otherwise provided herein or by law. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. [Section 222.]

Section 5. Quorum and Adjournment. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by law or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented; provided, however, that if the adjournment is for more than 30 days, or if

¹ Citations are to the General Corporation Law of the State of Delaware as in effect on January 1, 1997 and are inserted for reference only, and do not constitute a part of the Bylaws.

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after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting, conforming to the requirements of Section 4 of Article I hereof, shall be given to each stockholder of record entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. [Sections 216, 222(c).]

Section 6. Voting. Except as otherwise provided by law or by the Certificate of Incorporation, each stockholder shall be entitled at every meeting of the stockholders to one vote for each share of stock having voting power standing in the name of such stockholder on the books of the Corporation on the record date for the meeting, and such votes may be cast either in person or by written proxy. Every proxy must be duly executed and filed with the Secretary of the Corporation. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. No vote of the stockholders need be taken by written ballot unless otherwise required by law. Any vote which need not be taken by ballot may be conducted in any manner approved by the meeting. Every vote taken by written ballot shall be counted by one or more inspectors of election appointed by the Board of Directors. When a quorum is present at any meeting, the vote of the holders of a majority of the stock which has voting power present in person or represented by proxy shall decide any question properly brought before such meeting, unless the question is one upon which by express provision of law, the Certificate of Incorporation or these Bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. [Sections 212, 216.]

Section 7. Stockholder Proposals and Nominations of Directors. Nominations for election to the Board of Directors of the Corporation at a meeting of the stockholders may be made by the Board of Directors, or on behalf of the Board of Directors by a Nominating Committee appointed by the Board of Directors, or by any stockholder of the Corporation entitled to vote for the election of directors at such meeting. Any nominations, other than those made by or on behalf of the Board of Directors, and any proposal by any stockholder to transact any corporate business at an annual or special stockholders meeting, shall be made by notice in writing and mailed by certified mail to the Secretary of the Corporation and (i) in the case of an annual meeting, received no later than 35 days prior to the date of the annual meeting; provided, however, that if less than 35 days’ notice of a meeting of stockholders is given to the stockholders, such notice of proposed business or nomination by such stockholder shall have been made or delivered to the Secretary of the Corporation not later than the close of business on the seventh day following the day on which the notice of a meeting was mailed, and (ii) in the case of a special meeting of stockholders, received not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed. A notice of nominations by stockholders shall set forth as to each proposed nominee who is not an incumbent director (i) the name, age, address and principal occupation of each nominee proposed in such notice, (ii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee and the nominating stockholder and (iii) any other information concerning the nominee that must be disclosed regarding nominees in proxy solicitations pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and the rules under such section.

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The Chairman of the Board, or in his absence the Chief Executive Officer, if one is appointed, otherwise the President or the Secretary, may, if the facts warrant, determine and declare to the meeting of stockholders that a nomination was not made in accordance with the foregoing procedure and that the defective nomination shall be disregarded.

Section 8. Inspectors of Elections. Preceding any meeting of the stockholders, the Board of Directors may appoint one or more persons to act as Inspectors of Elections and may designate one or more alternate inspectors. In the event either no inspector or alternate is appointed or no inspector or alternate is able to act, the Secretary shall serve as the inspector or the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of the duties of an inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector shall:

(a) ascertain the number of shares outstanding and the voting power of each;

(b) determine the shares represented at a meeting and the validity of proxies and ballots;

(c) count all votes and ballots;

(d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and

(e) certify his or her determination of the number of shares represented at the meeting and his or her count of all votes and ballots.

The inspector may appoint or retain other persons or entities to assist in the performance of the duties of inspector.

When determining the shares represented and the validity of proxies and ballots, the inspector shall be limited to an examination of the proxies, any envelopes submitted with those proxies, ballots and the regular books and records of the Corporation. The inspector may consider reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers or their nominees or a similar person which represent more votes than the holders of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspector considers other reliable information as outlined in this Section, the inspector, at the time of his or her certification pursuant to (e) of this Section, shall specify the precise information considered, the person or persons from whom the information was obtained, when this information was obtained, the means by which the information was obtained, and the basis for the inspector’s belief that such information is accurate and reliable. [Sections 231(a), (b), (d).]

Section 9. Opening and Closing of Polls. The date and time for the opening and the closing of the polls for each matter to be voted upon at a meeting of stockholders shall be announced at the meeting. The inspector of the election shall be prohibited from accepting any ballots, proxies or votes nor any revocations thereof or changes thereto after the closing of the polls, unless the Court of Chancery upon application by a stockholder shall determine otherwise. [Section 231(c).]

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Section 10. Participation in Meetings by Conference Telephone. So long as the Corporation has 35 or fewer stockholders, any stockholder may participate in any meeting of stockholders by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting.

ARTICLE II

DIRECTORS

Section 1. General Powers. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate of Incorporation directed or required to be exercised or done by the stockholders. [Section 141(a).]

Section 2. Number of Directors; Removal; Qualifications. (a) The number of directors constituting the initial Board of Directors shall be five and, thereafter, the number of directors shall be fixed from time to time by resolution of the Board of Directors; provided that the number shall at no time be less than three or more than fifteen. In case of any increase in the number of directors in advance of an annual meeting of stockholders, each additional director shall be elected by the directors then in office, although less than a quorum, to hold office until the next annual meeting of shareholders or until his successor is elected. No decrease in the number of directors shall shorten the term of any incumbent director.

(b) The Board of Directors shall be divided into three classes, designated Classes I, II and III, which shall be as nearly equal in number as possible. Directors of Class I shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1998; directors of Class II shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 1999; and directors of Class III shall be elected to hold office for a term expiring at the annual meeting of stockholders to be held in 2000. At each succeeding annual meeting of stockholders following such initial classification and election, the respective successors of each class shall be elected for three-year terms.

(c) After the election or appointment of a director, the holders of a majority of the shares then entitled to vote generally for the election of directors may remove such director or the entire Board of Directors, but only for cause.

(d) At any time securities of the Corporation are registered under Section 12 of the Securities Exchange Act of 1934, as amended, no less than two directors shall be persons other than (i) officers or employees of the Corporation or it subsidiaries or (ii) individuals having a relationship which, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Directors need not be shareholders of the Corporation. [Sections 141(b), (k).]

Section 3. Vacancies. Vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum

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of the Board of Directors, and directors so chosen shall hold office until the next annual meeting of shareholders or until their successors shall have been duly elected and qualified. [Section 223.]

Section 4. Regular Meetings. Regular meetings of the Board of Directors may be held without notice immediately after the annual meeting of the stockholders and at such other times and places as shall from time to time be determined by the Board of Directors. [Section 141(g).]

Section 5. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board or the Chief Executive Officer, if one is appointed, otherwise the President or the Secretary on five days’ written notice to each director by whom such notice is not waived, given either personally or by courier, mail, facsimile transmission or telegram, and shall be called by the Chief Executive Officer, President or the Secretary in like manner and on like notice on the written request of any two directors. [Section 141(g).]

Section 6. Quorum. At all meetings of the Board of Directors, a majority of the total number of directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the Directors present thereat may adjourn the meeting from time to time to another place, time or date, without notice other than announcement at the meeting, until a quorum shall be present. [Section 141(b).]

Section 7. Written Action. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes or proceedings of the Board or such committee. [Section 141(f).]

Section 8. Participation in Meetings by Conference Telephone. Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any such committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. [Section 141(i).]

Section 9. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of two or more of the directors of the Corporation and each to have such lawfully delegable powers and duties as the Board may confer. Each such committee shall serve at the pleasure of the Board of Directors. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Except as otherwise provided by law, any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation and may authorize the seal of the Corporation to be affixed to all papers which may require it. Any committee or committees so designated by the Board shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless otherwise

5

prescribed by the Board of Directors, a majority of the members of the committee shall constitute a quorum for the transaction of business, and the act of a majority of the members present at a meeting at which there is a quorum shall be the act of such committee. Each Committee shall act at meetings held pursuant to duly issued notice as set out in Section 5 of this Article, waivers of notice or unanimous written consent. Each committee shall prescribe its own rules for calling and holding meetings and its method of procedure, subject to any rules prescribed by the Board of Directors, and shall keep a written record of all actions taken by it. No such committee shall have the power or authority:

(a) to amend the Certificate of Incorporation or provide for the issuance of shares of stock or fix the designations and any of the preferences or rights of shares or the conversion into, or the exchange of shares for, shares of any class or classes or any other series of the same of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series;

(b) to adopt an agreement of merger or consolidation under Section 251 or Section 252 of the General Corporation Law of the State of Delaware;

(c) to recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation’s property and assets;

(d) to recommend to the stockholders a dissolution of the Corporation or a revocation of a dissolution;

(e) to amend the Bylaws of the Corporation; or

(f) to declare a dividend.

Section 10. Compensation. The Board of Directors may establish such compensation for, and reimbursement of the expenses of, directors for attendance at meetings of the Board of Directors or committees, or for other services by directors to the Corporation, as the Board of Directors may reasonably determine. [Section 141(h).]

Section 11. Regulations; Manner of Acting. To the extent consistent with applicable law, the Certificate of Incorporation and these Bylaws, the Board of Directors may adopt such special rules and regulations for the conduct of their meetings and for the management of the property, affairs and business of the Corporation as the Board of Directors may deem appropriate. The directors shall act only as a Board, and the individual directors shall have no power as such.

ARTICLE III

NOTICES

Section 1. Generally. Whenever by law or under the provisions of the Certificate of Incorporation or these Bylaws notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail or national courier service, addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed

6

to be given at the time when the same shall be deposited in the United States mail or with such courier service. Notice to directors may also be given by facsimile transmission, telegram or telephone. [Section 222(b).]

Section 2. Waivers. Whenever any notice is required to be given by law or under the provisions of the Certificate of Incorporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to such notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. [Section 229.]

ARTICLE IV

OFFICERS

Section 1. Generally. The officers of the Corporation shall be elected by the Board of Directors and shall consist of a Chief Executive Officer, a President, a Chief Operating Officer, a Secretary and a Treasurer. The Board of Directors may also choose any or all of the following: a Chairman of the Board of Directors, one or more Vice Presidents, and one or more Assistant Secretaries and Assistant Treasurers or any other officers deemed necessary by the Board of Directors. Any number of offices may be held by the same person. [Section 142(a).]

Section 2. Compensation. The compensation of the Chief Executive Officer, the President and all officers and agents of the Corporation who are also directors of the Corporation shall be fixed by the Board of Directors. The Board of Directors may delegate the power to fix the compensation of other officers and agents of the Corporation to an officer of the Corporation and, in the absence of any express designation, the Chief Executive Officer, if one is appointed, otherwise the President, shall have the power to fix such amounts.

Section 3. Election. The officers of the Corporation shall hold office until their successors are elected and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the directors. Any vacancy occurring in any office of the Corporation may be filled by the Board of Directors. [Section 142(b).]

Section 4. Authority and Duties. Each of the officers of the Corporation shall have such authority and shall perform such duties as are customarily incident to their respective offices or as may be specified from time to time by the Board of Directors in a resolution which is not inconsistent with these Bylaws. [Section 142(a).]

Section 5. Removal and Resignation; Vacancies. Any officer may be removed for or without cause at any time by the Board of Directors. Any officer may resign at any time by delivering a written notice of resignation, signed by such officer, to the Board of Directors or the President. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise shall be filled by the Board of Directors. [Sections 142(b), (e).]

7

Section 6. Chairman. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and of the Board of Directors and shall have such other duties and responsibilities as may be assigned to him or her by the Board of Directors. The Chairman may delegate to any qualified person authority to chair any meeting of the stockholders, either on a temporary or a permanent basis. [Section 142(a).]

Section 7. President/Chief Executive Officer. The President shall be the principal executive officer of the Company unless a separate Chief Executive Officer is appointed by the Board of Directors. The Chief Executive Officer, if one is appointed, otherwise the President, shall carry out and direct the operations of the Company under the direction of the Board of Directors, subject to the specific delegation of any duties to a separate Chief Executive Officer. The President or the Chief Executive Officer, if one is appointed, shall preside at all meetings of the shareholders. The President and the Chief Executive Officer, if one is appointed, shall have general power to execute contracts, notes, bonds and other instruments on behalf of the Company and shall have such other duties and responsibilities as may be prescribed by the Board of Directors from time to time. In the absence of a Secretary, the President shall perform the duties thereof. [Section 142(a).]

Section 7A. Chief Operating Officer. The Chief Operating Officer shall carry out and direct the operations of the Company under the direction of the Chief Executive Officer.

Section 8. Execution of Documents and Action With Respect to Securities of Other Corporations. The Chief Executive Officer, the President, the Chief Operating Officer and the Executive Vice President shall have and are hereby given full power and authority, except as otherwise required by law or directed by the Board of Directors, (a) to execute, on behalf of the Corporation, all duly authorized contracts, agreements, deeds, conveyances or other obligations of the Corporation, applications, consents, proxies and other powers of attorney and other documents and instruments and (b) to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders (or with respect to any action of such stockholders) of any other corporation in which the Corporation may hold securities and otherwise to exercise any and all rights and powers which the Corporation may possess by reason of its ownership of securities of such other corporation. In addition, the Chief Executive Officer, if one is appointed, otherwise the President, may delegate to the Secretary or to other officers, employees and agents of the Corporation the power and authority to take any action which the Chief Executive Officer, if one is appointed, otherwise the President, is authorized to take under this Section 8 of this Article IV, with such limitations as the Chief Executive Officer, if one is appointed, otherwise the President, may specify; such authority so delegated by the Chief Executive Officer, if one is appointed, otherwise the President, shall not be redelegated by the person to whom such execution authority has been delegated. [Section 142(a).]

Section 9. Vice President. Each Vice President, however titled, shall perform such duties and services and shall have such authority and responsibilities as shall be assigned to or required from time to time by the Board of Directors or the President. [Section 142(a).]

Section 10. Secretary and Assistant Secretaries. (a) The Secretary shall attend all meetings of the stockholders and all meetings of the Board of Directors and record all proceedings of the meetings of the stockholders and of the Board of Directors and shall perform like duties for the standing committees when requested by the Board of Directors, the President

8

or the Chairman. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and meetings of the Board of Directors. The Secretary shall perform such duties as may be prescribed by the Board of Directors or its Chairman or the Chief Executive Officer, if one is appointed, otherwise the President. The Secretary shall have charge of the seal of the Corporation and authority to affix the seal to any instrument. The Secretary or any Assistant Secretary may attest to the corporate seal by handwritten or facsimile signature. The Secretary shall keep and account for all books, documents, papers and records of the Corporation except those for which some other officer or agent has been designated or is otherwise properly accountable. The Secretary shall have authority to sign stock certificates.

(b) Assistant Secretaries, in the order of their seniority, shall assist the Secretary and, if the Secretary is unavailable or fails to act, perform the duties and exercise the authorities of the Secretary. [Section 142(a).]

Section 11. Treasurer and Assistant Treasurers. (a) The Treasurer, if so designated, shall be the Chief Financial Officer of the Corporation and may be known as such. The Treasurer shall have the custody of the funds and securities belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Treasurer or the President. The Treasurer shall disburse the funds and pledge the credit of the Corporation and shall render to the Board of Directors and the President, as and when required by them, or any of them, an account of all transactions by the Treasurer.

(b) Assistant Treasurers, in the order of their seniority, shall assist the Treasurer and, if the Treasurer is unable or fails to act, perform the duties and exercise the powers of the Treasurer. [Section 142(a).]

ARTICLE V

INDEMNIFICATION

Section 1. Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer or employee of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (hereinafter an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a director, officer or employee or in any other capacity while serving as a director, officer or employee, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the

9

benefit of the indemnitee’s heirs, executors and administrators; provided, however, that, except as provided in Section 2 of this Article V with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 1 of this Article V shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an “advancement of expenses”); and provided, further, that, if the General Corporation Law of the State of Delaware requires it, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Article V or otherwise (hereinafter an “undertaking”).

Section 2. Right of Indemnitee To Bring Suit. If a claim under Section 1 of this Article V is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or part in any such suit or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses), it shall be a defense that the indemnitee has not met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware. Likewise, in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that the indemnitee has not met such standards. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified or to such advancement of expenses under this Article V or otherwise shall be on the Corporation.

Section 3. Nonexclusivity of Rights. The rights of indemnification and to the advancement of expenses conferred in this Article V shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, bylaw, contract, agreement, vote of stockholders or disinterested directors or otherwise.

10

Section 4. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any indemnitee against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware.

Section 5. Indemnification of Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article V or as otherwise permitted under the General Corporation Law of the State of Delaware with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.

Section 6. Indemnification Contracts. The Board of Directors is authorized to enter into a contract with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing for indemnification rights equivalent to or, if the Board of Directors so determines, greater than, those provided for in this Article V.

Section 7. Effect of Amendment. Any amendment, repeal or modification of any provision of this Article V by the stockholders or the directors of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such amendment, repeal or modification. [Section 145.]

ARTICLE VI

STOCK

Section 1. Certificates. Shares of the Corporation’s stock may be certificated or uncertificated, as provided under Section 158 of the General Corporation Law of the State of Delaware. Certificates representing shares of stock of the Corporation shall be in such form as shall be determined by the Board of Directors, subject to applicable legal requirements. Such certificates shall be numbered and their issuance recorded in the books of the Corporation, and such certificates shall exhibit the holder’s name and the number of shares and shall be signed by, or in the name of the Corporation by, the Chief Executive Officer, if one is appointed, otherwise the President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation. Any or all of the signatures and the seal of the Corporation, if any, upon such certificates may be facsimiles, engraved or printed. [Section 158.]

Section 2. Transfer. Transfers of stock shall be made on the books of the Corporation only by the record holder of such stock, or by attorney lawfully constituted in writing, and in the case of stock represented by a certificate, upon surrender of the certificate, duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer. [Section 151.]

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Section 3. Lost, Stolen or Destroyed Certificates. The Secretary may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact, satisfactory to the Secretary, by the person claiming the certificate of stock to be lost, stolen or destroyed. As a condition precedent to the issuance of a new certificate or certificates, the Secretary may require the owner of such lost, stolen or destroyed certificate or certificates to give the Corporation a bond in such sum and with such surety or sureties as the Secretary may direct as indemnity against any claims that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed or the issuance of the new certificate. [Section 167.]

Section 4. Record Date. (a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. [Section 213.]

ARTICLE VII

GENERAL PROVISIONS

Section 1. Fiscal Year. The fiscal year of the Corporation shall be the calendar year or such other annual period as shall be fixed from time to time by the Board of Directors.

Section 2. Corporate Seal. The Board of Directors may adopt a corporate seal and use the same by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

Section 3. Reliance Upon Books, Reports and Records. Each director, each member of a committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the records

12

of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation’s officers or employees, or committees of the Board of Directors, or by any other person as to matters the director, committee member or officer believes are within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. [Section 141(e)]

Section 4. Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded and the day of the event shall be included.

Section 5. Dividends. The Board of Directors may from time to time declare and the Corporation may pay dividends upon its outstanding shares of capital stock, in the manner and upon the terms and conditions provided by law and the Certificate of Incorporation. [Section 173.]

ARTICLE VIII

AMENDMENT OF BYLAWS

In furtherance and not in limitation of the powers conferred upon it by law, the Board of Directors is expressly authorized to adopt, repeal, alter or amend the Bylaws of the Corporation by the affirmative vote of a majority or more of the entire Board of Directors. In addition to any requirements of law and any provision of the Certificate of Incorporation, the stockholders of the Corporation may adopt, repeal, alter or amend any provision of the Bylaws upon the affirmative vote of the holders of a majority or more of the combined voting power of the then outstanding stock of the Corporation entitled to vote generally in the election of directors. [Section 109(a).]

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EX-10.1

Exhibit 10.1

STOCK PURCHASE AGREEMENT

BY AND AMONG

THE SELLING STOCKHOLDERS,

PINNACLE PHARMACEUTICALS, INC.

AND

NEW RIVER MANAGEMENT IV, LP

May 10, 2007

TABLE OF CONTENTS

		Page
ARTICLE I DEFINITIONS		1
Section 1.1.	Accounts.	1
Section 1.2.	Affiliate.	1
Section 1.3.	Agreement.	2
Section 1.4.	Assets.	2
Section 1.5.	Balance Sheet.	2
Section 1.6.	Books and Records.	2
Section 1.7.	Buyer.	2
Section 1.8.	Closing.	2
Section 1.9.	Closing Date.	2
Section 1.10.	Code.	2
Section 1.11.	Common Stock Per Share Purchase Price.	3
Section 1.12.	Company Common Stock.	3
Section 1.13.	Company Preferred Stock.	3
Section 1.14.	Company Stock Options.	3
Section 1.15.	Consulting Agreement.	3
Section 1.16.	Contracts.	3
Section 1.17.	Effective Time.	3
Section 1.18.	Employee Benefit Plan.	3
Section 1.19.	Employment Agreement.	3
Section 1.20.	Environmental Laws.	4
Section 1.21.	ERISA.	4
Section 1.22.	ERISA Affiliate.	4
Section 1.23.	Financial Statements.	4
Section 1.24.	GAAP.	4
Section 1.25.	Governmental Authority.	4
Section 1.26.	Hazardous Materials.	4
Section 1.27.	Intellectual Property.	4
Section 1.28.	Inventory.	5
Section 1.29.	IRS.	5
Section 1.30.	Key Employees.	5
Section 1.31.	Knowledge of the Company.	5
Section 1.32.	Law.	5
Section 1.33.	Lease.	5
Section 1.34.	Liens.	5
Section 1.35.	Material Adverse Effect.	6
Section 1.36.	Material Contracts.	6
Section 1.37.	Opinion of Company Counsel.	6
Section 1.38.	Pension Plans.	6
Section 1.39.	Permits.	6
Section 1.40.	Permitted Liens.	6

(i)

Section 1.41.	Petroleum Products.	6
Section 1.42.	Preferred Stock Per Share Purchase Price.	6
Section 1.43.	Purchased Stock.	6
Section 1.44.	Real Property.	6
Section 1.45.	Required Consents.	7
Section 1.46.	Tax and Taxes.	7
Section 1.47.	Tax Return.	7
ARTICLE II PURCHASE AND SALE		7
Section 2.1.	Sale of Purchased Stock.	7
Section 2.2.	Purchase of Purchased Stock.	7
Section 2.3.	Payment for Company Stock Options.	8
Section 2.4.	Closing Deliveries.	8
Section 2.5.	Other Closing Payments.	8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY		8
Section 3.1.	Organization of the Company.	8
Section 3.2.	Authorization; Enforceability.	9
Section 3.3.	No Violation or Conflict by the Company.	9
Section 3.4.	No Consents.	9
Section 3.5.	Capitalization.	9
Section 3.6.	Subsidiaries.	10
Section 3.7.	Litigation.	10
Section 3.8.	Title to, Sufficiency and Condition of Assets.	10
Section 3.9.	Contracts.	11
Section 3.10.	Accounts.	11
Section 3.11.	Inventory.	11
Section 3.12.	Financial Statements.	11
Section 3.13.	Absence of Undisclosed Liabilities.	12
Section 3.14.	Permits.	12
Section 3.15.	Real Properties.	12
Section 3.16.	Intellectual Property.	13
Section 3.17.	Orders, Commitments and Returns.	14
Section 3.18.	Books and Records.	15
Section 3.19.	Affiliated Transactions.	15
Section 3.20.	Insurance.	15
Section 3.21.	Tax Matters.	16
Section 3.22.	Compliance with Law.	17
Section 3.23.	Environmental Conditions.	17
Section 3.24.	Labor Matters.	19
Section 3.25.	No Adverse Change.	20
Section 3.26.	Employee Benefit Plans.	22
Section 3.27.	Warranties and Service Payment Obligations.	23
Section 3.28.	Bank Accounts.	23

(ii)

Section 3.29.	Customers and Suppliers.	23
Section 3.30.	Fees and Expenses of Brokers and Others.	24
Section 3.31.	Disclosure.	24
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLERS		24
Section 4.1.	Authorization; Enforceability.	24
Section 4.2.	Title to Purchased Stock.	24
Section 4.3.	Disclosure.	25
Section 4.4.	No Consents.	25
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE BUYER		25
Section 5.1.	Organization of Buyer.	25
Section 5.2.	Authorization; Enforceability.	25
Section 5.3.	No Violation or Conflict.	26
Section 5.4.	No Consents.	26
Section 5.5.	Litigation.	26
Section 5.6.	Fees and Expenses of Brokers and Others.	26
ARTICLE VI [RESERVED]		26
ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE BUYER		27
Section 7.1.	Compliance with Agreement.	27
Section 7.2.	Proceedings, Instruments and Due Diligence Satisfactory.	27
Section 7.3.	No Litigation.	27
Section 7.4.	Representations and Warranties.	27
Section 7.5.	Material Damage to Assets; Material Adverse Effect.	27
Section 7.6.	Employment Agreements with Key Employees.	27
Section 7.7.	Consulting Agreement.	28
Section 7.8.	Deliveries at Closing.	28
Section 7.9.	Consents from Holders of Company Stock Options.	28
ARTICLE VIII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS AND THE COMPANY		29
Section 8.1.	Compliance with Agreement.	29
Section 8.2.	Proceedings and Instruments Satisfactory.	29
Section 8.3.	No Litigation.	29
Section 8.4.	Representations and Warranties.	29
Section 8.5.	Deliveries at Closing.	29

(iii)

ARTICLE IX POST-CLOSING COVENANTS		30
Section 9.1.	Additional Instruments.	30
Section 9.2.	Access to Books and Records.	30
Section 9.3.	Certain Tax Matters.	30
ARTICLE X [RESERVED]		31
ARTICLE XI MISCELLANEOUS		31
Section 11.1.	Entire Agreement; Amendment; Waiver.	31
Section 11.2.	Expenses.	31
Section 11.3.	Governing Law; Consent to Jurisdiction.	31
Section 11.4.	Further Assurances.	32
Section 11.5.	Termination and Survival of Representations and Warranties.	32
Section 11.6.	Assignment.	32
Section 11.7.	Notices.	32
Section 11.8.	Counterparts.	33
Section 11.9.	Interpretation.	33
Section 11.10.	Severability.	33
Section 11.11.	No Third Party Rights.	34
Section 11.12.	Specific Performance.	34
Section 11.13.	Counsel to Company.	34

(iv)

SCHEDULES
Schedule 1.40	Permitted Liens
Schedule 1.45	Required Consents
Schedule 2.2	Sellers’ Accounts
Schedule 2.3	Option Holders’ Accounts
Schedule 2.5	Closing Amounts Payable
Schedule 3.12	Financial Statements
Schedule 3.16	Intellectual Property
EXHIBITS
Exhibit A	Selling Stockholders
Exhibit 1.15	Consulting Agreement
Exhibit 1.19	Employment Agreement
Exhibit 1.37	Opinion of Company Counsel

(v)

STOCK PURCHASE AGREEMENT

This STOCK PURCHASE AGREEMENT (the “Agreement”), made as of May     , 2007, by and among Pinnacle Pharmaceuticals, Inc., a Delaware corporation (the “Company”), the selling stockholders listed on Exhibit A hereto (each a “Seller” and together, “Sellers”), and New River Management IV, LP, a Virginia partnership (“Buyer”), recites and provides as follows:

RECITALS

WHEREAS, Sellers collectively own all of the issued and outstanding shares of capital stock of the Company; and

WHEREAS, Sellers desire to sell, and Buyer desires to purchase, all of the issued and outstanding shares of capital stock of the Company.

NOW, THEREFORE, in consideration of the promises and agreements set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

When used in this Agreement, the following terms shall have the meanings specified:

Section 1.1. Accounts.

“Accounts” shall mean all accounts receivable, notes receivable and associated rights as of the Effective Time (including, without limitation, amounts due from vendors, all security deposits, letters of credit and security interests in collateral) arising from the sale of goods and services in the ordinary course of the business of the Company, together with any notes or other amounts due to the Company from its officers, employees or Affiliates.

Section 1.2. Affiliate.

“Affiliate” shall mean, as applied to any person, (a) any other person directly or indirectly controlling, controlled by or under common control with, that person, (b) any other person that owns or controls ten percent (10%) or more of any class of equity securities of that person or any of its Affiliates or (c) as to a corporation, each director and officer thereof, and as to a partnership, each general partner thereof, and as to a limited liability company, each managing member or similarly authorized person thereof (including officers), and as to any other entity, each person exercising similar authority to those of a director or officer of a corporation. For the purposes of this definition, “control” (including with correlative meanings, the terms “controlling,” “controlled by,” and “under common control with”) as applied to any person,

means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that person, whether through ownership of voting securities or by contract or otherwise.

Section 1.3. Agreement.

“Agreement” shall mean this Stock Purchase Agreement, together with the schedules and exhibits attached hereto, as the same may be amended from time to time in accordance with the terms hereof.

Section 1.4. Assets.

“Assets” shall mean, collectively, all of the tangible and intangible assets owned by the Company as of the Effective Time.

Section 1.5. Balance Sheet.

“Balance Sheet” shall mean the balance sheet of the Company as of December 31, 2006 set forth in the Financial Statements.

Section 1.6. Books and Records.

“Books and Records” shall mean original or true and complete copies of all of the books, records, files, data and information of the Company as of the Effective Time (including, without limitation, customer lists, financial and accounting records, purchase orders and invoices, sales orders and sales order log books, credit and collection records, correspondence and miscellaneous records with respect to customers and supply sources and all other general correspondence).

Section 1.7. Buyer.

“Buyer” shall mean New River Management IV, LP, a Virginia partnership.

Section 1.8. Closing.

“Closing” shall mean the meeting of the closing of the transactions contemplated hereby to be held at 10:00 a.m., Richmond, Virginia time, on the Closing Date, at the offices of Troutman Sanders LLP, 1001 Haxall Point, Richmond, Virginia 23219, or at such other time and place as the parties may mutually agree in writing.

Section 1.9. Closing Date.

“Closing Date” shall mean May     , 2007, or such other date as the parties may mutually agree in writing.

Section 1.10. Code.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

2

Section 1.11. Common Stock Per Share Purchase Price.

“Common Stock Per Share Purchase Price” shall mean $3.75.

Section 1.12. Company Common Stock.

“Company Common Stock” shall mean the Company’s common stock, par value $0.001 per share.

Section 1.13. Company Preferred Stock.

“Company Preferred Stock” shall mean the Company’s Series A Preferred Stock, par value $0.001 per share.

Section 1.14. Company Stock Options.

“Company Stock Options” shall mean options to purchase Company Common Stock outstanding as of the date hereof.

Section 1.15. Consulting Agreement.

“Consulting Agreement” shall mean a consulting agreement between the Company and Dr. Sidney Hecht in substantially the form of Exhibit 1.15 attached hereto

Section 1.16. Contracts.

“Contracts” shall mean those contracts, agreements, blanket and other purchase orders, leases of personal property (such as computers and copiers), sales orders, license agreements, relationships and commitments and invoices related thereto, to which the Company is a party or by which the Company is bound (whether written or oral).

Section 1.17. Effective Time.

“Effective Time” shall mean 11:59 p.m., Richmond, Virginia time on the date immediately preceding the Closing Date.

Section 1.18. Employee Benefit Plan.

“Employee Benefit Plan” shall mean an “employee benefit plan” as defined in Section 3(3) of ERISA, each Pension Plan and any other plans, programs, agreements, arrangements or policies that provide compensation or other benefits, whether or not subject to ERISA, to any present or former employee, non-employee director or service provider of the Company or an ERISA Affiliate, or any dependent or beneficiary thereof.

Section 1.19. Employment Agreement.

“Employment Agreement” shall mean an employment agreement between the Company and each of the Key Employees in substantially the form of Exhibit 1.19 attached hereto

3

Section 1.20. Environmental Laws.

“Environmental Laws” shall have the meaning set forth in Section 3.23(a) hereto.

Section 1.21. ERISA.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

Section 1.22. ERISA Affiliate.

“ERISA Affiliate” shall mean each entity that is a member of a controlled group or affiliated service group of which the Company is a member or that is treated as a single employer with the Company under Section 414(b), 414(c), 414(m) or 414(o) of the Code or ERISA.

Section 1.23. Financial Statements.

“Financial Statements” shall mean the balance sheets of the Company as of December 31, 2004, 2005, and 2006 and the statements of income and retained earnings and statements of cash flows of the Company for the years ended December 31, 2004, 2005, and 2006 set forth in Schedule 3.12 hereto.

Section 1.24. GAAP.

“GAAP” shall mean generally accepted accounting principles of the United States as in effect at the time of the preparation of the subject financial statement consistently applied.

Section 1.25. Governmental Authority.

“Governmental Authority” shall have the meaning set forth in Section 3.23(a) hereto.

Section 1.26. Hazardous Materials.

“Hazardous Materials” shall have the meaning set forth in Section 3.23(a) hereto.

Section 1.27. Intellectual Property.

“Intellectual Property” shall mean all intellectual property owned or licenses by the Company as of the Effective Time, including, without limitation, the following: (a) all registered and unregistered domestic and foreign inventions, patents and patent applications, (b) all registered and unregistered trademarks, service marks, trademark registration and applications, trade dress, logos, trade names and brand names, and any combination of such names, including all goodwill associated therewith and all applications, registrations and renewals in connection therewith, (c) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith, (d) all trade secrets and confidential business information (including ideas, research and development, know-how, compositions, designs, formulae, technology, processes, drawings, specifications, customer and supplier lists, pricing and cost information and business and market plans and proposals), (e) all computer programs and software and source code (including hard copy and soft copy as well as all data and related

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documentation), (f) all websites and related content (including, without limitation, underlying software, URL’s and domain names), (g) all financial models, (h) all customer lists, current and past and (i) all other intellectual property rights owned, used, filed by, licensed or possessed by the Company.

Section 1.28. Inventory.

“Inventory” shall mean all of the Company’s inventories of raw materials, work in process, finished goods and supplies held for use or sale by the Company as of the Effective Time.

Section 1.29. IRS.

“IRS” shall mean the Internal Revenue Service of the United States.

Section 1.30. Key Employees.

“Key Employees” shall mean Nour Eddine Fahmi, Ph.D, Jing-Zhen Deng, Ph.D and Larisa Dedkova, Ph.D.

Section 1.31. Knowledge of the Company.

“Knowledge of the Company” shall mean (a) the actual knowledge, after reasonable inquiry, of Sidney Hecht, Ph.D, and (b) the actual knowledge, without any duty of inquiry, of each of the Key Employees.

Section 1.32. Law.

“Law” shall mean any federal, state, local or other law or treaty or governmental requirement of any kind, and the rules, regulations and orders promulgated thereunder, including, without limitation, the U.S. Federal Food, Drug and Cosmetic Act of 1938, as amended, the Public Health Service Act, any related law and any regulations promulgated thereunder by the U.S. Food and Drug Administration.

Section 1.33. Lease.

“Lease” shall mean the lease agreement by and between the University of Virginia Foundation and the Company, dated May 3, 2004, pursuant to which the Company leases the Real Property.

Section 1.34. Liens.

“Liens” shall mean any lien, mortgage, security interest, Tax lien, attachment, levy, charge, claim, restriction, imposition, pledge, encumbrance, conditional sale or title retention arrangement, or any other interest in property or assets (or the income or profits therefrom) designed to secure the repayment of indebtedness, whether consensual or nonconsensual and whether arising by agreement or under any Law or otherwise.

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Section 1.35. Material Adverse Effect.

“Material Adverse Effect” shall mean any event, change or effect that has a material adverse effect on (a) the properties, business, results of operations, or condition (financial or otherwise) of the Company or (b) the ability of Sellers to consummate the transactions contemplated hereby.

Section 1.36. Material Contracts.

“Material Contracts” shall have the meaning set forth in Section 3.9 hereto.

Section 1.37. Opinion of Company Counsel.

“Opinion of Company Counsel” shall mean the opinion of LeClair Ryan, A Professional Corporation, counsel to the Company, substantially in the form of Exhibit 1.37 attached hereto.

Section 1.38. Pension Plans.

“Pension Plans” mean each “employee pension benefit plan” (as defined in Section 3(2) of ERISA) sponsored, maintained or contributed to, or required to be maintained or contributed to by the Company.

Section 1.39. Permits.

“Permits” shall mean governmental approvals, franchises, authorizations, registrations, permits and licenses.

Section 1.40. Permitted Liens.

“Permitted Liens” shall mean Liens for Taxes for the current tax year that are not yet due and payable and those Liens affecting the Assets that are specifically listed on Schedule 1.40 hereto.

Section 1.41. Petroleum Products.

“Petroleum Products” shall have the meaning set forth in Section 3.23(a) hereto.

Section 1.42. Preferred Stock Per Share Purchase Price.

“Preferred Stock Per Share Purchase Price” shall mean $1.00.

Section 1.43. Purchased Stock.

“Purchased Stock” shall mean all of the issued and outstanding shares of capital stock of the Company, consisting of all of the issued and outstanding shares of Company Common Stock (including any Company Common Stock issuable upon the exercise of any Company Stock Options or upon conversion of any shares of Company Preferred Stock) and all of the issued and outstanding shares of Company Preferred Stock.

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Section 1.44. Real Property.

“Real Property” shall mean the real property leased or owned by the Company as of the Effective Time, together with all improvements and fixtures thereon and all easements, rights-of-way and other appurtenants thereto.

Section 1.45. Required Consents.

“Required Consents” shall mean the consent to the assignment of the Lease by the University of Virginia Foundation and those consents required from parties to the Contracts and Permits that are necessary or required in order to give effect to the transactions contemplated herein, all of which are specifically identified on Schedule 1.45 attached hereto.

Section 1.46. Tax and Taxes.

“Tax” or “Taxes” shall mean any federal, state, county, local or foreign taxes, charges, levies, imposts, duties, other assessments or similar charges of any kind whatsoever, including interest, penalties and additions imposed thereon or with respect thereto.

Section 1.47. Tax Return.

“Tax Return” shall mean any report, return, information return or other information required to be supplied to a taxing authority in connection with Taxes, including any return of an affiliated or combined unitary group.

ARTICLE II

PURCHASE AND SALE

Section 2.1. Sale of Purchased Stock.

At the Closing, upon the terms and subject to the conditions of this Agreement, and in consideration of the payments to be made by Buyer to Sellers pursuant to Section 2.2 hereof, each Seller shall sell, transfer, convey and deliver to Buyer all of the shares of Purchased Stock owned by such Seller, and Buyer shall purchase such shares of Purchased Stock from such Seller, free and clear of all Liens. Each Seller shall deliver, or cause to be delivered, to Buyer one or more stock certificates representing the Purchased Stock owned by such Seller, duly endorsed for transfer or accompanied by duly executed stock powers.

Section 2.2. Purchase of Purchased Stock.

At the Closing, Buyer shall purchase from each Seller, by wire transfer of immediately available funds to the account designated by such Seller on Schedule 2.2 attached hereto, the Purchased Stock held by such Seller as follows:

(a) Payment for Company Common Stock. Buyer shall pay to each Seller the Common Stock Per Share Purchase Price for each share of Company Common Stock held by such Seller;

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(b) Payment for Company Preferred Stock. Buyer shall pay to each Seller the Preferred Stock Per Share Purchase Price for each share of Company Preferred Stock held by such Seller; and

Section 2.3. Payment for Company Stock Options.

All Company Stock Options shall become exercisable and fully vested immediately prior to Closing and cease to represent, as of Closing, a right to acquire shares of Company Common Stock, and at the Closing Buyer shall pay to the holder of such Company Stock Options to the account designated by such holder on Schedule 2.3, in settlement and cancellation thereof, a lump sum cash payment of an amount equal to (i) the excess, if any, of (A) the Common Stock Per Share Purchase Price over (B) the exercise price per share of Company Common Stock subject to such Company Stock Option, multiplied by (ii) the number of shares of Company Common Stock for which such Company Stock Option shall not theretofore have been exercised (with Buyer being entitled to withhold from payments made to holders of Company Stock Options pursuant to this Section 2.3 any applicable tax withholdings, which the Buyer shall cause the Company to pay promptly after the Closing to the appropriate taxing authorities, and such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Company Stock Options in respect of which such deduction and withholding was made by Buyer).

Section 2.4. Closing Deliveries.

At the Closing, Sellers and the Company shall deliver, or cause to be delivered, to Buyer those deliveries required to be made at or prior to the Closing pursuant to Section 7.8 hereof, and Buyer shall deliver, or cause to be delivered, to Sellers and the Company those deliveries required to be made at or prior to the Closing pursuant to Section 8.5 hereof.

Section 2.5. Other Closing Payments.

At the Closing, Buyer shall pay in cash on behalf of the Company the accounts payable of the Company set forth on Schedule 2.5 hereto.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

As an inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, the Company hereby represents and warrants to Buyer that, except as set forth in the Disclosure Schedule attached hereto:

Section 3.1. Organization of the Company.

(a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has full corporate power and authority to carry on its business as it is currently being conducted and to own, operate and hold under lease its assets and properties as, and in the places where, such assets and properties are currently owned, operated or held. The Company is duly qualified or licensed to transact business as a foreign corporation, and is in good standing, in each jurisdiction in which the conduct or nature of its business or the ownership, leasing or holding of its properties makes such qualification necessary.

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(b) The Company has full corporate power and authority to enter into this Agreement and has taken all corporate action necessary in order to enter into and deliver this Agreement and to consummate the transactions contemplated hereby.

Section 3.2. Authorization; Enforceability.

This Agreement is, and the other documents and instruments required hereby to which the Company is a party will be, when executed and delivered by the Company, the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with their respective terms. The Company has the absolute and unrestricted right, power, authority and capacity to execute and deliver, and to perform its obligations under, this Agreement and the other documents and instruments required hereby to which the Company is a party.

Section 3.3. No Violation or Conflict by the Company.

The execution, delivery and performance by the Company of this Agreement and all of the other documents and instruments required hereby to which the Company is a party do not and will not (a) conflict with or violate (i) the charter or bylaws of the Company, (ii) any Law, rule, regulation, judgment, order or decree binding on the Company or any of its assets (iii) any Contract or other contract, note, bond, indenture, lease, agreement or arrangement to which the Company is a party or by which the Company or any of its assets are bound, or (b) give any party to any Contract or other contract, note, bond, indenture, lease, agreement or arrangement to which the Company is a party or by which the Company is bound any right of termination, cancellation, acceleration or modification thereunder.

Section 3.4. No Consents.

Except for the Required Consents, all of which shall have been obtained prior to the Closing, no consent of any other person, and no notice to, filing or registration with, or consent, license, permit, order, approval or authorization of, any Governmental Authority is necessary or is required to be made or obtained by the Company in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

Section 3.5. Capitalization.

The authorized capital of the Company consists of 1,500,000 shares of Company Common Stock and 500,000 shares of Company Preferred Stock. The Purchased Stock represents all of the issued and outstanding capital stock of the Company and has been duly and

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validly issued and is fully paid and non-assessable. None of the Purchased Stock was issued in violation of any preemptive, subscription or similar rights. All of the Purchased Stock was offered and sold in compliance with all applicable federal and state securities laws and regulations. There are no options, warrants or other rights to subscribe for or purchase any capital stock of the Company or securities convertible into or exchangeable for, or which otherwise confer on the holder any right to acquire, any capital stock of the Company, nor is the Company committed to issue any such option, warrant or other right, other than the Company Stock Options included in the Purchased Stock. There are no outstanding stock appreciation, phantom stock, profit participation or similar rights with respect to the capital stock of the Company. There are no shares of capital stock reserved for issuance for any purpose.

Section 3.6. Subsidiaries.

The Company does not own any capital stock of any other corporation or any interest in any partnership, joint venture, limited liability company or other business, nor does the Company have the right or obligation to acquire any ownership interest in any corporation, partnership, joint venture, limited liability company or other business.

Section 3.7. Litigation.

There is no litigation, arbitration, proceeding, governmental investigation, citation or action of any kind pending or, to the Knowledge of the Company, overtly proposed or threatened, by, before, or involving any Governmental Authority or arbitration tribunal (a) against the Company, (b) relating to the business, Assets, properties or products of the Company or (c) that seeks restraint, prohibition, damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby. There is no unresolved product liability, product warranty or worker’s compensation claim that has been asserted or filed or, to the Knowledge of the Company, overtly threatened against the Company by, before, or involving any Governmental Authority or arbitration tribunal. To the Knowledge of the Company, the Company is not a party or subject to or in default under any judgment, order, injunction or decree of any Governmental Authority or arbitration tribunal applicable to it or any of its properties, Assets, operations or business.

Section 3.8. Title to, Sufficiency and Condition of Assets.

The Company owns good, valid and marketable title to all of the Assets (whether tangible or intangible), free and clear of all Liens other than Permitted Liens. The Assets and Contracts include all tangible and intangible assets, contracts and rights necessary or desirable for the operation by Buyer of the business of the Company immediately after the Effective Time in accordance with the Company’s past practices. The tangible Assets are in good operating condition and repair, subject to ordinary wear and tear, are substantially fit for use in accordance with the Company’s past practices and are adequate for which they are currently used or held for use. There are no existing or proposed agreements, options, commitments or rights with, of or to any person or Governmental Authority to acquire or to condemn, expropriate or otherwise take without payment any of the assets of the Company or any interest therein.

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Section 3.9. Contracts.

The Company has provided to Buyer (or a current or former Affiliate of Buyer) true and complete copies of all written Contracts (including all amendments or modifications thereto) that require the payment, or involve the receipt, of more than $10,000 during any 12-month period or have a term in excess of one year (the “Material Contracts”) or that include a covenant not to compete or other covenant restricting the business of the Company, that relate to a license, agreement or understanding with respect to the Intellectual Property, or that involve any Seller or any Affiliate of any Seller or any officer, employee or director of the Company and, in the case of oral Material Contracts, true and complete written summaries of the terms thereof. Each Material Contract is in full force and effect and is enforceable in accordance with its terms. The Company has performed each material term, covenant and condition of each Material Contract that is to be performed by it at or before the date hereof, or such material term, covenant or condition will be performed at or before the Closing (including, without limitation, pursuant to Section 2.5 hereof). No event has occurred or circumstances exist that could, with the passage of time or compliance with any applicable notice requirements or both, constitute a default of, result in a material violation or breach of, or give any right to accelerate, modify, cancel or terminate any Material Contract by the Company or, to the Knowledge of the Company, any other party under any such Material Contract. To the Knowledge of the Company, no party to any Material Contract intends to exercise any right of cancellation, termination, acceleration or modification under any such Material Contract. The Company has not made any prior assignment of any Material Contract or any of its rights or obligations thereunder.

Section 3.10. Accounts.

All Accounts reflected on the Balance Sheet represented as of the date of the Balance Sheet valid obligations arising from sales actually made or services actually performed by the Company in the ordinary course of business or valid claims as to which full performance has been rendered by the Company. Except to the extent paid prior to the Closing Date, such Accounts are, or will be as of the Closing Date, current and collectible. There is no contest, claim, defense or right of setoff, other than returns in the ordinary course of business of the Company, under any Contract with any account debtor of an Account relating to the amount or validity of such Account. Further, no counterclaims, defenses or offsetting claims with respect to the Accounts have been asserted or, to the Knowledge of the Company, threatened.

Section 3.11. Inventory.

All Inventory reflected on the Balance Sheet is of merchantable quality and quantity usable or salable in the ordinary course of business, except for obsolete and slow-moving items and items of below-standard quality, all of which have been written off or written down to net realizable value in the Books and Records. The quantities of each item of Inventory reflected on the Balance Sheet (whether raw materials, work-in-process or finished goods) are not excessive but are reasonable in the present circumstances of the Company.

Section 3.12. Financial Statements.

The Financial Statements set forth in Schedule 3.12 present fairly in all material respects the results of operations, the financial position and cash flows of the Company as of the respective dates thereof, and for the periods indicated and were prepared in accordance with GAAP consistently applied (except as described in the notes thereto, in the case of audited financial statements, or for the absence of notes and normal recurring year-end adjustments, in the case of unaudited financial statements).

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Section 3.13. Absence of Undisclosed Liabilities.

To the Knowledge of the Company, except for any liability or obligation arising under any Material Contract, the Company has no liabilities or obligations (whether known or unknown, absolute or contingent, accrued or unaccrued, asserted or unasserted, or otherwise due or to become due) of any nature other than liabilities or obligations (a) which were accrued or reserved against on the Financial Statements or the Balance Sheet, (b) that are current liabilities incurred in the ordinary course of business consistent with past practices since the date of the Balance Sheet or (c) that have been or will have been discharged or paid in full prior to the Effective Time.

Section 3.14. Permits.

The Company possesses all Permits necessary or required for the conduct of its business, and all such Permits are in full force and effect and are being complied with in all material respects. The Company has not received written notice that the Company is in violation of any Permit. The Company has taken all necessary actions to maintain such Permits. No loss or expiration of any such Permit is pending, or to the Knowledge of the Company, threatened, other than expiration in accordance with the terms thereof.

Section 3.15. Real Properties.

The Company does not own any real property. The Real Property subject to the Lease and the Real Property subleased by the Company until December 31, 2007 from Spinner Technologies, Inc., an Affiliate of the University of Virginia Patent Foundation, constitute all real property leased by the Company. The Company has delivered to Buyer (or a current or former Affiliate of Buyer) true and correct copies of all certificates of occupancy and building permits in the possession of the Company for the improvements located on the Real Property. With respect to each parcel of Real Property, to the Knowledge of the Company:

(a) the Company has good and valid title to the leasehold estates in all leased Real Property, in each case free and clear of all mortgages, Liens, leases, assignments, subleases, easements, covenants, rights-of-way and other similar restrictions of any nature whatsoever, except easements, covenants, rights-of-way and other similar restrictions of record; any conditions that may be shown by a current, accurate survey or physical inspection of any leased Real Property made prior to Closing; and (i) zoning, building and other similar restrictions, and (ii) mortgages, Liens, easements, covenants, rights-of-way and other similar restrictions that have been placed by any developer, landlord or other third party on property over which the Company has easement rights or on any leased Real Property and subordination or similar agreements relating thereto.

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(b) there are no pending or, to the Knowledge of the Company, threatened condemnation or expropriation proceedings, lawsuits or administrative actions relating to the parcel or other legal matters affecting adversely the current use, occupancy or value thereof;

(c) all facilities have received all approvals of Governmental Authorities (including licenses and Permits) required in connection with the ownership, occupation or operation thereof and in all material respects have been operated and maintained in accordance with applicable Law;

(d) all buildings located on such parcel (including the foundation, load-bearing walls, roof and roof membrane, if applicable) are free from material patent structural defects, and the plumbing, mechanical, electrical, heating and ventilation systems installed within such buildings are in a good state of repair and are in good working order;

(e) there are no material improvements necessary to use any leased Real Property to conduct the business of the Company as it is currently being conducted;

(f) there are no leases, subleases, licenses, concessions or other agreements, written or oral, granting to any party or parties (other than the Company) the right of use or occupancy of any portion of the parcel;

(g) there are no outstanding options or rights of first refusal to purchase the parcel, or any portion thereof or interest therein;

(h) there are no parties in possession of the parcel, other than tenants under any leases or subleases, who are in possession of space to which they are entitled;

(i) all facilities located on the parcel are supplied with utilities and other services necessary for the operation of such facilities, including gas, electricity, water, telephone, sanitary sewer and storm sewer, all of which services are adequate in accordance with all applicable Laws;

(j) each parcel abuts on and has direct vehicular access to a public road, or has access to a public road; and

(k) there are no material improvements necessary to use each parcel for its intended purpose as of the Effective Time.

Section 3.16. Intellectual Property.

(a) The Company is the sole owner of all right, title and interest in and to the Intellectual Property owned by the Company and has all necessary licenses, rights, permissions and authorizations to use the Intellectual Property licensed by the Company, including, without limitation, all required computer software licenses free and clear of all Liens. The Intellectual

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Property constitutes all non-tangible property necessary for the operation of the business of the Company as presently conducted. To the Knowledge of the Company, each item of Intellectual Property has been used by the Company with the authorization of every other claimant thereto and the execution, delivery and performance of this Agreement will not impair such use by the Company after the Effective Time.

(b) For a period of three years prior to the date hereof, the Company has not interfered with, infringed upon, misappropriated or otherwise come into conflict with any intellectual property rights of any third party, and the Company has not received any charge, complaint, claim, demand or notice alleging any such interference, infringement, misappropriation or violation (including any claim that the Company must license or refrain from using any intellectual property rights of any third party). To the Knowledge of the Company, no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of the Company. There are no pending claims, including but not limited to litigation, arbitration, opposition proceedings, petitions to cancel, interferences, administrative proceedings, demand letters, cease and desist letters, or other demands, challenges, or disputes of any nature challenging, impacting, or involving the Intellectual Property, or the Company’s rights therein. A description of any such claims asserted, filed, settled or resolved in the last three years is set forth on Schedule 3.16. Such identifications shall include descriptions of the parties involved, the Intellectual Property involved, the nature of the claims, the resolution of the claims, the date of resolution, and true and correct copies of any demand letters, cease and desist letters, complaints, notices of opposition, petitions to cancel, decisions or orders, or settlement agreements.

(c) Schedule 3.16 identifies each patent, trademark, copyright or other registration that has been issued to the Company with respect to any of the Intellectual Property, identifies each pending application or application for registration that the Company has made with respect to any of the Intellectual Property and identifies each license, agreement or other permission that the Company has granted to any third party with respect to any of the Intellectual Property (together with any exceptions thereto). The Company has delivered to Buyer (or a current or former Affiliate of Buyer) correct and complete copies of all such patents, registrations, applications, licenses, agreements and permissions (as amended to date) and has made available to Buyer correct and complete copies of all other written documentation evidencing ownership and prosecution (if applicable) of each such item. Schedule 3.16 also identifies each trade name or unregistered trademark used by the Company. With respect to each item of Intellectual Property required to be identified therein: (i) to the Knowledge of the Company, the item is not subject to any outstanding injunction, judgment, order, decree, ruling or charge; (ii) no action, suit, proceeding, hearing, charge, complaint, claim or demand is pending or, to the Knowledge of the Company, is threatened which challenges the legality, validity, enforceability, use or ownership of the item; and (iii) the Company has not licensed or permitted any third party to use any such item.

Section 3.17. Orders, Commitments and Returns.

All accepted and unfulfilled orders for the sale of products and the performance of services entered into by the Company and all outstanding contracts or commitments for the

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purchase of supplies, materials and services used or to be used in the business of the Company were made in bona fide transactions in the ordinary course of business. There are no customer or distributor claims against the Company to return products by reason of alleged overshipments or adulterated, misbranded, damaged or otherwise defective products or otherwise, and no products of the Company are in the hands of customers or distributors under a consignment arrangement or other understanding that such products will be returnable.

Section 3.18. Books and Records.

The Books and Records, all of which have been made available to Buyer, are complete and correct in all material respects. The minute books of the Company contain accurate and complete records of all meetings held of, and corporate action taken by, the stockholders, the Board of Directors and committees of the Board of Directors of the Company, and no meeting of any such stockholders, Board of Directors or committee has been held for which minutes have not been prepared and are not contained in such minute books. At the Closing, all such Books and Records will be in the possession of the Company.

Section 3.19. Affiliated Transactions.

The Company has not purchased, licensed or leased or otherwise acquired any property or assets or obtained any services from, or sold, licensed, leased or otherwise disposed of any property or assets or provided any services to, any employee (except with respect to remuneration for services as an employee), stockholder, officer or director, or any Affiliate of any of the foregoing. The Company does not owe any contractual obligation or commitment to any of the foregoing (other than compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business), and none of the foregoing owes any amount or has any contractual obligation to the Company.

Section 3.20. Insurance.

The Company has made available to Buyer (or a current or former Affiliate of Buyer) copies of each insurance policy (including policies providing property, casualty, liability and workers’ compensation coverage and bond and surety arrangements) that is in force as of the date hereof and as to which the Company is a party, a named insured or otherwise the beneficiary of coverage. The Company has delivered a certificate of insurance issued by the insurance provider to Buyer (or a current or former Affiliate of Buyer) for each such insurance policy. With respect to each such insurance policy: (a) the policy is legal, valid, binding, enforceable and in full force and effect; (b) neither the Company nor, to the Knowledge of the Company, any other party to the policy is in breach or default thereunder (including with respect to the payment of premiums or the giving of notices), and no event has occurred that, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification or acceleration under the policy; and (c) no party to any policy has repudiated any provision thereof. The Company has been covered during the past five years by insurance substantially similar in scope to policies currently in effect. The Company has disclosed to Buyer (or a current or former Affiliate of Buyer) any self-insurance arrangements affecting the Company. The Company has disclosed to Buyer (or a current or former Affiliate of Buyer) all claims made by the Company under any insurance policy during the past five years with respect to its business.

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Section 3.21. Tax Matters.

(a) The Company has disclosed to Buyer (or a current or former Affiliate of Buyer) all Tax elections, consents and agreements made by or affecting the Company, all types of Taxes paid and Tax Returns filed by or on behalf of the Company and the status of all examinations, administrative or judicial proceedings, and litigation with respect to any Taxes of the Company.

(b) The Company has filed or caused to be filed all Tax Returns required to have been filed by or for it, and all information set forth on such Tax Returns is accurate and complete in all material respects.

(c) The Company has paid all Taxes shown as due on all Tax Returns that it has filed.

(d) The Company is in compliance with, and its records contain all information and documents (including, without limitation, properly completed IRS Forms W-9) necessary to comply with, all applicable information reporting and Tax withholding requirements under applicable Laws, and such records identify with specificity all accounts subject to backup withholding under Section 3406 of the Code.

(e) The Company has collected or withheld all amounts required to be collected or withheld by it for any Taxes, and all such amounts have been paid to the appropriate governmental agencies or set aside in appropriate accounts for future payment when due.

(f) The Balance Sheet fully and properly reflects, as of its date, the liabilities of the Company for all Taxes that are required by GAAP to be reflected thereon.

(g) For all periods after the date of the Balance Sheet, the Books and Records fully and properly reflect the liabilities of the Company for all Taxes that are required by GAAP to be reflected thereon.

(h) The Company has not granted (and is not subject to) any waiver currently in effect extending the period of limitations for the assessment of any Tax, no unpaid Tax deficiency has been asserted against or with respect to the Company by any taxing authority, and there is no pending examination, administrative or judicial proceeding, or deficiency or refund litigation with respect to any Taxes of the Company.

(i) The Company is not required to include in income any amount for an adjustment pursuant to Section 481 of the Code or the regulations thereunder or any similar provision of state law.

(j) Neither the Company nor any ERISA Affiliate is a party to any agreement or other arrangement under which the Company or any ERISA Affiliate is or may become

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obligated to make any payment that would constitute an “excess parachute payment” within the meaning of Section 280G of the Code or that would cause compensation payable by it to be non-deductible under Section 162(m) of the Code.

(k) No Seller is a “foreign person” for purposes of Section 1445 of the Code.

(l) The Company is not and has never been a member of an affiliated group within the meaning of Section 1504(a) of the Code, and neither the Company nor any entity to whose liabilities the Company has succeeded has filed or been included in a consolidated, unitary, or combined Tax Return with another person.

(m) To the Knowledge of the Company, there are no due but unpaid Taxes payable by the Company that (i) are or could become a Lien on any Asset, (ii) could be reasonably expected to have a Material Adverse Effect or (iii) could result in any liability to Buyer.

(n) The Company has provided Buyer (or a current or former Affiliate of Buyer) with true and correct copies of all correspondence between the Company and any taxing authority.

(o) Since April 16, 1997, the Company has not distributed to its stockholders or security holders stock or securities of a controlled corporation in a transaction to which Section 355(a) of the Code applies.

Section 3.22. Compliance with Law.

Except as would not have a Material Adverse Effect, the conduct of the business of the Company and its use of the Assets and performance under the Contracts do not violate or conflict, and have not violated or conflicted, with any Law. The Company has not received any notice or other communication that alleges the Company is in violation of any applicable Laws or regulations. The Company is not in default under, and has complied in all material respects with, every federal, state or local grant that the Company has been awarded, no money received by the Company pursuant to any such grant is required to be returned or reimbursed and the Company has no ongoing obligations that have not been either satisfied, discharged or fulfilled.

Section 3.23. Environmental Conditions.

(a) Definitions. When used in this Section 3.23:

(i) “Environmental Laws” shall mean any and all applicable federal, state, local or municipal Laws (including common law), rules, orders, regulations, statutes, ordinances, codes, decrees or requirements of any Governmental Authority (as defined below) regulating, relating to or imposing liability or standards of conduct concerning any Hazardous Materials (as defined below), Petroleum Products (as defined below) or environmental protection, together with any amendment or reauthorization thereto or thereof, as now or at any time hereafter in effect;

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(ii) “Governmental Authority” shall mean any federal, state, local, municipal or other governmental department, commission, board, bureau, agency or instrumentality, or any court, in each case having jurisdiction over the applicable matter and whether of the United States or another country;

(iii) “Hazardous Materials” shall mean any pollutants, contaminants, solid waste, hazardous material, hazardous waste, infectious or biomedical medical waste, or hazardous or toxic substance defined or regulated as such in or under any Environmental Law, including, without limitation, materials exhibiting the characteristics of ignitability, corrosivity, radioactivity, reactivity or toxicity characteristic leaching procedure, as such terms are now or hereafter defined in connection with hazardous materials or hazardous wastes or hazardous or toxic substances in any applicable Environmental Law; and

(iv) “Petroleum Products” shall mean gasoline, diesel fuel, motor oil, waste or used oil, heating oil, kerosene and any other petroleum products.

(b) The Company has at all times conducted its business in compliance in all material respects with all Environmental Laws.

(c) (i) To the Knowledge of the Company, the Company has not used, stored, treated, transported, manufactured, refined, handled, produced or disposed of any Hazardous Materials or Petroleum Products on, under, at, from or in any way affecting any of its properties or assets (including, without limitation, any properties or assets now or previously owned or operated by the Company), or otherwise, in any manner which constituted or constitutes a violation of any applicable Environmental Law governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials or Petroleum Products, and (ii) to the Knowledge of the Company, no prior owner of any such property or asset or any tenant, subtenant, prior tenant or prior subtenant thereof has used Hazardous Materials or Petroleum Products on, from or in any way affecting any such property or asset, or otherwise, in any manner which constituted or constitutes a violation of any applicable Environmental Law governing the use, storage, treatment, transportation, manufacture, refinement, handling, production or disposal of Hazardous Materials or Petroleum Products.

(d) To the Knowledge of the Company, there has been no (i) off-site shipment of any Hazardous Materials or Petroleum Products by the Company or (ii) release by the Company on, under, at, from or in any way affecting any real properties now or previously owned or operated by the Company, which off-site shipment or release gives rise to liabilities or obligations under Environmental Laws or common law that could have a material adverse effect on the Assets or Contracts or the properties, business, financial condition or results of operations of the Company. The Company has not received any notices or claims that alleges that the Company is in violation of any Environmental Laws or that it is a responsible party in connection with any claim or notice asserted pursuant to 42 U.S.C. Section 9601 et seq., or any state superfund law.

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(e) The Company has received all Permits as may be required under applicable Environmental Laws to conduct the business of the Company as currently conducted, and the Company is in compliance in all material respects with the terms and conditions of each such Permit.

(f) The Company has provided to Buyer (or a current or former Affiliate of Buyer) true and accurate copies of all environmental site assessments, compliance audits, environmental management system reviews, environmental consulting agreements, and regulatory correspondence concerning the Real Property.

(g) The Company has provided to Buyer (or a current or former Affiliate of Buyer) true and accurate copies of all insurance policies, insurance policy applications, notices to insurance carriers, reservation of rights letters, environmental insurance policy or applications, and financial assurance documentation concerning or potentially concerning the Real Property.

(h) The Company has provided to Buyer (or a current or former Affiliate of Buyer) true and accurate copies of all accounting and financial records involving past, present and proposed expenditures for environmental compliance, environmental remediation, and environmental investigations involving the Real Property or property at which waste or materials from the Company actually or allegedly have been sent.

(i) The Company has provided to Buyer (or a current or former Affiliate of Buyer) true and accurate copies of all correspondence with any prior owner or operator of the Real Property concerning any environmental issue at the Real Property.

(j) The Company has not in the past been nor is it currently named as a potentially responsible party for the investigation, remediation or monitoring of environmental conditions under any Environmental Laws at any sites not owned by the Company.

(k) The Company has disclosed to Buyer (or a current or former Affiliate of Buyer) all material facts that the Company reasonably believes would be reasonably likely to have a material adverse effect on the Company from (x) the cost of pollution control equipment currently required or known to be required in the future, (y) investigation, assessment, monitoring, remediation, response, removal, corrective action, cleanup, or remediation costs and any related costs currently required or known to be required in the future, or (z) any other environmental, health or safety matter affecting the Company.

(l) The Company does not know of any characteristic, condition or trait in the products manufactured, assembled or sold by the Company or any characteristic, condition or trait at the Real Property which could, with the passage of time or giving of notice or both, give rise to any liability or obligation of the Buyer under any Environmental Laws.

Section 3.24. Labor Matters.

(a) The Company has disclosed to Buyer (or a current or former Affiliate of Buyer) the following information for each employee of the Company (including each employee on leave of absence or layoff status): name, job title and current compensation paid or payable. To the Knowledge of the Company, no employee of the Company intends to terminate his or her employment.

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(b) The Company is and has been in compliance in all material respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment and wages and hours including, without limitation, any such Laws respecting employment discrimination and occupational safety and health requirements, and has not and is not engaged in any unfair labor practice.

(c) There is no unfair labor practice charge or complaint against the Company pending or, to the Knowledge of the Company, overtly threatened before the National Labor Relations Board or any other comparable authority.

(d) The Company is not a party to any collective bargaining agreements.

(e) There is no litigation, arbitration proceeding, governmental investigation, citation or action of any kind pending or, to the Knowledge of the Company, proposed or overtly threatened against the Company relating to employment, employment practices, terms and conditions of employment or wages and hours.

(f) Each employee of the Company is employed on an “at will” basis.

(g) There are no pending or, to the Knowledge of the Company, threatened strikes, lockouts or other work stoppages involving any persons employed by the Company.

(h) There are no representation petitions or other similar petitions or requests for representation pending or, to the Knowledge of the Company, proposed or threatened, before the National Labor Relations Board or other federal, provincial, state, or local agency in connection with any persons employed by the Company.

Section 3.25. No Adverse Change.

Since the date of the Balance Sheet, the business of the Company has been operated in the ordinary course and substantially in the same manner as previously conducted, and there has not been any:

(a) change in the Company’s authorized or issued capital stock, grant of any stock option or right to purchase shares of capital stock of the Company, issuance of any security convertible into such capital stock, grant of any registration rights, purchase, redemption, retirement or other acquisition by the Company of any shares of any such capital stock, declaration or payment of any dividend or other distribution or payment in respect of shares of capital stock, or split, combination or reclassification of any shares of capital stock of the Company;

(b) amendment to the charter or bylaws of the Company;

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(c) material adverse change in the business of the Company, financial condition, or results of operations of the Company and, to the Knowledge of the Company, no fact or condition has occurred or exists or is contemplated or threatened (other than general economic or industry conditions) which might reasonably be expected to result in any such material adverse change;

(d) merger or consolidation with, purchase of substantially all of the assets of, or other acquisition of any business or proprietorship, firm, association, corporation or other business organization or division thereof;

(e) loss or, to the Knowledge of Company, threatened or contemplated loss of business of one or more customers of the Company, which loss could reasonably be expected to have a Material Adverse Effect;

(f) borrowings by the Company other than trade payables arising in the ordinary course of business or pledge or hypothecation of any Assets to secure any indebtedness of the Company;

(g) forgiveness of any indebtedness or other obligations owed to the Company;

(h) payment or increase by the Company of any bonuses, salaries or other compensation to any stockholder, director, officer or (except in the ordinary course of business) employee or entry into any employment, severance or similar contract with any director, officer or employee;

(i) entry into any collective bargaining agreement;

(j) adoption of, or increase in the payments to or benefits under, any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, severance or other employee benefit plan for or with any employees of the Company;

(k) damage to, or destruction, condemnation or loss of, any asset or property of the Company, whether or not covered by insurance, materially and adversely affecting the properties, assets, business, or financial condition of the Company, taken as a whole;

(l) termination or assignment of, or receipt of notice of termination of, any Material Contract or insurance policy;

(m) sale (other than sales of inventory in the ordinary course of business), lease or other disposition of any asset or property of the Company or mortgage, pledge, or imposition of any Lien (other than a Permitted Lien) on any material asset or property of the Company, including the sale, lease or other disposition of any of the Intellectual Property;

(n) capital expenditure by the Company outside of the ordinary course of business;

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(o) purchase of Inventory or trade accounts payable incurred by the Company in excess of levels (giving effect to seasonal needs) normally purchased or incurred by the Company in the ordinary course of business consistent with past practices;

(p) cancellation or waiver of any claims or rights with a value to the Company in excess of $10,000;

(q) change in the accounting methods and Tax elections used by the Company; or

(r) agreement, whether oral or written, by the Company to do any of the foregoing.

Section 3.26. Employee Benefit Plans.

(a) The Company has provided Buyer (or a current or former Affiliate of Buyer) a true and complete list of the Employee Benefit Plans currently or previously maintained by the Company or an ERISA Affiliate, together with a copy of the same, the most recent annual report on Form 5500 filed with the IRS, the most recent summary plan description and each summary of material modifications thereto, if applicable.

(b) No Employee Benefit Plan is a “multiemployer plan” as defined in Section 3(3) of ERISA and neither the Company nor any ERISA Affiliate has previously maintained or had an obligation to contribute to a “multiemployer plan” (as defined above); and if any Employee Benefit Plan is such a “multiemployer plan”, the Company and each ERISA Affiliate may terminate its participation in such plan without any withdrawal liability.

(c) Each Employee Benefit Plan has been maintained, funded and administered in accordance with its terms and all applicable Laws, including without limitation complying with all written plan document, reporting, disclosure, fiduciary and prohibited transaction requirements applicable thereto.

(d) Neither the Company nor any ERISA Affiliate has any obligation to provide welfare benefits to any former employee, non-employee director or service provider or the spouses, dependents or beneficiaries thereof other than those benefits required under Section 4980B of the Code and Sections 601 et seq. of ERISA.

(e) There are no audits, examinations, investigations or other reviews which are ongoing or have been completed in the last three years by any Governmental Authority, termination proceedings or other claims (except routine claims for benefits payable under the Employee Benefit Plans) or proceedings against or involving any Employee Benefit Plans or asserting any rights to or claims for benefits or breach of duty under any Employee Benefit Plans, and none have been threatened or noticed.

(f) Each Pension Plan that is intended to be a Tax-qualified plan in the United States has been the subject of a determination letter from the IRS to the effect that such Pension Plan as established, amended and currently in effect and any related trust is qualified and exempt

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from Federal income Taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such determination letter has been revoked and, to the Knowledge of the Company, no such revocation has been threatened.

(g) Each Employee Benefit Plan subject to Section 409A of the Code has been operated and is in compliance with the requirements of Section 409A of the Code.

(h) Each Employee Benefit Plan that is intended to be a cafeteria plan within the meaning of Section 125 of the Code and each trust or other entity that is intended to be a voluntary employees’ beneficiary association within the meaning of Section 501(c)(9) of the Code meets the applicable requirements of such Code sections, respectively.

(i) Each Employee Benefit Plan, or the participation of the Company or ERISA Affiliate therein, may in the discretion of the Company or ERISA Affiliate be terminated without any liability other than those amounts which are recorded as liabilities on the Company’s or an ERISA Affiliate’s Books and Records.

(j) No Pension Plan is subject to Title IV of ERISA or Section 412 of the Code; and if any Pension Plan is subject to Title IV of ERISA or Section 412 of the Code, no such Pension Plan has an accumulated funding deficiency for purposes of Section 412 of the Code, each such Pension Plan is fully funded on both an ongoing and a termination basis and the Company has not incurred any liability under Title IV of ERISA with respect thereto.

Section 3.27. Warranties and Service Payment Obligations.

(a) No warranty, express or implied, has been made or extended by the Company with respect to the Assets, or the products or services provided by the Company in relation thereto. There are no claims (actual or threatened) based on any product warranty of which the Company has received notice.

(b) The Company has not granted to any person the right to repair, maintain, service or support any of the Assets. No agreement for the sale, license, service, support or maintenance of the Assets obligates the Company to provide any change in functionality or other alterations in the performance of the Assets or to provide new products or technology.

Section 3.28. Bank Accounts.

The Company has disclosed to Buyer (or a current or former Affiliate of Buyer) all bank accounts, safety deposit boxes and lock boxes (designating each authorized signatory with respect thereto) of the Company.

Section 3.29. Customers and Suppliers.

The Company is not engaged in any disputes with any current customer or supplier, and there has not been any material adverse change, and, to the Knowledge of the Company, there are no facts which could reasonably be expected to result in a material adverse change, in the business relationship of the Company with any current customer or supplier. The Company has

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not received any written notice, nor does the Company have any Knowledge that: (a) any current customer intends to terminate, fail to renew or seek any material adverse modification of its existing business arrangements with the Company; or (b) any current supplier (i) has sought, or is seeking, to substantially increase the price it charges the Company for supplies or other goods and services or (ii) will not sell supplies or other goods and services to Buyer or the Company at any time after the Closing Date on terms and conditions similar to those used in current sales to the Company, subject to general and customary price increases.

Section 3.30. Fees and Expenses of Brokers and Others.

The Company is not committed to any liability for any brokers’ or finders’ fees or any similar fees in connection with the transactions contemplated hereby, and the Company has not retained any broker or other intermediary to act on its behalf in connection with the transactions contemplated by this Agreement.

Section 3.31. Disclosure.

Neither this Agreement or any schedule or exhibit hereto nor any certificate or other document furnished to Buyer by the Company pursuant hereto contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein, in light of the circumstances under which they were made, not misleading.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLERS

As an inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, each Seller hereby severally (as to himself or herself or itself and not as to any other Seller) represents and warrants to Buyer that:

Section 4.1. Authorization; Enforceability.

This Agreement is, and the other documents and instruments required hereby to which such Seller is a party will be, when executed and delivered by such Seller, the legal, valid and binding obligation of such Seller, enforceable against such Seller in accordance with their respective terms. Such Seller has the absolute and unrestricted right, power, authority and capacity to execute and deliver, and to perform its obligations under, this Agreement and the other documents and instruments required hereby to which such Seller is a party. With respect to any Seller that is a corporation, limited liability company, partnership or other entity, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by such Seller, to the extent required by the governing documents of such Seller or applicable Law, have been duly and validly authorized by the board of directors or other governing body of such Seller and no other corporate, limited liability, partnership or other proceedings on the part of such Seller, and, as the case may be, its board of directors or other governing body or its stockholders, partners or members are necessary therefore.

Section 4.2. Title to Purchased Stock.

Such Seller is the record and beneficial owner and owns good, valid and marketable title to the number of shares of Purchased Stock listed under its name on Exhibit A attached hereto, free and clear of any and all Liens. Upon Buyer’s payment of the Purchase Price, Buyer will own good, valid and marketable title to the Purchased Stock, free and clear of any and all Liens, and good, valid and marketable title to the Purchased Stock, free and clear of any and all Liens, will pass to Buyer. Other than this Agreement, the Purchased Stock is not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any such agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the Purchased Stock.

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Section 4.3. Disclosure.

Such Seller is not aware of any material facts or circumstances regarding the Company that such Seller reasonably believes should be disclosed to Buyer that would materially and adversely effect Buyer’s decision to purchase the Purchased Stock.

Section 4.4. No Consents.

No consent of any other person, and no notice to, filing or registration with, or consent, approval or authorization of, any court or governmental, regulatory or self-regulatory agency is necessary or is required to be made or obtained by such Seller in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE BUYER

As an inducement to the Company and Sellers to enter into this Agreement and to consummate the transactions contemplated hereby, the Buyer hereby represents and warrants to the Company and Sellers that:

Section 5.1. Organization of Buyer.

Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia. Buyer has full corporate power and authority to carry on its business as it is currently being conducted and to own, operate and hold under lease its assets and properties as, and in the places where, such assets and properties are currently owned, operated or held. Buyer is duly qualified or licensed to transact business as a foreign corporation, and is in good standing, in each jurisdiction where the failure to be so qualified could be reasonably expected to have a material adverse effect on its business, financial condition or results of operations.

Section 5.2. Authorization; Enforceability.

This Agreement is, and the other documents and instruments required hereby to which Buyer is a party will be, when executed and delivered by Buyer, the legal valid and binding obligation of Buyer, enforceable against Buyer in accordance with their respective terms. Buyer

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has the absolute and unrestricted right, power, authority and capacity to execute and deliver, and to perform its obligations under, this Agreement and the other documents and instruments required hereby to which Buyer is a party.

Section 5.3. No Violation or Conflict.

The execution, delivery and performance by Buyer of this Agreement and all of the other documents and instruments required hereby to which Buyer is a party do not and will not (a) conflict with or violate (i) the charter or bylaws of Buyer, (ii) any Law, rule, regulation, judgment, order or decree binding on Buyer or (iii) any contract or agreement to which Buyer is a party or by which Buyer is bound, or (b) give any party to any contract or agreement to which Buyer is a party or by which Buyer is bound any right of termination, cancellation, acceleration or modification thereunder.

Section 5.4. No Consents.

No consent of any other person, and no notice to, filing or registration with, or consent, approval or authorization of, any court or governmental, regulatory or self-regulatory agency is necessary or is required to be made or obtained by Buyer in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

Section 5.5. Litigation.

There is no litigation, arbitration, proceeding, governmental investigation, citation or action of any kind pending or, to the knowledge of Buyer, overtly proposed or threatened, by, before, or involving any Governmental Authority or arbitration tribunal that involves Buyer and that seeks restraint, prohibition, damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby.

Section 5.6. Fees and Expenses of Brokers and Others.

Buyer is not committed to any liability for any brokers’ or finders’ fees or any similar fees in connection with the transactions contemplated hereby has not retained any broker or other intermediary to act on its behalf in connection with the transactions contemplated by this Agreement.

ARTICLE VI

[RESERVED]

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ARTICLE VII

CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE BUYER

Each and every obligation of Buyer to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of the following express conditions precedent:

Section 7.1. Compliance with Agreement.

The Company and Sellers shall have performed and complied in all material respects with all of their respective obligations under this Agreement which are to be performed or complied with by it prior to or on the Closing Date.

Section 7.2. Proceedings, Instruments and Due Diligence Satisfactory.

All proceedings, corporate or other, to be taken by the Company and Sellers in connection with the transactions contemplated by this Agreement, and all documents incident thereto, shall be reasonably satisfactory in form and substance to Buyer and Buyer’s counsel. Buyer shall have completed its due diligence review of the Company to the satisfaction of Buyer in its sole discretion.

Section 7.3. No Litigation.

No investigation, suit, action or other proceeding shall be threatened or pending before any court or governmental agency that seeks restraint, prohibition, damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby.

Section 7.4. Representations and Warranties.

Each of the representations and warranties of the Company and Sellers contained in this Agreement that is qualified by materiality shall be true and correct on and as of the Closing Date as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct as of such certain date), and each of the representations and warranties that is not so qualified shall be true and correct in all material respects on and as of the Closing Date as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct in all material respects as of such certain date).

Section 7.5. Material Damage to Assets; Material Adverse Effect.

Between the date of this Agreement and the Closing Date, (a) the Assets shall not have been materially and adversely affected by reason of any loss, taking, condemnation, destruction or physical damage, whether or not insured against and (b) there shall not have occurred any Material Adverse Effect.

Section 7.6. Employment Agreements with Key Employees.

Each Key Employee shall have entered into an Employment Agreement with the Company.

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Section 7.7. Consulting Agreement.

Dr. Sidney Hecht shall have entered into a Consulting Agreement with the Company.

Section 7.8. Deliveries at Closing.

Sellers or the Company, as the case may be, shall have delivered to Buyer the following documents, each properly executed and dated as of the Closing Date by Sellers or the Company, as the case may be, and in form and substance reasonably acceptable to Buyer:

(a) the certificates evidencing all of the Purchased Stock, which certificates shall be duly endorsed in blank or accompanied by duly executed stock powers;

(b) a secretary’s certificate of the Company, including (i) the charter of the Company, certified by the Secretary of State or equivalent governmental body of the Company’s jurisdiction of its incorporation, (ii) the bylaws of the Company and (iii) the resolutions of the Board of Directors of the Company approving the transaction contemplated by this Agreement;

(c) a current certificate of good standing from the Company’s jurisdiction of incorporation and from each jurisdiction in which the Company is qualified to transact business as a foreign corporation;

(d) the minute books of the Company, including all stock registers, corporate seals and related materials;

(e) all Required Consents and other consents, approvals and waivers from Governmental Authorities and other parties required to be obtained by the Company or Sellers;

(f) the Opinion of Company Counsel; and

(g) such other documents and certificates as Buyer shall reasonably request.

Section 7.9. Consents from Holders of Company Stock Options.

The Company shall have delivered to Buyer true and correct copies of consents of all of the holders of Company Stock Options that are necessary to effect the treatment contemplated by Section 2.3 hereof.

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ARTICLE VIII

CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLERS AND THE COMPANY

Each and every obligation of Sellers and the Company to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of the following express conditions precedent:

Section 8.1. Compliance with Agreement.

Buyer shall have performed and complied in all material respects with all of its obligations under this Agreement which are to be performed or complied with by it prior to or on the Closing Date.

Section 8.2. Proceedings and Instruments Satisfactory.

All proceedings, corporate or other, to be taken by Buyer in connection with the transactions contemplated by this Agreement, and all documents incident thereto, shall be reasonably satisfactory in form and substance to Sellers, the Company and the Company’s counsel.

Section 8.3. No Litigation.

No investigation, suit, action or other proceeding shall be threatened or pending before any court or governmental agency that seeks restraint, prohibition, damages or other relief in connection with this Agreement or the consummation of the transactions contemplated hereby.

Section 8.4. Representations and Warranties.

Each of the representations and warranties of Buyer contained in this Agreement that is qualified by materiality shall be true and correct on and as of the Closing Date as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct as of such certain date) and each of the representations and warranties that is not so qualified shall be true and correct in all material respects on and as of the Closing Date as if made on and as of such date (other than representations and warranties which address matters only as of a certain date which shall be true and correct in all material respects as of such certain date).

Section 8.5. Deliveries at Closing.

Buyer shall have delivered to Sellers and the Company such documents and certificates as Sellers or the Company shall reasonably request, each properly executed and dated as of the Closing Date and in form and substance reasonably acceptable to Sellers and the Company.

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ARTICLE IX

POST-CLOSING COVENANTS

Section 9.1. Additional Instruments.

At any time and from time to time after the Closing, at either a Seller’s, the Company’s or Buyer’s request and without further consideration, the Company, Sellers or Buyer, as the case may be, shall execute and deliver such other instruments of sale, transfer, conveyance, assignment and confirmation and take such other action as a Seller, the Company or Buyer may reasonably deem necessary or desirable in order to more effectively consummate the transactions contemplated herein.

Section 9.2. Access to Books and Records.

From and after the Closing Date, Buyer will authorize and permit Sellers and their representatives to have access during normal business hours, upon reasonable notice and for reasonable purposes and in such manner as will not unreasonably interfere with the conduct of Buyer’s or the Company’s business, to all of the Books and Records. From and after the Closing Date, Sellers will authorize and permit Buyer and its representatives to have access during normal business hours, upon reasonable notice and for reasonable purposes to all books, records, files, documents and other correspondence related to the business of the Company prior to the Closing that are not included among the Books and Records. The Company, Buyer and Sellers agree to (a) maintain all books, records, files, documents and other correspondence related to the Company’s business prior to the Closing in accordance with their respective normal document retention practices after the Closing Date and (b) make available to each other, their counsel and accountants all information and documents reasonably available to them which relate to any claim that may be subject to indemnification hereunder and to render to each other such assistance as may reasonably be required in order to ensure the proper and adequate defense of any such claim.

Section 9.3. Certain Tax Matters.

(a) Sellers agree to cooperate with Buyer, and Buyer agrees to cooperate with Sellers, to the extent necessary in connection with the filing, pursuant to any provision of Law, of any information return or other document relating to Buyer’s acquisition of the Company and any of the other transactions contemplated by this Agreement.

(b) Sellers agree to make available to Buyer and the Company records in the custody of Sellers, to furnish other information, and otherwise to cooperate to the extent reasonably required for the preparation or filing of Tax Returns relating to the Company.

(c) Each Seller shall pay (and shall indemnify and hold Buyer harmless from) all sales, stamp, recordation and transfer taxes arising out of, or directly related to, the sale of such Seller’s Purchased Stock under this Agreement. For the avoidance of doubt, such Seller shall not pay (or indemnify or hold Buyer harmless from) any sales, stamp, recordation or transfer taxes arising out of, or related to, any other transactions contemplated by this Agreement, including without limitation the sale of Purchased Stock by any other Seller.

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ARTICLE X

[RESERVED]

ARTICLE XI

MISCELLANEOUS

Section 11.1. Entire Agreement; Amendment; Waiver.

This Agreement and the documents referred to herein and to be delivered pursuant hereto constitute the entire agreement between the parties pertaining to the subject matter hereof and supersede all prior and contemporaneous agreements, understandings, negotiations and discussions of the parties, whether oral or written. There are no warranties, representations or other agreements between the parties in connection with the subject matter hereof, except as specifically set forth herein. No amendment, supplement, modification or termination of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provision of this Agreement, whether or not similar, nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

Section 11.2. Expenses.

Each of the parties hereto shall pay the fees and expenses of their respective counsel, accountants and other experts and the other expenses incident to the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby, except that Buyer shall pay the fees and expenses of counsel to the Company.

Section 11.3. Governing Law; Consent to Jurisdiction.

This Agreement shall be construed and interpreted according to the laws of the Commonwealth of Virginia, without regard to the conflicts of law rules thereof. Each of the parties hereto, in respect of itself and its properties, agrees to be subject to (and hereby irrevocably submits to) the nonexclusive jurisdiction of any United States federal or Virginia state court sitting in Richmond, Virginia, in respect of any suit, action or proceeding arising out of or relating to this Agreement or the transactions contemplated herein, and irrevocably agrees that all claims in respect of any such suit, action or proceeding may be heard and determined in any such court. Each of the parties hereto irrevocably waives, to the fullest extent it may effectively do so under applicable Law, any objection to the laying of the venue of any such suit, action or proceeding brought in any such court and any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Either party hereto may make service on the other party by sending or delivering a copy of the process to the

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party to be served at the address and in the manner provided for the giving of notices in Section 11.7 hereof. Nothing in this Section 11.3, however, shall affect the right of any party to bring any action or proceeding arising out of or relating to this Agreement in any other court or to serve legal process in any other manner permitted by Law or in equity.

Section 11.4. Further Assurances.

In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each party to this Agreement shall take all such necessary action that is reasonably requested by another party, all at the sole expense of the requesting party. The parties hereto shall execute any additional instruments necessary to consummate the transactions contemplated hereby upon the reasonable request of another party.

Section 11.5. Termination and Survival of Representations and Warranties.

The representations and warranties of the Company in this Agreement and in all other certificates and documents delivered pursuant to this Agreement shall terminate upon, and shall not survive, the Closing. The representations and warranties of each Seller and of Buyer in this Agreement and in all other certificates and documents delivered pursuant to this Agreement shall survive the Closing.

Section 11.6. Assignment.

This Agreement and each party’s respective rights hereunder may not be assigned, by operation of Law or otherwise, without the prior written consent of the other parties, except that Buyer may assign any of its rights under this Agreement to any subsidiary of Buyer. This Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their successors and permitted assigns.

Section 11.7. Notices.

All notices, requests, claims, demands, disclosures and other communications required or permitted by this Agreement shall be in writing and shall be deemed to have been given at the earlier of the date (a) when delivered personally, by messenger or by overnight delivery service by a recognized commercial carrier to the other party (or to an officer of the other party, if such party is not a natural person), (b) five days after being mailed by registered or certified United States mail, postage prepaid, return receipt requested, or (c) when received via facsimile or electronic mail (confirmed by telephone in each case), in all cases addressed to the person for whom it is intended at his address set forth below or beneath its signature hereto or to such other address as a party shall have designated by notice in writing to the other party in the manner provided by this Section 11.7:

32

If to Buyer:	New River Management IV, LP
	1881 Grove Avenue
	Radford, Virginia 24141
	Attention:	Randal J. Kirk
	Phone:	(540) 633-7978
	Fax:	(540) 633-7939
With a copy to:	Troutman Sanders LLP
	1001 Haxall Point
	Richmond, Virginia 23219
	Attention:	John Owen Gwathmey, Esquire
	Phone:	(804) 697-1225
	Fax:	(804) 698-5174
If to Company:	Pinnacle Pharmaceuticals, Inc.
	McCormick Road
	Charlottesville, Virginia 22904-4319
	Attention:	Sidney Hecht, PhD
	Phone:	(434) 924-3906
	Fax:	(434) 924-7856
With a copy to:	LeClair Ryan, A Professional Corporation
	123 East Main Street, 8th Floor
	Charlottesville, Virginia 22902
	Attention:	Michael P. Drzal, Esquire
	Phone:	(434) 245-3431
	Fax:	(434) 296-0905

Section 11.8. Counterparts.

This Agreement may be executed in several counterparts, each of which shall be deemed an original, but such counterparts shall together constitute but one and the same Agreement. The execution of this Agreement by any of the parties may be evidenced by way of a facsimile transmission of such party’s signature, or a photocopy of such facsimile transmission, and such facsimile signature shall be deemed to constitute the original signature of such party hereto.

Section 11.9. Interpretation.

Unless the context requires otherwise, all words used in this Agreement in the singular number shall extend to and include the plural, all words in the plural number shall extend to and include the singular and all words in any gender shall extend to and include all genders. All references to contracts, agreements, leases or other understandings or arrangements shall refer to oral as well as written matters. The table of contents and article and section headings in this Agreement are inserted for convenience of reference only and shall not constitute a part hereof.

Section 11.10. Severability.

If any provision, clause or part of this Agreement, or the application thereof under certain circumstances, is held invalid or unenforceable by any court of competent jurisdiction, the remainder of this Agreement, or the application of such provision, clause or part under other circumstances, shall not be affected thereby and shall remain in full force and effect.

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Section 11.11. No Third Party Rights.

Nothing in this Agreement, express or implied, is intended to or shall confer upon any person other than the parties to this Agreement and their successors and permitted assigns any rights, benefits or remedies of any nature whatsoever under, or by reason of, this Agreement. No third party is entitled to rely on any of the representations, warranties and agreements contained in this Agreement. The Company, Buyer and Sellers assume no liability to any third party because of any reliance on the representations, warranties and agreements of the Company, Buyer or Sellers contained in this Agreement.

Section 11.12. Specific Performance.

The parties hereto agree that irreparable damage would occur in the event any of the provisions of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity.

Section 11.13. Counsel to Company.

LeClair Ryan, A Professional Corporation (“LeClair Ryan”) has served as legal counsel to the Company in connection with this Agreement and the transactions contemplated hereby after full disclosure to Sellers of its representation of the Company. Each Seller acknowledges that he, she, or it has not been represented by LeClair Ryan in connection with this Agreement or the transactions contemplated hereby, is fully aware of such Seller’s right to the advice of counsel independent from that of the Company, and that LeClair Ryan has advised Seller of such right. Each Seller further acknowledges that no advice or representations have been made by LeClair Ryan or the Company with respect to the tax or other consequences of this Agreement to such Seller. By executing this Agreement, each Seller represents that he, she, or it has either consulted independent legal counsel or elected, notwithstanding the advisability of seeking such independent legal counsel, not to consult such independent legal counsel.

[Signature Pages Follow]

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IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed in its name by a duly authorized officer as of the day and year first above written.

New River Management IV, LP
By:	/s/ Randal J. Kirk
Name:	Randal J. Kirk
Title:	Manager, Third Security, LLC, which is the Manager of Third Security Capital Partners IV, LLC, New River Management IV, LP
Pinnacle Pharmaceuticals, Inc.
By:	/s/ Sidney Hecht
Name:	Sidney Hecht
Title:	President

[SIGNATURES CONTINUE ON THE FOLLOWING PAGES]

[COUNTERPART SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]

Transgenomic, Inc.
By:	/s/ Debra A. Schneider
Name:	Debra A. Schneider
Title:	V.P. & CFO
Address:	12325 Emmet Street
	Omaha, NE 68164
Phone:	(402) 452-5446
Fax:	(402) 452-5461

[COUNTERPART SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]

/s/ Sidney Hecht
Sidney Hecht
Address:	4770 Drakeson Road
	Charlottesville, VA 22911
Phone:	(434) 466-4952
Fax:	(434) 924-7856

[COUNTERPART SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]

/s/ Francis Schmidt
Francis Schmidt
Address:	801 Westport Dr
	Columbia, MO 65203
Phone:	(573) 424-6872
Fax:	(573) 884-4597

[COUNTERPART SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]

S.R. One Limited
By:	/s/ Joyce A Lonergan
Name:	Joyce A. Lonergan
Title:	President
Address:	200 Barr Harbor Drive, Suite 250
	Four Tower Bridge
	West Conshohocken, PA 19428
Phone:	+1 610 567 1000
Fax:	+1 610 567 1039

[COUNTERPART SIGNATURE PAGE TO STOCK PURCHASE AGREEMENT]

The University of Virginia Patent Foundation
By:	/s/ Robert S. MacWright
Name:	Robert S. MacWright
Title:	Executive Director & CEO
By:	/s/ Erik L Hewlett
Name:
Title:
Address:	250 W Main Street
	Suite 300
	Charlottesville, PA 22402
Phone:	(434) 924-2175
Fax:	(434) 982-1583

Exhibit A

Sellers	Shares of Company Common Stock
Sidney Hecht	210,000
Francis Schmidt	120,000
S.R. One, Limited	250,000	*
The University of Virginia Patent Foundation	250,000	*
Transgenomic, Inc.	250,000
	1,080,000

* Immediately prior to the Closing, each of S.R. One, Limited and The University of Virginia Patent Foundation converted all 250,000 shares of Company Preferred Stock held by it into 250,000 shares of Company Common Stock.

2

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Craig J. Tuttle, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Transgenomic, Inc. (the Registrant);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

/s/ CRAIG J. TUTTLE

Craig J. Tuttle

President and Chief Executive Officer

Date: August 14, 2007

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Debra A. Schneider, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Transgenomic, Inc. (the Registrant);

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

/s/ DEBRA A. SCHNEIDER

Debra A. Schneider

Chief Financial Officer

Date: August 14, 2007

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Quarterly Report on Form 10-Q of Transgenomic, Inc. for the quarter ended June 30, 2007, I, Craig J. Tuttle, President and Chief Executive Officer of Transgenomic, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) Such Quarterly Report on Form 10-Q of Transgenomic, Inc. for the quarter ended June 30, 2007, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in such Quarterly Report on Form 10-Q of Transgenomic, Inc. for the quarter ended June 30, 2007, fairly presents, in all material respects, the financial condition and results of operations of Transgenomic, Inc.

/s/ CRAIG J. TUTTLE

Craig J. Tuttle

President and Chief Executive Officer

Date: August 14, 2007

A signed original of the certification required by Section 906 has been provided to Transgenomic, Inc. and will be retained by Transgenomic, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the accompanying Quarterly Report on Form 10-Q of Transgenomic, Inc. for the quarter ended June 30, 2007, I, Debra A. Schneider, Chief Financial Officer of Transgenomic, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) Such Quarterly Report on Form 10-Q of Transgenomic, Inc. for the quarter ended June 30, 2007, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in such Quarterly Report on Form 10-Q of Transgenomic, Inc. for the quarter ended June 30, 2007, fairly presents, in all material respects, the financial condition and results of operations of Transgenomic, Inc.

/s/ DEBRA A. SCHNEIDER

Debra A. Schneider

Chief Financial Officer

Date: August 14, 2007

A signed original of the certification required by Section 906 has been provided to Transgenomic, Inc. and will be retained by Transgenomic, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.