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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended March 31, 2005

Or

For the transition period from              to             

Commission file number: 000-30975

TRANSGENOMIC, INC.

(Exact name of registrant as specified in its charter)

(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 accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934,    Yes  ¨    No  x

As of May 13, 2005, the number of shares of common stock outstanding was 34,234,922.

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TRANSGENOMIC INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

See notes to consolidated financial statements.

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UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

See notes to consolidated financial statements.

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UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands except per share data)

See notes to consolidated financial statements.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

A. CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements of Transgenomic, Inc. and Subsidiaries (the “Company”) have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. In the opinion of management of the Company, all adjustments (consisting of only normal and recurring items) have been made to present fairly the financial positions, the results of operations and cash flows for the periods presented.

The results of operations for the three months ended March 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year.

Although the Company believes that the disclosures are adequate to make the information presented not misleading, these financial statements should be read in conjunction with the consolidated financial statements for the period ended December 31, 2004, that are included in the Company’s annual report on Form 10-K, as amended.

The Company has experienced recurring net losses and had an accumulated deficit of $109,993 at March 31, 2005. Based on the Company’s 2005 operating plan, management believes its existing sources of liquidity will be sufficient to meet its cash needs during 2005. If necessary, the Company’s management believes they can manage costs and expenses at reduced levels to conserve working capital. The need for any such cost and expense reductions during 2005 would likely delay implementation of the Company’s business plan. Additionally, management may pursue additional financing alternatives. Ultimately, the Company must achieve sufficient revenue levels to support its cost structure.

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.

Cash and Cash Equivalents.

For purposes of reporting cash flows, cash and cash equivalents include cash and temporary 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 each of the three months ended March 31, 2005 and 2004.

Revenue Recognition.

Revenue 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. Our sales terms do not provide for the right of return unless the product is damaged or defective. Revenues from certain services associated with our 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 WAVE systems. These contracts cover specific time periods and revenue associated with these contracts is deferred and recognized over the service period. At March 31, 2005 and December 31, 2004, deferred revenue, mainly associated with the Company’s service contracts, included on the Company’s balance sheet was approximately $1,765 and $1,478, respectively.

During the three months ended March 31, 2004, the Company recognized approximately $196 of product sales under bill-and-hold arrangements. Under these arrangements, the customer had accepted title and risk of ownership

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

to the product, but had requested that the Company store the product on behalf of the customer, in a rented freezer, until the three months ended June 30, 2004. There were no sales recognized during the three months ended March 31, 2005 under bill-and-hold arrangements.

Stock Based Compensation.

The Company accounts for its employee stock option grants under the provisions of Accounting Principles Board Opinion No. 25 (“APB”), Accounting for Stock Issued to Employees, which utilizes the intrinsic value method. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair market value of the Company’s common stock at the date of grant over the stock option exercise price. Stock option grants to non-employees are accounted for using the fair value method of accounting in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, using the Black-Scholes model.

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation.

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 decreased net loss approximately $200 and $120 for the three months ended March 31, 2005 and 2004, respectively.

Earnings Per Share.

Basic earnings per share are 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 and warrants or conversion of convertible notes, where dilutive.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

Recently Issued Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment. SFAS No.123R addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using APB No. 25 and generally requires that such transactions be accounted for using a fair-value-based method. The Company expects to adopt this standard on January 1, 2006. The Company is currently assessing the final impact of this standard on its financial position, results of operations or cash flows. This assessment includes evaluating option valuation methodologies and assumptions as well as potential changes to compensation strategies.

On November 24, 2004, the FASB issued SFAS No. 151, Inventory Costs – an amendment of ARB No. 43. SFAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs be excluded from the cost of inventory and expensed when incurred. It also requires that allocation of fixed production overhead be based on the normal capacity of the production facilities. SFAS No. 151 will be effective at the beginning of 2006. The Company is currently assessing the final impact of this standard on its financial position, results of operations or cash flows.

Use of Estimates.

The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

B. INVENTORIES

Inventories consisted of the following at March 31, 2005 and December 31, 2004:

The Nucleic Acids operating segment inventory at March 31, 2005 and December 31, 2004 consisted primarily of phosphoramadites and the raw materials to produce phosphoramadites which are used and produced at the Company’s facility in Glasgow, Scotland. As of March 31, 2005, the Company has classified a portion of this inventory as a long-term other asset based on its existing sales forecasts for these products.

The Company periodically evaluates its inventory of chemical building blocks to determine whether they continue to meet quality and other specifications and over what time period such products are expected to be sold. Product that does not meet quality and other specifications can generally be re-worked to enhance purity. Costs to purify such product and related yield losses are expensed as incurred.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

C. GOODWILL

At March 31, 2005 and December 31, 2004, goodwill by operating segment consisted of the following:

D. OTHER ASSETS

At March 31, 2005 and December 31, 2004, finite lived intangible assets and other assets consisted of the following:

Amortization expense for intangible assets was approximately $249 and $243 during the three months ended March 31, 2005 and 2004, respectively. Amortization expense for intangible assets is expected to be approximately $763 for the remainder of 2005, $342 in 2006, $330 in 2007, $62 in 2008, $133 in 2009, $133 in 2010 and $26 in 2011

E. DEBT

At March 31, 2005 and December 31, 2004, debt consisted of the following:

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

On March 18, 2005, Laurus agreed to extend the borrowing base waiver on the Credit Line until March 31, 2006. In connection with this extension, the Company agreed to allow Laurus to convert $1,879 of the outstanding principal balance under the Credit Line into 3,600,000 shares of its common stock at $0.52 per share. In addition, on March 24, 2005 the Company agreed to allow Laurus to convert $650 of the outstanding principal balance of the Term Note into 1,250,000 shares of common stock at $0.52 per share. Laurus agreed to apply this Term Note conversion against substantially all remaining 2005 scheduled principal payments on such loan. The closing market price of the Company’s common stock the day before each of these conversions was $0.58 per share. No other provisions of our Credit Line or Term Note (collectively, the “Laurus Loans”) were modified, including the $1.00 conversion price for remaining debt. In conjunction with these conversions we accelerated amortization of $409 of related debt premiums and discounts and recorded a charge of $1,365 related to fair value of incremental shares received by Laurus.

Interest expense consisted of the following:

Principal repayments under the Term Note are scheduled as follows: $0 for the remainder of 2005, $875 in 2006, and $800 in 2007.

F. COMMITMENTS AND CONTINGENCIES

The Company has been named as a defendant in a lawsuit filed in Spain by a prospective distributor who claims that the Company breached a promise to grant the plaintiff a distributorship for certain of the Company’s products in a specific geographic area in Europe. The plaintiff is seeking monetary relief of approximately $500. The Company believes the lawsuit is without merit and intends to vigorously defend this matter.

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

The Company leases certain equipment, vehicles and operating facilities. The Company’s leases related to its operating facilities currently expire on various dates through 2010. At March 31, 2005, the future minimum lease payments required under non-cancellable lease provisions are approximately $1,092 for the remainder of 2005, $1,384 in 2006, $441 in 2007, $187 in 2008, $191 in 2009, and $181 in 2010. Rent expense related to all operating leases for the three months ended March 31, 2005 and 2004 was approximately $237 and $585, respectively.

At March 31, 2005, the Company had firm commitments totaling $477 to a vendor to purchase components used in WAVE Systems.

G. INCOME TAXES

Income tax recorded during the three months ended March 31, 2005 and 2004 related to income taxes in states, foreign countries and other local jurisdictions offset by refunds received.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

Due to the Company’s cumulative losses, expected losses in future years and inability to utilize any additional losses as carrybacks, the Company has not provided for an income tax benefit during the three months ended March 31, 2005 or 2004 based on management’s determination that it was more likely than not that such benefits would not be realized. The Company will continue to assess the recoverability of deferred tax assets and the related valuation allowance. To the extent the Company begins to generate taxable income in future periods and it determines that such valuation allowance is no longer required, the tax benefit of the remaining deferred tax assets will be recognized at such time. As of March 31, 2005 and December 31, 2004, the Company’s deferred tax assets were offset by a valuation allowance of approximately $39,417 and $38,287, respectively.

H. STOCKHOLDERS’ EQUITY

During three months ended March 31, 2005, the Company issued 4,900,000 shares of common stock in conjunction with conversions under the Laurus Loans.

I. STOCK OPTIONS

During the three months ended March 31, 2005, the Company granted 172,500 options at an exercise price of $1.09 per share. The following table summarizes activity under the 1997 Stock Option Plan during the three months ended March 31, 2005.

The weighted average fair value of options granted during the three months ended March 31, 2005 was $0.59 per share. The fair value of each stock option granted is estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted three months ended March 31, 2005: no common stock dividends; risk-free interest rates of 4.14% to 4.79%; 85% volatility; and an expected option life of 3 years. At March 31, 2005, the weighted average remaining contractual life of options outstanding was 5.2 years.

The following table summarizes information about options outstanding as of March 31, 2005:

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

J. OPERATING SEGMENT AND GEOGRAPHIC INFORMATION

The Company operates in two reportable segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income. Expenses that cannot be directly identified to an operating activity or are considered corporate overhead are not allocated to the segments in arriving at operating income for the segment. Generally, decisions regarding asset allocation, financing, taxes or other items impacting the Company’s balance sheet are made at the corporate level and, accordingly, operating segment balance sheet information is not typically reviewed by operating decision makers.

The BioSystems operating segment generates revenue from the sale of automated instrument systems and associated consumable products and services. This segment’s products are based upon two of the Company’s three core competencies: separations chemistries and enzymology. Specifically, this segment’s main products are the WAVE system, related bioconsumables and research services.

The Nucleic Acids operating segment generates revenue from the sale of products and services based upon all three of the Company’s core competencies: nucleic acid chemistries, separations chemistries and enzymology. Specifically, this segment’s main products are nucleic acid building blocks or “phosphoramidites,” fluorescent markers, dyes and associated reagents and novel chemistry and process development services.

The following table sets forth net sales and operating income (loss) by segment.

During the three months ended March 31, 2005, sales to Novartis Pharmaceuticals, Inc. totaled $717 and represented 10% of net sales within the BioSystems Operating segment and 10% of total consolidated net sales.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in thousands except per share data)

During the three months ended March 31, 2004, sales to Geron Corporation (“Geron”) totaled $722 and represented 32% of net sales within our Nucleic Acids operating segment and 8% of total consolidated net sales. In the first quarter of 2004, the Company entered into addendums to an existing supply agreement with Geron. The addendums allowed Geron to pay for products being manufactured by the Company under the addendum with Geron common stock. The following is a summary of Geron shares received and sold by the Company during the three months ended March 31, 2005 and 2004.

Subsequent to March 31, 2005, Geron issued 101,801 shares valued at $608 as a prepayment for products that are expected to be completed in the second half of 2005. These shares were sold during the second quarter of 2005 for $617 resulting in a gain of $9.

K. RESTRUCTURING PLAN

The Company had accrued expenses associated with its 2004 restructuring plan of $931 and $1,909 at March 31, 2005 and December 31, 2004, respectively. The balance at March 31, 2005 relates primarily to future rents on closed facilities (net of projected sublease rents) of which $602 is expected to be paid during the remainder of 2005 and $329 in 2006 and thereafter.

L. RESTATEMENTS OF CONSOLIDATED STATEMENTS OF CASH FLOWS

Subsequent to the issuance of the Company’s financial statements for the year ended December 31, 2004, the Company’s management determined that it had incorrectly included the amortization of software development costs within net cash flows from investing activities rather than within net cash flows from operating activities.

As a result, the Company’s unaudited consolidated statement of cash flows for the three months ended March 31, 2004 have been restated from the amounts previously reported to correct these errors. This restatement had no impact on the Company’s consolidated balance sheets or consolidated statements of operations. The impact of this restatement on the consolidated statements of cash flows is as follows: (dollars in thousands):

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

The following analysis gives effect to the restatement of our statements of cash flows for the quarter ended March 31, 2004, as discussed in Note L to the accompanying unaudited consolidated financial statements.

Overview

We provide innovative products and services for the synthesis, purification and analysis of nucleic acids. Our operations fall into two principal business units, BioSystems and Nucleic Acids. Our BioSystems products include our WAVE^® automated instrument systems, WAVE associated consumable products and other related consumable products. Our Nucleic Acids products consist principally of chemical building blocks for nucleic acid synthesis. Both business units have service offerings as well, including genetic variation discovery and analysis services and custom synthesis of specialty nucleic acids.

Our technologies center around three core competencies: separation chemistries, enzymology, and nucleic acid chemistries. In our first core competency, separations chemistry, we employ novel chemistries for separating nucleic acids, proteins, peptides, amino acids and carbohydrates. Our most significant separation technology is currently embodied in the WAVE System. The WAVE System is a versatile instrument that can be used for genetic variation detection, size-based double-strand DNA separation and analysis, single-strand DNA separation and analysis and DNA purification. The WAVE System requires the use of various consumable products that we manufacture and sell separately.

Our second core competency is expertise in developing novel enzymes. Enzymes are proteins that act as catalysts for biochemical reactions. Several of these reactions are useful in genomics. The ability to develop enzymes useful in the experimental manipulation of genes provides powerful tools for producing genetic material in the form needed for further analysis or incorporation into diagnostics and therapeutics. These products can also expand the sale of consumable products to WAVE System users and may also be sold for other applications. Our SURVEYOR^® product line of mutation detection kits allow for the cleaving of DNA at points where DNA sequence variations exists. The resulting DNA fragments can then be analyzed by our WAVE System, fluorescent capillary electrophoresis or standard gel electrophoresis. SURVEYOR Kits provide a simple and robust method of scanning relatively large DNA fragments for both known and novel sequence variations.

Our third core competency is nucleic acid chemistries. Our synthetic nucleic acid products consist of chemical building blocks of nucleic acids (known as phosphoramidites). We also manufacture related specialty chemicals such as fluorescent markers and molecular tags, dyes, quenchers, linkers, and solvents used to modify nucleic acids for subsequent detection or manipulation. These products are used by research organizations, diagnostic companies and pharmaceutical companies. These products are produced primarily in our Glasgow, Scotland facility. Prior to November 11, 2004, we had also manufactured synthesized segments of nucleic acids (known as oligonucleotides) in a facility in Boulder, Colorado. On November 11, 2004, we sold the assets associated with this facility to a subsidiary of Eyetech Pharmaceuticals, Inc. As a result of this sale, we no longer manufacture and sell these specialized oligonucleotides.

Our operations are managed based upon the nature of the products and services provided. Accordingly, we operate in two reportable segments, BioSystems and Nucleic Acids. Operations for these segments are evaluated based upon specific identification of revenues and expenses associated with the business activities resulting in a segment operating income or loss. See the Notes to the accompanying consolidated financial statements for detailed segment information.

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To respond to changes in the overall business climate and our liquidity position, we instituted significant changes during the fourth quarter of 2004 designed to, among other things, better align our cost structure with projected revenues, focus on opportunities in our BioSystems operating segment, and minimize the adverse financial effect of our Nucleic Acids operating segment. Specifically, during the fourth quarter of 2004, we sold our manufacturing facility in Boulder, Colorado and implemented a restructuring plan (the “2004 Restructuring Plan”). While the primarily goals of these changes were to provide the foundation for a self-sustaining, growth-oriented company with positive cash flows and earnings, there can be no assurance that we can achieve these goals.

Executive Summary

An increasing installed base and strong performance from Discovery Services, fueled 8% revenue growth in our BioSystms operating segment during the first quarter of 2005 compared to the same period of 2004. Revenues from our Nucleic Acids operating segment did not meet our expectations during the quarter; however, amendments recently executed with Geron Corporation (“Geron”) and other customers provide significant backlog for the remainder of 2005.

Expenses for the first quarter of 2005 reflect the benefits we expected to receive from the sale of our Boulder, Colorado facility and the 2004 Restructuring Plan. Our loss from operations of $1.23 million (including depreciation and amortization expense of $1.05 million) and cash flows used by operations of $0.21 million ranked among the best quarters since our initial public offering in 2000, and demonstrated significant progress toward our goal of generating positive operating and net cash flows. Foreign currency charges totaling $0.20 million during the quarter were not expected and adversely affected our loss from operations and cash flows from operations. We spent $0.94 million during the quarter to fund our 2004 Restructuring Plan, which also adversely affected cash flow from operations. These restructuring costs were expected and had been previously accrued. We are assessing strategies to effectively manage our foreign exchange risk (which could be significant) and do not expect cash paid for restructuring costs to recur at these levels.

Our liquidity and working capital positions improved during the first quarter of 2005 due principally to conversions of borrowing under our credit line (“Credit Line”) and term note (“Term Note”) (collectively, the “Laurus Loans”) with Laurus Master Fund, Ltd. (“Laurus”) totaling $2 million into common stock. The accounting effects of conversions and modifications to the Laurus Loans had an adverse effect on our reported results. Interest expense during the quarter totaled $1.66 million, representing an effective annual interest yield approaching 100%. However, interest actually paid or accrued on this debt totaled only $0.17 million. The remainder of the expense related primarily to net amortization of discounts and premiums plus non-cash charges associated with the aforementioned conversion of Laurus Loans into shares of our common stock. We continue to evaluate alternatives to simplifying our capital structure and enhancing the transparency of reported results.

Results of Operations

Changes in Results of Operations

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Three Months Ended March 31, 2005 and 2004

Net Sales. Net sales for the quarter ended March 31, 2005 decreased $1.26 million or 15% from the same period of 2004 as a result of a $0.54 million or 8% increase in sales in our BioSystems operating segment offset by a $1.80 million or 80% decrease in sales in our Nucleic Acids operating segment.

The increase in sales in our BioSystems operating segment resulted from increases in sales of bioconsumables of $0.10 million or 5% and Discovery Services of $0.44 million or 126%. These increases were offset by the slight decrease in sales of bioinstruments. WAVE Systems sold totaled 23 during the quarter ended March 31, 2005 compared to 32 in during the same period of 2004. The selling prices of our instruments vary based on the specific model and optional accessories. We had an installed base of approximately 1,216 units at March 31, 2005 compared to 1,193 units at December 31, 2004. The increase in the installed base of instruments continues to drive increases in sales of bioconsumables used with these instruments. The increase in Discovery Services revenue during 2005 was primarily attributable to the discovery services agreements that we entered into with pharmaceutical companies to support their clinical development of oncology therapeutics. We plan to continue to seek opportunities to provide genetic variation discovery and analysis services to pharmaceutical and other customers and believe that these services provide us a significant opportunity to expand revenues in the future. During the three months ended March 31, 2005, Discovery Services sales to Novartis Pharmaceuticals, Inc. (“Novartis”) totaled $0.72 million and represented 10% of net sales within the BioSystems operating segment and 10% of total consolidated net sales. Sales to Novartis may fluctuate substantially from period to period. Future revenues from our BioSystems operating segment would be substantially reduced if Novartis’s need for our products declined.

Nucleic Acids operating segment sales decreased by $1.80 million or 80% during the quarter ended March 31, 2005 compared to the same period of 2004 as a result of the elimination of any sales of specialty oligonucleotides produced by our former facility in Boulder, Colorado. As a result of the sale of this facility in November 2004, we no longer manufacture or sell oligonucleotides. Sales of our chemical building block products produced in our Glasgow, Scotland facility decreased $1.12 million or 72% as a result of lower sales to Geron Corporation (“Geron”). Sales of chemical building blocks to Geron during the first quarter of 2005 totaled $0.05 million compared to $0.72 million during the first quarter of 2004.

During the three months ended March 31, 2004, sales to Geron totaled $0.72 million and represented 32% of net sales within our Nucleic Acids operating segment and 8% of total consolidated net sales. Sales to Geron may fluctuate substantially from period to period. Subsequent to March 31, 2005, Geron issued 101,801 shares valued at $0.61 million as a prepayment for products that are expected to be completed in the second half of 2005.

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 and supplies) associated with our Discovery Services operations. Depreciation expense included in costs of goods sold totaled $0.58 million and $0.57 million during the quarters ended March 31, 2005 and 2004, respectively.

Costs of goods sold during the quarter ended March 31, 2005 decreased $1.37 million or 24% from the same period of 2004 as a result of a $0.69 million or 25% increase in our BioSystems operating segment and a $2.06 million or 69% decrease in our Nucleic Acids operating segment. The overall decrease was primarily attributable to the sale of our oligonucleotide facility and our 2004 Restructuring Plan.

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Gross profit was $2.97 million or 40% of total net sales during the first quarter of 2005 compared to $2.86 million and 33% during the same period of 2004. A summary of gross profit by operating segment follows (dollars in thousands):

We expect gross profits from our BioSystems operating segment to be within historic ranges of 50% to 60%. As a result of the sale of our Boulder, Colorado facility and the 2004 Restructuring Plan, we anticipate that our cost of goods sold will be significantly improved. However, our Nucleic Acids operating segment continues to have excess capacity in its Glasgow, Scotland manufacturing facility that will adversely impact costs of goods sold and gross profit until demand for our Nucleic Acids building block products increase.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily include personnel costs, marketing, travel and entertainment costs, professional fees, and facility costs. These costs totaled $3.59 million during the quarter ended March 31, 2005 compared to $4.25 million during the same period of 2004, a decrease of $0.66 million or 16%. This decrease related primarily to the 2004 Restructuring Plan, offset by the effects of foreign currency adjustments that totaled $0.20 million and $0.12 million during the quarters ended March 31, 2005 and 2004, respectively. Depreciation expense included in selling, general and administrative expenses totaled $0.18 million and $0.27 million during the quarters ended March 31, 2005 and 2004, respectively.

As a percentage of revenue, selling, general and administrative expenses totaled just over 49% during the quarters ended March 31, 2005 and 2004.

Research and Development Expenses. Research and development expenses primarily include personnel costs, supplies, and facility costs. These costs totaled $0.61 million during the quarter ended March 31, 2005 compared to $1.93 million during the same period of 2004, a decrease of $1.32 million or 69%. The decrease related primarily to the 2004 Restructuring Plan, which resulted in the elimination of substantially all research and development efforts associated with our Nucleic Acids operating segment. Depreciation expense included in research and development expenses included $0.14 million and $0.21 million during the quarters ended March 31, 2005 and 2004, respectively.

As a percentage of revenue, research and development expenses totaled 8% and 22% of revenue during the quarters ended March 31, 2005 and 2004. We expect to continue to invest a substantial portion of our revenues in research and development activities primarily associated with our BioSystems operating segment. Research and development costs are expensed in the year in which they are incurred.

Other Income (Expense). Other expense during the quarter ended March 31, 2005 of $1.66 million consisted of interest expense of $1.65 million and other net expense of $.01 million. Other expense during the quarter ended March 31, 2004 consisted of interest expense of $0.59 million and other net expense of $0.05 million, which consisted primarily of net investment losses associated with sales of Geron stock.