U.S.
SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


FORM
10-KSB/A


Amendment
No. 1





xANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
fiscal year ended December 31,
2007


oTRANSITION
REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934





For the
transition period from [    ] to
[    ]


333-136424


(Commission
File Number)





WaferGen
Bio-systems, Inc.


(Exact
Name of Registrant as Specified in Charter)








Nevada
            20-3699764(State
      or other jurisdiction of incorporation)
            (IRS
      Employer Identification No.)


Bayside
Technology Center


46531
Fremont Blvd.


Fremont,
CA 94538


(Address
of principal executive offices, including zip code)


Issuer’s
telephone number: (510) 651-4450





Securities
registered pursuant to Section 12(b) of the Act:  None


Securities
registered pursuant to Section 12(g) of the Act:  None





Check
whether the issuer(1) has filed all reports required to filed by Section 13 or
15(d) of the Securities Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90
days.  Yes x   No
o





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.  x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   YES o   NO
x





State
Issuer’s revenues for the fiscal year ended December 31, 2007:
$228,973.





The
aggregate market value of WaferGen Bio-systems, Inc. Common Stock, $0.001 par
value, held by non-affiliates, computed by reference to the average of the
closing price as reported by OTCBB on April 11, 2008, was $25,518,243. Shares of
common stock held by each executive and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.





Number of
shares of Common Stock of WaferGen- Bio-systems, Inc, $0.001 per value, issued
and outstanding as of March 28, 2008: 23,217.846.





DOCUMENTS
INCORPORATED BY REFERENCE





None.





Transitional
Small Business Disclosure Format (check one):  YesoNo x










EXPLANATORY
NOTE





WaferGen
Bio-systems, Inc. (the "Company") is filing this Amendment No. 1 (the “Amended
Report”) to its Annual Report on Form 10-KSB for the Company's fiscal year ended
December 31, 2007 (the “Original Report”) in order to include the information
required to be disclosed pursuant to Part III of Form 10-KSB and make certain
other limited changes in Item 1, “Description of Business,” under the heading
“Risk Factors.”  In addition, our principal executive officer and
principal financial officer have reissued their certifications as set
forth in Exhibits 31.1, 31.2, 32.1 and 32.2 of this Amended Report, and our
independent auditors have provided a new consent as set forth in Exhibit
23.1 of this Amended Reort.




Except
for those items as expressly set forth in the paragraph above, this Amended
Report continues to speak as of the date of the Original Report, and the Company
has not updated the financial disclosure or other disclosures contained herein
to reflect events that have occurred subsequent to the filing of the Original
Report. Accordingly, this Amended Report should be read in conjunction with the
Original Report and the Company’s other filings made with the SEC subsequent to
the filing of the Original Report.





TABLE OF
CONTENTS





PageFORWARD-LOOKING STATEMENTS
            1PART
      IITEM
      1.
            
            Description of Business
            1ITEM
      2.
            
            Description of Property
            19ITEM
      3.
            
            Legal Proceedings
            19ITEM
      4.
            
            Submission of Matters to a Vote of Security
      Holders
            19PART
      IIITEM
      5.
            
            Market for Registrant’s Common Equity,
      Related Stockholder Matters and Issuer Purchases of Equity
      Securities
            20ITEM
      6.
            
            Management’s Discussion and Analysis or Plan of
      Operations
            22ITEM
      7.
            
            Financial Statements and Supplementary
      Data
            29ITEM
      8.
            
            Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            55ITEM
      8A.
            
            Controls and Procedures
            55ITEM
      8B.
            
            Other Information
            56PART
      IIIITEM
      9.
            
            Directors, Executive Officers, Promoters, Control Persons and
      Corporate Governance; Compliance with Section 16(a) of the Exchange
      Act
            57ITEM
      10.
            
            Executive Compensation
            60ITEM
      11.
            
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            62ITEM
      12.
            
            Certain Relationships and Related Transactions, and Director
      Independence
            64ITEM
      13.
            
            Exhibits
            66ITEM
      14.
            
            Principal Accountant Fees and
    Services
            67SIGNATURES
            68EXHIBIT INDEX
            66


Table of Contents


FORWARD LOOKING STATEMENTS





Safe Harbor
Statement under the Private Securities Litigation Reform Act of
1995





Information included in this Form 10-KSB may contain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Except for the
historical information contained in this discussion of the business and the
discussion and analysis of financial condition and results of operations, the
matters discussed herein are forward looking statements. These forward looking
statements include but are not limited to the Company’s plans for sales growth
and expectations of gross margin, expenses, new product introduction, and the
Company’s liquidity and capital needs. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project” or the negative of these words or other
variations on these words or comparable terminology. In addition to the risks
and uncertainties described in “Risk Factors” below and elsewhere in this Form
10-KSB, these risks and uncertainties may include consumer trends, business
cycles, scientific developments, changes in governmental policy and regulation,
currency fluctuations, economic trends in the United States and inflation.
Forward-looking statements are based on assumptions that may be incorrect, and
there can be no assurance that any projections or other expectations included in
any forward-looking statements will come to pass. Our actual results could
differ materially from those expressed or implied by the forward-looking
statements as a result of various factors. Except as required by applicable
laws, we undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.








PART
I





Item
      1.
                Description of
Business





As
used in this Current Report on Form 10-KSB, all references to the “Company,”
“we,” “our” and “us” for periods prior to May 31, 2007 refer to WaferGen, Inc.
(or “WaferGen”) and for periods on or after May 31, 2007 refer to WaferGen
Bio-systems, Inc. (or “WBSI”).  On May 31, 2007, Wafergen was acquired
by WBSI.  In the transactions, Wafergen merged with a subsidiary of
WBSI and became a wholly-owned subsidiary of WBSI (the “Merger”).  In
connection with the Merger, the officers and board members of WBSI immediately
prior to the Merger resigned and were replaced by the officers and board members
of Wafergen, Inc. immediately prior to the Merger along with certain newly
elected board members.





Company
Background and Overview





Our
offices are located in Silicon Valley in Fremont, California. Since beginning
operations in 2003, we have been seeking to develop novel products for cell
biology and genetic analysis.





We intend
to develop instruments and other commercial products to serve the genetic
analysis segment of the life science industry. Pharmaceutical and biotech
companies spent in excess of $55.2 billion in 2006 for new drug discovery. We
believe that many of these efforts seek new therapeutic drugs, and that much of
this spending will be directed at developments at the molecular level for
understanding the expression of specific segments of DNA1(or genes).





The
expression of a gene is fundamental in understanding many disease processes and
hence, drug efficacy. For example, in the field of oncology greater
understanding of gene expression by certain types of cancerous cells has led to
the discovery of specific disease biomarkers that allow clinicians more accurate
diagnosis, prognosis and treatment options for their
patients.  Examples of drugs developed by others specifically
targeting biomarkers include Herceptin, used in the treatment of breast cancer,
and Gleevac, used in the treatment of chronic myelogenous leukemia. We also
believe an era of personalized treatment providing options for patients with
certain malignancies will expand to other diseases. Researchers are targeting at
the molecular level and are focusing attention and research budgets on research
tools that help them to develop therapies for other highly prevalent disease
states including heart and lung disease, arthritis, and diabetes.


________________________


1 DNA: (Deoxyribonucleic
acid) - A polymeric molecule consisting of deoxyribonucleotide building blocks
that in a double-stranded, double helical form is the genetic material of most
organisms. cDNA: - a DNA complementary to a RNA, and synthesized from it in vitro by reverse
transcription.


1
 Table of Contents


We
currently produce and sell our SmartSlideTM Micro-incubation System and we are
developing a gene expression product, the SmartChipTM Real Time PCR System. The
SmartSlideTM System provides a controlled environment and physiological
conditions for time lapse imaging studies, allowing researchers to characterize,
differentiate, and proliferate various cells, as well as providing optimal
growth conditions for cells that are difficult to grow, such as stem and primary
cells.





We are
completing development of our SmartChipTM System, which is an innovative tool to
allow scientists, in a single step, to achieve greater sensitivity and accuracy
in gene expression than present methods, allowing identification of the full
spectrum of expressed genes (rather than only a portion thereof), with the
ability to discriminate small changes in expression. The SmartChipTM System’s
high density, rapid cycling configuration is expected to provide throughput
levels that are expected to deliver clinical research solutions at a fraction of
the time and cost currently afforded by existing competing systems.





The
current market cost of real-time polymerase chain reaction (“real-time
PCR”)2,
which we believe researchers currently view as the “gold standard” for genetic
analysis, is approximately $1.00 per data point. We believe that our development
of the SmartChipTM System, which is designed to utilize real-time PCR, will cost
approximately $0.03 per acquired data point.





We
believe our SmartChipTM System is also capable of achieving time-savings when
compared to existing technologies. Research analyzing the whole genome utilizing
currently available real-time PCR technology would take weeks to months. Our
goal for design and development of our SmartChipTM System is to develop the
ability to quantitatively analyze the whole genome with the performance of
real-time PCR technology, which, if we succeed, could be as short as a single
day, and would represent a significant advancement. In addition, our development
of the SmartChipTM System seeks to allow 100,000 data points per chip, which
could enable a large number of reactions to run in parallel, thus addressing the
unmet needs of the clinical trial market. We believe today’s leading
technologies are limited in throughput of 96-well, 384-well, or a single sample.
Some new entrants in the market place like Biotrove & Fluidigm offer medium
throughput solution of 3,000-10,000 assays per chip. However are associated with
high instrument and running cost or suffer from poor performance and will be
difficult to scale up to whole genome on a single chip.





According
to UBSInvestment Research Report: Life
Sciences,December 11,
2006 and Frost &
Sullivan Report - U.S. qRT-PCRMarkets -October 5, 2006Deutsche Bank Research Report -
Pharmacogenomics is the “new new” thing in Healthcare,December 11, 2006, and our
own estimates, the genetic analysis market had approximately $2.8 billion in
worldwide revenues in 2007. Overall growth for the market is forecast at a
compounded annual growth rate (CAGR) of 10-16% and global revenue is estimated
to reach $4.9 billion by 2012.





WaferGen
intends to employ a business model that generates revenue from the sale of both
instruments and a recurring revenue stream from the sale of consumables, similar
to the “razor and razor blade” business model.





We
introduced our SmartSlideTM System during 2006 and made our first sales during
October 2006. We generated approximately $228,973 of revenue and $5,957,664 of
total loss during 2007. During the final stages of The Smart ChipTM System
development we expect to incur significant additional costs completing
development and commercializing this product. We have produced an alpha version
of the Smart Chip Real Time PCR system, but we have not produced a commercially
available product or made any sales of our Smart ChipTM System. Our sales of
SmartSlideTM Systems have been sold to several leading research institutions
including Abbott Labs, NASA, Harvard University, The Mayo Clinic, Memorial
Sloan-Kettering, UCLA, University of Southern California, VA Medical Center,
University of California at Davis, University of North Texas, Eisai Research,
and the University of Georgia.


________________________


2 Polymerase Chain Reaction
(PCR) - PCR is an enzymatic process to increase the number of copies of DNA for
easier detection.  Real-time PCR chemistries allow for detection of
the reaction in the early phase rather than the late phase of the
reaction.


2
 Table of Contents


Technology
Overview





Genes are
segments of DNA that carry separate information packets of the genome. Gene
expression profiles are used to provide information on roughly 30,000 genes
within the human genome. Life science researchers use gene expression analysis
to study the differential expression of genes in normal versus disease states.
The permanent DNA sequence in each human cell is transcribed or copied into RNA
(combinations of nucleic acids)3which is then translated
into functional proteins. In disease, gene expression profiles may demonstrate
the over or under-expression of genes. There are two technologies used to
measure gene expression, microarray and real-time PCR.





Microarrays
consist of different nucleic acid probes that are chemically attached to a
surface, such as a microchip, glass slide, or a bead. Microarrays are based upon
hybridization technology to detect the presence of a specific gene sequence and
to analyze genetic information. DNA and RNA are made of defined nucleic acid
sequences that bind to unique complementary sequences to form a hybrid. This
binding of single strands of DNA or RNA to form double-stranded DNA or RNA is
termed hybridization. Scientists utilize the hybridization phenomenon to measure
the amount of expression or presence of a gene in a particular
sample.





Microarrays
have limited sensitivity, accuracy and dynamic range. Human genes are expressed
across a six log range, with most species of RNA being present in less than 100
copies. The dynamic range of microarrays is estimated to be 2-3 logs and thus
microarrays are unable to detect a 2 fold difference at lower expression levels,
capturing only 20-40% of the expressed genes. Consequently, one obtains only a
partial view of the expression profile when utilizing microarrays. These
overlooked genes may be important in a particular disease state (limited
sensitivity). As a consequence of these limitations, the discovery of genes
identified by microarray technology requires further validation using real-time
PCR.





The
second technology, real-time PCR, represents a sensitive and accurate method to
measure gene expression. Traditional PCR is an enzymatic process to increase the
number of DNA copies for easier detection. Real-time PCR permits quantitative
analysis, rather than just a qualitative yes/no. In many cases it is important
to determine the number of DNA copies in a given sample. Furthermore, real-time
PCR chemistries allow for the detection in the early phase, rather than the
later phase of these reactions, thereby decreasing process time and increasing
accuracy.





Because
it does not measure thousands of genes simultaneously (like a microarray
analysis), real-time PCR has low throughput and relatively high cost, making it
unfeasible for whole genome analysis or for very high throughput studies. Thus,
in practice, researchers typically first use microarray to identify which genes
are over or under-expressed in the whole genome and then apply real-time PCR to
a specific set of those genes to accurately quantify gene
expression.





We
believe our SmartChipTM System, assuming successful development and
commercialization, would combine the best of both existing technologies - whole
genome analysis enabled by microarrays with the sensitivity and accuracy of
real-time PCR. Our SmartChipTM System will be provided with pico-liter
(one-trillionth of a liter) dispensing into a 33,000-100,000 well chip that will
allow for high throughput real- time PCR or the real time amplification of the
entire human genome in triplicate. Our SmartChipTM chips are designed with
evaporation control measures that allow for the use of nano-liter (one-billionth
of a liter) volumes, fast thermal cycling, and temperature control. Our software
system is being developed to also analyze the high throughput data after the
completion of the real-time PCR analysis. The user friendly, content-ready
SmartChipTM System, is being designed to be able to accept samples out of the
box, incorporating many of the necessary substrates and chemicals.


________________________


3 RNA: (Ribonucleic acid) -
A polymeric molecule consisting of ribonucleotide building
blocks.  The three major types in cells are ribosomal RNA (rRNA),
transfer RNA (tRNA), and messenger RNA (mRNA), each of which performs an
essential role in protein synthesis. RNAi is RNA interference that helps
regulate turning genes on and off.


3
 Table of Contents


The
SmartChipTM System is being engineered to deliver superior performance with the
combination of high sensitivity and high throughput on a single chip, enabling
scientists to rapidly view a large dynamic range of the expressed genes of the
human genome. The genetic analysis using the SmartChipTM System is expected to
require one day versus what would currently take days to weeks to complete
utilizing existing genetic analysis systems. As more clinical studies are
carried out using validated gene sets, we believe the market will require, and
demand, higher throughput solutions to process large numbers of clinical
samples. Today’s solutions typically allow only one chip per patient or, in the
case of real-time PCR, a few  genes per patient. We believe that we
can solve these problems.





The
following table outlines benefits we believe could be realized from the use of a
SmartChipTM System compared to our estimates of the microarray and real-time PCR
technologies in use today.





Microarray
            SmartChipTM
            Real
      -Time PCR#
      of Genes
            Whole
      Genome
            Whole
      Genome
            <1000Dynamic Range
            2
      to 3 logs
            6
      logs
            6
      logsQuantitative
            Semi
            Yes
            YesThroughput
      per
              run
            1
      Sample
              30,000
      genes
              (actually
      only 20 -30%
              of
      expressed genes)
            1
      Sample
              30,000
      genes
              Many
      genes x many
              samples
            Few
      samples (96 -384)
              x
      few genesSensitivity
            100,000
      starting copies
            1-10
      starting copies
            1-10
      starting copiesProject
      Process
            Multiple
      steps
            Single
      step
            2
      stepsTime
      per run
              Hybridization
      or
              PCR
            20
      hours
            15-20
      minutes
            2
      hoursWhole
      Genome
              Assay
      Time
            Days
            Day
            MonthsCost/gene
            3.3
      cents
              plus
      cost real –time PCR
              validation
            3.3
      cents
            $1
      - 2Cost/whole
              genome
            $1000
      plus cost
              validation
            $1000
            >$100,000
      -185,000





Competition





We
believe the primary industry competitors in the markets in which WaferGen plans
to enter and compete are Applied Biosystems (“ABI,” which is a division of
Applera Corporation), Affymetrix, Inc. (“Affymetrix”) and Illumina, Inc.
(“Illumina”). Other companies known to be currently serving the genetic analysis
market include Agilent Technologies, Inc., GE Healthcare (a business segment of
General Electric Company), Bio-Rad Laboratories, Inc., Stratagene Corporation,
Eppendorf AG, Beckman Coulter, Inc. and F. Hoffmann-La Roche & Co. Minor
players in the same market include NimbleGen Systems, Inc., Fluidigm Corporation
and BioTrove, Inc. The marketplace for gene expression technologies is highly
competitive, with many of the major players already controlling significant
market share, many of which have significantly greater financial, technology,
and other resources than we do. Affymetrix is the leader in microarrays for
whole genome analysis and ABI is the market leader for real-time PCR. We believe
gene expression is a growing market and this market is driven by the need for
better solutions to solve scientific challenges. These established competitors
could compete with us by developing new products similar to our SmartChipTM
System. Even though we believe that we have created a unique solution, this does
not mean that our competitors will not develop effective products to compete
with our products.





Some new
competitors, such as Biotrove and Fluidigm have recently begun offering
instrument-only solutions. These companies have micro-channel based technologies
that offer throughput of 6,000 to 10,000 assays per instrument.


4
 Table of Contents


Products





SmartChipTM System





Our
SmartChipTM System is designed asan integrated
instrument capable of thermal cycling, real-time detection and software for
control and analysis. The product, upon completion, will be available with
primer-ready chips for gene expression and genotyping analysis.





We are
planning to commercialize our SmartChipTM  System with two chip
configurations:





·
            A
      33,000 assays chip for study of gene panels or for candidate genes of
      interest to customers; and





·
            A
      High throughput whole genome version of 100,000 assays chip for whole
      genome studies in triplicate.





The alpha
SmartChipTM System has been built to thermally cycle and detects the fluorescent
signal output from real-time PCR runs on the chips.  This compact
system is intended to allow for the use of very small reaction volumes, which
are dispensed using a pico-liter dispenser, while improving detection
sensitivity and assuring uniformity across the chip.





The
SmartChipTM System is expected to perform quantitative gene expression and
genotyping assays on whole genomes at a competitive price (3.3 cents per
acquired data point compared to $1 per data point for current real-time PCR
assays). This system is expected to have the ability to perform genome-wide
nano-volume (100 nl) real-time PCR assays in triplicates, performed in minutes
using pre-fabricated real-time PCR chips. The system is expected to have
superior performance for a whole genome or high-throughput system and a dynamic
range of 6 logs for gene expression with high sensitivity.





Some of
the key challenges that are addressed with the SmartChipTM System are multi-head
pico-liter dispensing, evaporation control, sealing, scalability, fast thermal
cycling, temperature control and optimized 1,000 genes in 100nL reaction
volume.





To date,
we have designed 5,500-, 33,000-, and 100,000- well chips and already
implemented the 5,500- well chip. With these chips, we have demonstrated our
ability to perform several key steps required in a commercial version of the
SmartChipTM System including fast thermal cycling. This requires the ability to
seal, which we have also demonstrated. We have also completed 100 pico-liters
dispensing with evaporation control. Certain of the milestones that we have yet
to achieve prior to launching the SmartChipTM System are specified in the
SmartChipTM Product Road Map Chart.





Market
Opportunities: SmartChipTM System Product Potential





Sequencing
of the human genome has led to a new healthcare paradigm where disease is
understood at the molecular level, allowing the potential for a patient to be
diagnosed according to genetic information and treated with drugs designed to
work on specific molecular targets. This has led to the need for accurate,
highly sensitive, high throughput gene expression data by researchers,
clinicians and pharmaceutical companies. We believe the SmartChipTM System, with
its advantages of higher throughput, lower cost, superior sensitivity, and
accuracy will make these multiple market applications a practical
reality.





We
believe the SmartChipTM System will become the technology of choice in both
research and clinical settings.





·
            Biomarker
      Discovery. Identification of new targets (biomarkers) for drugs can be
      identified through the analysis of gene profile expression in diseased
      cells. Potential applications include disease states such as diabetes,
      arthritis, and certain commonly occurring
  cancers.





·
            Drug
      Validation and Optimization. Genetic analysis is being used to determine
      the likely toxicity (toxicogenomics) and the likelihood of therapeutic
      response to a specific genetic profile (pharmacogenomics). Recently issued
      FDA guidance4calls for drug
      companies to voluntarily submit pharmacogenomic data to support their drug
      development programs.


________________________


4 FDA News Release - March 22,
2005 - issued a final guidance titled “Pharmacogenomic Data
Submissions.”


5
 Table of Contents


·
            Drug
      Response Monitoring. Patient outcomes can be improved by evaluation of a
      proposed drug’s potency and specificity in order to determine
      individualized patient dosing, thereby decreasing adverse drug reactions,
      and improving drug efficacy.





·
            Detection
      of Rare Mutations. The Cancer Genome Project is using the human genome
      sequence and high throughput mutation detection techniques to identify
      somatically acquired sequence variants/mutations and hence identify genes
      critical in the development of human
cancers.





Target and Biomarker Discovery and
Validation: Gene expression patterns (biomarkers) related to
specific diseases are becoming increasingly important in drug development.
Comparison of gene expression patterns between normal and diseased patients or
expression profiles in the presence or absence of drugs leads to discovery of
genes or a set of genes that can be used in drug development. This requires
monitoring of tens, hundreds or thousands of mRNAs (messenger RNAs) in large
numbers. A typical genetic analysis currently involves the use of microarrays to
identify genes, which are either over-expressed or under-expressed in a small
subset of patients. After detailed bioinformatics analysis, a number of
differentially expressed genes (2 to 200) are evaluated using real-time PCR in a
different subset of patients (50 to 100). The differentially expressed genes in
this patient cohort are then validated using a larger patient
group.





This
sequential process may take from many months to a few years to complete using
currently available techniques. The limitation in today’s gene expression
studies is the use of microarrays as a starting point for discovery, which only
provides a partial glimpse of the expression profile. Real-time PCR techniques,
which offer significantly increased sensitivity, are limited in throughput and
are cost prohibitive for whole genome analysis. It would cost in excess of
$100,000 per analysis (assuming $1/assay plus reference plus triplicates) to
study even a single whole genome (30,000 genes) sample and will take many months
to complete this study (reported in a recent MACQ study conducted by the FDA and
published in September 2006 in Nature Biotechnology).5Biomarker investigation
requires multiples of such analyses to confirm discovery.





Drug Development and Clinical Trial
Validation:Clinical trials are the most expensive phase for
pharmaceutical drug development. The use of gene expression and genotyping is
becoming critical to identify a safe drug (toxicogenomics) for the right patient
population (pharmacogenomics). Once a set of genes (biomarker) is identified
they are used in numerous samples in clinical trials for pattern recognition and
toxicity profiling. Similarly, loci of single nucleotide
mismatches/polyphormisms (SNPs) involved in disease variation and metabolism are
also being utilized in clinical trials to understand disease predisposition,
requiring thousands of samples to be analyzed.





Recently,
the FDA has asked for voluntary data submission utilizing these genetic
approaches in clinical trials.6This has created a need for reliable, high-throughput, cost-effective
technologies. Today’s hybridization based techniques can process only one sample
at a time. Thus, for a clinical trial of 1,000 patients, one would need to use
1,000 chips. Other PCR-based techniques typically process 96 to 384 gene
expression studies with many competing technologies; the researcher is typically
limited to the amount of the biological sample to prepare RNA. We also believe
our technology can be easily scaled to meet future higher-throughput
needs.





Drug Response Monitoring: In
addition to studying gene expression, genotyping measures genetic variation in
the DNA. Sometimes it is not a single variation but the combination of these
sequence differences that may lead to a disease state or a response to a
specific therapy.


________________________


5 The MicroArray Quality Control
(MAQC) project shows inter- and intra-platform reproducibility of gene
expression measurements, Nature Biotechnology, Vol. 24:9, p 1151, September
2006.





6 FDA News Release - March 22,
2005 - issued a final guidance titled “Pharmacogenomic Data
Submissions.


6
 Table of Contents


For this
reason, researchers look at patterns of these variations in a large number of
healthy and affected patients in order to correlate SNPs with specific disease.
Large-scale genotyping studies are being conducted in various genome centers
around the world, driven by available research funds, resulting in the greater
demand for cost effective high throughput solutions.





Detection of Rare Mutations:
The Cancer Genome Project’s DNA sequencing of patients’ tumors is underway and
is rapidly defining cancer-causing mutations. Today, this is accomplished by
using hybridization approaches which are unable to detect rare somatic
mutations. Such techniques require the use of more sensitive methods like PCR
and require genotyping of many samples (50 - 500). WaferGen intends to use
allele specific PCR with the SmartChipTM System to enable genotyping at multiple
sites in multiple samples, as well as to provide a robust solution for detecting
rare mutations.  Current allele-selective PCR is able to reliably
genotype SNPs (germ-line) and also reliably detect minority (somatic) mutations
at 1/100 to 1/10,000 mutations.





Future Applications: From Research to
Diagnostics: New biomarkers for gene
expression and genotyping are eventually expected to become essential for
practicing physicians to identify the right drug for the right patients and lead
to new ways of diagnosing and monitoring diseases. Biomarkers and platforms that
are being used in clinical trials for a particular therapy are expected to
become standard for molecular diagnostics. This market is still in its early
development.





Sales
and Marketing





We
utilize a seasoned life science marketing team and WaferGen-employed direct
sales and application support personnel.  In 2008, we expect to
increase our sales and support by an addition two employees for selling
SmartSlideTM and SmartChipTM Systems. We are in the process of identifying life
science distributors to sell and support our product line in Europe and the Far
East.





Seasonality





We do not
have sufficient product history to determine seasonality with a high degree of
confidence. It is expected that customers’ purchasing patterns will not show
significant seasonal variation, although demand for our products may be lowest
in the first quarter of the calendar year and highest in the fourth quarter of
the calendar year as pharmaceutical and academic customers typically spend
unused budget allocations before the end of the fiscal year.





Intellectual
Property and Other Proprietary Rights





We intend
to pursue an intellectual property portfolio, including filing a number of U.S.
and international patent applications and in-licensing certain patents covering
products, methodologies, integration and applications. In our in-licensing
arrangements, we have obtained intellectual property rights from third parties
related to the development and marketing of the products, integration or
applications covered by such licensed intellectual property. We have a number of
pending patent applications that relate to the SmartChipTM and SmartSlideTM
products. In addition, we have an exclusive license under PCR patents from Delft
University of Technology, Netherlands. In addition to our patents, we rely on
trade secrets, know-how, and copyright and trademark protection. Our success may
depend on our ability to protect our intellectual property rights.





Government
Regulation and Environmental Matters





We are
subject to a variety of federal, state and municipal environmental and safety
laws based on our use of hazardous materials in both our manufacturing and
research and development operations. We believe that we are in material
compliance with applicable environmental laws and regulations. If we cause
contamination to the environment, intentionally or unintentionally, we could be
responsible for damages related to the clean-up of such contamination or
individual injury caused by such contamination. We cannot predict how changes in
the laws and regulations will impact how we conduct our business operations in
the future or whether the costs of compliance will increase in the
future.





Regulation
by governmental authorities in the United States and other countries is not
expected to be a significant factor in the manufacturing, labeling, distribution
and marketing of our products and systems.


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Employees





We have
assembled a team of scientists, engineers and business managers to support our
product development and commercialization activities. Their efforts will
continue to focus on selling, improving and refining our core technologies,
including our SmartSlideTM System and our SmartChipTM System products. We
currently have 23 full-time employees. None of our employees is represented by a
labor union, and we consider our employee relations to be good. We believe that
our future success will depend, in part, on our continued ability to attract,
hire and retain qualified personnel.





Risk
Factors





In
addition to the other information in this Annual Report on Form 10-KSB, the
factors and risks listed below, among others, could affect our future
performance and should be carefully considered in evaluating our
outlook.





Risks
Related to Our Company and Our Business





We
have a history of operating losses which may continue, in which case we may not
be able to reach profitability.





We have a
history of losses and may continue to incur operating and net losses for the
foreseeable future. We incurred a net loss of $5,957,664 for the year ended
December 31, 2007. As of December 31, 2007, our accumulated deficit was
$11,952,907. We have not achieved profitability on a quarterly or annual basis.
We may not be able to reach a level of revenue to achieve profitability. To
date, our revenues have been insignificant and not sufficient to achieve our
business plan. Our gross revenues for December 31, 2007 were $228,973. If our
revenues grow more slowly than anticipated or if operating expenses exceed
expectations, then we may not be able to achieve profitability in the near
future or at all, which may depress our stock price.





We
are a development stage company with limited operating history for investors to
evaluate our business.





We are a
development stage company and have had limited operations in the genetic
analysis segment of the life science industry. Since we are a company with a
limited operating history developing products focused on the analysis of genetic
function and variation, it is difficult for potential investors to evaluate our
business. To date, we have developed only one commercialized product, the
SmartSlideTM System, and our future operations and growth will likely depend on
our ability to successfully develop and market our SmartChipTM products. Our
proposed operations are subject to all of the risks inherent in light of the
expenses, difficulties, complications and delays frequently encountered in
connection with the formation of any new business, as well as those risks that
are specific to the life science industry. In evaluating us, investors should
consider the delays, expenses, problems and uncertainties frequently encountered
by companies developing markets for new products, services and technologies. We
may never overcome these obstacles and become profitable.





Because
our business depends on research and development spending levels for
pharmaceutical and biotechnology companies and academic and governmental
research institutions, our success and our operating results will substantially
depend on these customers.





We expect
that our revenues in the foreseeable future will be derived primarily from
products and services provided to a relatively small number of pharmaceutical
and biotechnology companies and academic, governmental and other research
institutions. Our success will depend upon their demand for and use of our
products and services. Our operating results may fluctuate substantially due to
reductions and delays in research and development expenditures by these
customers. For example, reductions in capital or operating expenditures by these
customers may result in lower than expected instrumentation sales and similarly,
reductions in operating expenditures by these customers could result in lower
than expected sales by us.


8
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We
expect that our results of operations will fluctuate, which could cause our
stock price to decline.





Our
revenue is subject to fluctuations due to the timing of sales of high-value
products and services projects, the impact of seasonal spending patterns, the
timing and size of research projects our customers perform, changes in overall
spending levels in the life sciences industry, the timing and amount of
government grant funding programs and other unpredictable factors that may
affect customer ordering patterns. Given the difficulty in predicting the timing
and magnitude of sales for our products and services, we may experience
quarter-to-quarter fluctuations in revenue and/or a sequential decline in
quarterly revenue.





In
addition, because of our continued research, marketing and hiring in connection
with our SmartChipTM product, we expect operating expenses to continue to
increase significantly. Accordingly, if revenue does not grow as anticipated, we
may not be able to achieve and maintain profitability. Any significant delays in
the commercial launch of our products, unfavorable sales trends in our existing
product lines, or impacts from the other factors mentioned above could adversely
affect our revenue growth or cause a sequential decline in quarterly revenues.
Due to the possibility of fluctuations in our revenue and expenses, we believe
that quarterly comparisons of our operating results are not a good indication of
our future performance. If our operating results fluctuate or do not meet the
expectations of stock market analysts and investors, our stock price probably
would decline.





We
have a limited history of commercial sales of systems and consumable products,
and our success depends on our ability to develop commercially successful
products and on market acceptance of our new and relatively unproven
technologies.





We may
not possess all of the resources, capability and intellectual property rights
necessary to develop and commercialize all of the products or services that may
result from our technologies. Sales of our SmartSlideTM stem cell research and
cell biology systems only began in October 2006, and some of our other
technologies, such as our gene expression analysis technologies, are in the
early stages of market introduction or are still in development. You should
evaluate us in light of the uncertainties and complexities affecting similarly
situated companies developing tools for the life sciences and pharmaceutical
industries. We must conduct a substantial amount of additional research and
development before some of our products will be ready for sale, and we currently
have fewer resources available for research and development activities than many
of our competitors. We may not be able to develop or launch new products in a
timely manner, or at all, or they may not meet customer requirements or be of
sufficient quality or at a price that enables us to compete effectively in the
marketplace. Challenges frequently encountered in connection with the
development or early commercialization of products and services using new and
relatively unproven technologies might limit our ability to develop and
successfully commercialize these products and services. In addition, we may need
to enter into agreements to obtain the intellectual property rights necessary to
commercialize some of our products or services, which may not be available on
favorable terms, or at all.





We
will need to raise additional capital to meet our business requirements in the
future and such capital raising may be costly or difficult to obtain and could
dilute current stockholders’ ownership interests.





We will
need to raise additional capital in the future, which may not be available on
reasonable terms or at all. We raised approximately $9.2 million in net proceeds
in our June 2007 private placement.  We expect that such proceeds,
together with our income, could fund our operations from the date hereof to
August 2008. We will need to raise additional funds through public or private
debt or equity financings to meet various business objectives including, but not
limited to:





·
            pursuing
      growth opportunities, including more rapid
  expansion;





·
            acquiring
      complementary businesses;





·
            making
      capital improvements to improve our
  infrastructure;





·
            hiring
      qualified management and key
employees;





·
            developing
      new services, programming or
products;





·
            responding
      to competitive pressures;





·
            complying
      with regulatory requirements such as licensing and registration;
      and





·
            maintaining
      compliance with applicable
laws.


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Any
additional capital raised through the sale of equity or equity backed securities
may dilute current stockholders’ ownership percentages and could also result in
a decrease in the market value of our equity securities.





The terms
of any securities issued by us in future capital transactions may be more
favorable to new investors, and may include preferences, superior voting rights
and the issuance of warrants or other derivative securities, which may have a
further dilutive effect on the holders of any of our securities then
outstanding.





Furthermore,
any additional debt or equity financing that we may need may not be available on
terms favorable to us, or at all. If we are unable to obtain required additional
capital, we may have to curtail our growth plans or cut back on existing
business and, further, we may not be able to continue operating if we do not
generate sufficient revenues from operations needed to stay in
business.





We may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
issue, such as convertible notes and warrants, which may adversely impact our
financial condition.





We
may encounter difficulties in managing our expected growth, which could increase
our losses.





We expect
to experience rapid and substantial growth in order to achieve our operating
plans, which will place a strain on our human and capital resources. If we are
unable to manage this growth effectively, our losses could increase. Our ability
to manage our operations and growth effectively requires us to continue to
expend funds to enhance our operational, financial and management controls,
reporting systems and procedures and to attract and retain sufficient numbers of
talented employees. If we are unable to scale up and implement improvements to
our manufacturing process and control systems in an efficient or timely manner,
or if we encounter deficiencies in existing systems and controls, then we will
not be able to make available the products required to successfully
commercialize our technology.





Failure
to attract and retain sufficient numbers of talented employees will further
strain our human resources and could impede our growth.





Our
financial condition could be adversely affected in the event of uninsured or
inadequately insured loss or damage.





We may
not be able to obtain insurance policies on terms affordable to us that would
adequately insure our business and property against damage, loss or claims by
third parties. To the extent our business or property suffers any damages,
losses or claims by third parties, which are not covered or adequately covered
by insurance, the financial condition of our Company may be materially adversely
affected.





If
we lose our key personnel or are unable to attract and retain additional
qualified personnel, we may be unable to achieve our goals.





We are
highly dependent on our management and scientific personnel, including our chief
executive officer, chief financial officer, chief technology officer and chief
scientific officer. The loss of any of their services could adversely impact our
ability to achieve our business objectives. We will need to hire additional
qualified personnel with expertise in molecular biology, chemistry, biological
information processing, sales, marketing and technical support. We compete for
qualified management and scientific personnel with other life science companies,
universities and research institutions, particularly those focusing on genomics.
Competition for these individuals, particularly in the San Francisco Bay
area, is intense, and the turnover rate can be high. Failure to attract and
retain management and scientific personnel would prevent us from pursuing
collaborations or developing our products or technologies.





Our
planned activities will require additional expertise in specific industries and
areas applicable to the products developed through our technologies, including
the life sciences and healthcare industries.


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Thus, we
will need to add new personnel, including management, and develop the expertise
of existing management. The failure to do so could impair the growth of our
business.





New
rules, including those contained in and issued under the Sarbanes-Oxley Act of
2002, may make it difficult for us to retain or attract qualified officers and
directors, which could adversely affect the management of our business and our
ability to obtain or retain listing of our common stock.





We may be
unable to attract and retain those qualified officers, directors and members of
Board of Directors committees required to provide for our effective management
because of the changes in the rules and regulations that govern publicly held
companies, including, but not limited to, certifications by principal executive
officers. The enactment of Sarbanes-Oxley has resulted in the issuance of a
series of rules and regulations and the strengthening of existing rules and
regulations by the SEC, as well as the adoption of more stringent rules by the
stock exchanges. The perceived increased personal risk associated with these
recent changes may deter qualified individuals from accepting roles as directors
and executive officers.





Further,
some of these recent changes heighten the requirements for board or committee
membership, particularly with respect to an individual’s independence and level
of experience in finance and accounting matters. We may have difficulty
attracting and retaining directors with the requisite qualifications. If we are
unable to attract and retain qualified officers and directors, the management of
our business and our ability to obtain or retain the listing of our common stock
on any stock exchange (assuming we elect to seek and are successful in obtaining
such listing) could be adversely affected.





We
are a holding company that depends on cash flow from our wholly-owned subsidiary
to meet our obligations.





After the
Merger, we became a holding company with no material assets other than the stock
of our wholly-owned subsidiary. Accordingly, all our operations are conducted by
WaferGen, our wholly-owned subsidiary. We currently expect that the earnings and
cash flow of our subsidiary will primarily be retained and used by it in its
operations, including servicing any debt obligations it may have now or in the
future.





All
of our former liabilities survived the Merger and there may be undisclosed
liabilities that could have a negative impact on our financial
condition.





Pursuant
to the Merger, we acquired the business of WaferGen as our sole line of
business, and accordingly are not pursuing our prior business. Although due
diligence activities were performed on us and WaferGen prior to the Merger, the
due diligence process may not have revealed all liabilities (actual or
contingent) of us or WaferGen that existed or which may arise in the future
relating to our activities before the consummation of the Merger.
Notwithstanding that all of our then-known liabilities were transferred to
Leaseco pursuant to the split-off in connection with the Merger, it is possible
that claims for liabilities may still be made against us, which we will be
required to defend or otherwise resolve. The provisions and terms of the merger
agreement and split-off may not be sufficient to protect us from claims and
liabilities and any breaches of related representations and warranties. Although
escrow provisions and limited post-closing adjustments in the merger agreement
are available to the stockholders of WaferGen and our pre-Merger stockholders,
there is no comparable protection offered to our other stockholders. Any
liabilities remaining from our pre-Merger company or WaferGen could harm our
financial condition.





We
may not be able to continue as a going concern.





Our
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. We have a history of operating losses that are
likely to continue in the future. We have included an explanatory paragraph in
Note 1 of our financial statements for the year ended December 31, 2007, to the
effect that our significant losses from operations and our dependence on equity
and debt financing raise substantial doubt about our ability to continue as a
going concern. Our accumulated deficit at December 31, 2007 was $11.95 million.
Our financial statements do not include any adjustments that might be necessary
should we be unable to continue as a going concern.





Our
operations must begin to provide sufficient revenues to improve our working
capital position. If we are unable to become profitable and cannot generate cash
flow from our operating activities sufficient to satisfy our current obligations
and meet our capital investment objectives, we may be required to raise
additional capital or debt to fund our operations, reduce the scope of our
operations or discontinue our operations. We may not be able to raise necessary
equity or debt financing on acceptable terms or at all.


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If
we fail to maintain an effective system of internal controls, we may not be able
to accurately report our financial results or detect fraud. Consequently,
investors could lose confidence in our financial reporting and this may decrease
the trading price of our stock.





We must
maintain effective disclosure and internal controls to provide reliable
financial reports. We have been assessing our controls to identify areas that
need improvement. Based on our evaluation as of December 31, 2007, we concluded
that there were material weaknesses in our internal controls and procedures as
of December 31, 2007. We are in the process of implementing improvements to our
controls, but have not yet completed implementing these changes. Failure to
implement these changes to our controls or any others that we identify as
necessary to maintain an effective system of such controls could harm our
operating results and cause investors to lose confidence in our reported
financial information. Any such loss of confidence would have a negative effect
on the trading price of our stock.





Because
we are not yet required to comply with rules requiring the adoption of certain
corporate governance measures, our stockholders have limited protections against
interested director transactions, conflicts of interest and similar
matters.





Sarbanes-Oxley,
as well as rule changes proposed and enacted by the SEC, the New York and
American Stock Exchanges and The Nasdaq Stock Market, as a result of
Sarbanes-Oxley, require the implementation of various measures relating to
corporate governance. These measures are designed to enhance the integrity of
corporate management and the securities markets and apply to securities which
are listed on those exchanges. Because we are not presently required to comply
with many of the corporate governance provisions, we have not yet adopted these
measures.





Until we
comply with the corporate governance measures adopted by the national securities
exchanges after the enactment of Sarbanes-Oxley, regardless of whether such
compliance is required, the absence of standards of corporate governance may
leave our stockholders without protections against interested director
transactions, conflicts of interest and similar matters and investors may be
reluctant to provide us with funds in the future if we determine it is necessary
to raise additional capital. We intend to comply with all applicable corporate
governance measures relating to director independence as soon as
practicable.





Litigation
or other proceedings or third-party claims of intellectual property infringement
could require us to spend significant time and money and could prevent us from
selling our products or services or impact our stock price.





Our
commercial success depends in part on our non-infringement of the patents or
proprietary rights of third parties and the ability to protect our own
intellectual property.





Third
parties may assert that we are employing their proprietary technology without
authorization even if we are not. As we enter new markets, we expect that
competitors will likely assert that our products infringe their intellectual
property rights as part of a business strategy to impede our successful entry
into those markets. Third parties such as ABI, the Roche family of companies,
Biometra biomedizinische Analytik GmbH, Stratagene Corporation, Bio-Rad
Laboratories, Inc., Eppendorf Incorporated, Enzo Biochem, Inc., Affymetrix,
Agilent Technologies, Inc., GE Healthcare, Inc., Beckman Coulter, Inc.,
Illumina, and others may have obtained and may in the future obtain patents and
claim that manufacture, use and/or sale of our technologies, methods or products
infringes these patents. We could incur substantial costs and divert the
attention of our management and technical personnel in defending ourselves
against these claims even if we are eventually successful in defending ourselves
against these claims. Furthermore, parties making claims against us may be able
to obtain injunctive or other relief, which effectively could block our ability
to further develop, commercialize, manufacture, use and sell methods and
products, and could result in the award of substantial damages against us. In
the event of a successful claim of infringement against us, we may be required
to pay damages and obtain one or more licenses from third parties, or be
prohibited from making, using or selling certain methods and/or products. We may
not be able to obtain these licenses at a reasonable cost, or at all. In that
event, we could encounter delays in product introductions while we attempt to
develop alternative methods or products. Defense of any lawsuit or failure to
obtain any of these licenses on favorable terms could prevent us from
commercializing products, and the prohibition of sale of any of our products
could materially affect our ability to grow and to attain
profitability.


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Our
proprietary intellectual property rights may not adequately protect our products
and technologies.





Although
we have filed a number of United States and international patent applications,
we have no issued patents covering our products or technologies. Our commercial
success will depend in part on obtaining and maintaining patent protection and
trade secret protection for our products and technologies. We may only be able
to protect products and technologies from unauthorized use by third parties to
the extent that valid and enforceable patents or trade secrets cover them.
Furthermore, the degree of future protection of our proprietary rights is
uncertain because legal means afford only limited protection and may not
adequately protect our rights or permit us to gain or keep a competitive
advantage.





The
patent positions of life sciences companies can be highly uncertain and involve
complex legal and factual questions for which important legal principles remain
unresolved. No consistent policy regarding the breadth of claims allowed in such
companies’ patents has emerged to date in the United States. The laws of some
countries other than the United States do not protect intellectual property
rights to the same extent as the laws of the United States, and many companies
have encountered significant problems in protecting and defending such rights in
foreign jurisdictions. The legal systems of certain countries, particularly
certain developing countries, do not favor the enforcement of patents and other
intellectual property protection, particularly those relating to biotechnology
and/or pharmaceuticals, which could make it difficult for us to stop the
infringement of any patents we may obtain in such countries. Proceedings to
enforce our patent rights in foreign jurisdictions could result in substantial
cost and divert our efforts and attention from other aspects of our business.
Changes in either the patent laws or in interpretations of patent laws in the
United States or other countries may diminish the value of our intellectual
property. Accordingly, we cannot predict the breadth of claims that may be
allowed or enforced in our patents or in third-party patents. For
example:





·
            we
      might not have been the first to conceive or reduce to practice one or
      more inventions disclosed in our pending patent
    applications;





·
            we
      might not have been the first to file patent applications for these
      inventions;





·
            others
      may independently develop similar or alternative products and technologies
      or duplicate any of our products and
  technologies;





·
            it
      is possible that none of our pending patent applications will result in
      issued patents, and even if they issue as patents, they may not provide a
      basis for commercially viable products, and/or may not provide us with any
      competitive advantages, or may be challenged and invalidated by third
      parties;





·
            we
      may not develop additional proprietary products and technologies that are
      patentable; and





·
            third-party
      patents may have an adverse effect on our ability to continue to grow our
      business.








We have
applied, and continue to apply, for patents covering our intellectual property
(e.g., products and technologies and uses thereof), as we deem appropriate.
However, we may fail to apply for patents on products and/or technologies in a
timely fashion or at all.





We also
rely on trade secrets to protect our technology, especially where we do not
believe patent protection is appropriate or obtainable. However, trade secrets
are difficult to protect. While we attempt to use reasonable efforts to protect
our trade secrets, our employees, consultants, contractors, or scientific and
other advisors may unintentionally or willfully disclose our information to
competitors. If we were to attempt to enforce a claim that a third-party had
illegally obtained and was using our trade secrets, it could be expensive and
time consuming, and the outcome could be unpredictable. In addition, courts
outside the United States are sometimes less willing to protect trade secrets
than courts inside the United States. Moreover, if our competitors independently
develop equivalent knowledge, methods and know-how, it may be difficult for us
to enforce our intellectual property and our business could be
harmed.


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If we are
not able to defend the patent or trade secret protection position of our
products and technologies, then we may not be able to exclude competitors from
developing or marketing competing products, and we may not generate enough
revenue from product sales to justify the cost of development of our products
and to achieve or maintain profitability.





We
may be unable to protect the intellectual property rights of the third parties
from whom we license certain of our intellectual property or with whom we have
entered into other strategic relationships, which could negatively impact our
competitive advantage.





Certain
of our intellectual property rights are currently licensed from third parties
and, in the future, we intend to continue to license intellectual property from
key strategic partners. We are, and will continue to be, reliant upon such third
parties to protect their intellectual property rights to any licensed
technology. Such third parties may not protect the intellectual property rights
that we license from them and we may be unable defend such intellectual property
rights on our own or we may have to undertake costly litigation to defend the
intellectual property rights of such third parties. There can be no assurances
that we will continue to have proprietary rights to any of the intellectual
property that we license from such third parties or otherwise have the right to
use through similar strategic relationships. Any loss or limitations on use with
respect to our right to use such intellectual property licensed from third
parties or otherwise obtained from third parties or with whom we have entered
into strategic relationships could negatively impact our competitive
advantage.





We
expect intense competition in our target markets, which could render our
products and/or technologies obsolete, result in significant price reductions or
substantially limit the volume of products that we sell. This would limit our
ability to compete and achieve and maintain profitability. If we cannot
continuously develop and commercialize new products, our revenue may not grow as
intended.





Future
competition will likely come from existing competitors as well as other
companies seeking to develop new technologies for analyzing genetic information.
Some of our competitors have various products and/or methodologies for gene
detection, expression, characterization, and/or analyses that may be competitive
with our products and/or methodologies. In addition, pharmaceutical and
biotechnology companies have significant needs for genomic information and may
choose to develop or acquire competing technologies to meet these needs. In the
molecular diagnostics field, competition will likely come from established
diagnostic companies, companies developing and marketing DNA probe tests for
genetic and other diseases and other companies conducting research on new
technologies to ascertain and analyze genetic information. Further, in the event
that we develop new technology and products that compete with existing
technology and products of well-established companies, there can be no guarantee
that the marketplace will readily adopt any such new technology and products
that we may introduce in the future.





The
market for genetic research and molecular diagnostic products is highly
competitive, with several large companies already having significant market
share. Established genetic research and diagnostic companies also have an
installed base of instruments in several markets, including clinical and
reference laboratories. In addition, these companies have formed alliances with
genomics companies which provide them access to genetic information that may be
incorporated into their diagnostic tests. We may not be able to compete
effectively with these companies.





Our
manufacturing capacity may limit our ability to sell our products.





We are in
the process of developing the capacity to meet our anticipated demand for our
products. There are uncertainties inherent in expanding our manufacturing
capabilities and we may not be able to increase our capacity in a timely manner.
For example, manufacturing and product quality issues may arise as we increase
production rates at our manufacturing facility and launch new products. As a
result, we may experience difficulties in meeting customer demand, in which case
we could lose customers or be required to delay new product introductions, and
demand for our products could decline. Due to the intricate nature of
manufacturing products, we may encounter similar or previously unknown
manufacturing difficulties in the future that could significantly reduce
production yields, impact our ability to launch or sell these products, or to
produce them economically, prevent us from achieving expected performance levels
or cause us to set prices that hinder wide adoption by
customers.


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If
we are unable to develop and maintain our manufacturing capability, we may not
be able to launch or support our products in a timely manner, or at
all.





We
currently possess only one facility capable of manufacturing our products and
services for both sale to our customers and internal use. If a natural disaster
were to significantly damage our facility or if other events were to cause our
operations to fail, these events could prevent us from developing and
manufacturing our products and services. If our networks or storage
infrastructure were to fail for an extended period of time, it would adversely
impact our ability to manufacture our products on a timely basis and may prevent
us from achieving our expected shipments in any given period.





We
may be adversely affected by environmental, health and safety laws, regulations
and liabilities.





As we
pursue our business plan, we will become subject to a variety of federal, state
and municipal environmental, health and safety laws based on our use of
hazardous materials in both our manufacturing and research and development
operations. These laws and regulations can often require expensive compliance
procedures or operational changes to limit actual or potential impacts to the
environment. A violation of these laws and regulations can result in substantial
fines, criminal sanctions and/or operational shutdown. Furthermore, we may
become liable for the investigation and cleanup of environmental contamination,
whether intentional or unintentional, and we could be responsible for damages
related to the clean-up of such contamination or individual injury caused by
such contamination. We may also be subject to related claims by private parties
alleging property damage and personal injury due to exposure to hazardous or
other materials as a result of such contamination. Some of these matters may
require expending significant amounts for investigation, cleanup or other costs.
Events such as these could negatively impact our financial
position.





Our
sales, marketing and technical support organization may limit our ability to
sell our products.





We
currently have limited resources available for sales and marketing and technical
support services as compared to some of our primary competitors. In order to
effectively commercialize our gene expression systems and other products to
follow, we will need to expand our sales, marketing and technical support staff
both domestically and internationally. We may not be successful in establishing
or maintaining either a direct sales force or distribution arrangements to
market our products and services. In addition, we compete primarily with much
larger companies that have larger sales and distribution staffs and a
significant installed base of products in place, and the efforts from a limited
sales and marketing force may not be sufficient to build the market acceptance
of our products required to support continued growth of our
business.





We
may be exposed to liability due to product defects.





The risk
of product liability claims is inherent in the testing, manufacturing, marketing
and sale of research products for therapeutic and diagnostic development. We may
seek to acquire additional insurance for clinical liability risks. We may not be
able to obtain such insurance or general product liability insurance on
acceptable terms or in sufficient amounts. A product liability claim or recall
could negatively impact our financial position.





Risks
Related to Our Industry





Our
success depends upon the continued emergence and growth of markets for analysis
of genetic variation and biological function.





We design
our products primarily for applications in the life sciences and pharmaceutical
industries. The usefulness of our technology depends in part upon the
availability of genetic data and its usefulness in identifying or treating
disease. We are initially focusing on markets for analysis of genetic variation
and biological function, namely gene expression profiling. This market is new
and emerging, and may not develop as quickly as we anticipate, or reach its full
potential. Other methods of analysis of genetic variation and biological
function may emerge and displace the methods we are developing. Also,
researchers may not seek or be able to convert raw genetic data into medically
valuable information through the analysis of genetic variation and biological
function. In addition, factors affecting research and development spending
generally, such as changes in the regulatory environment affecting life sciences
and pharmaceutical companies, and changes in government programs that provide
funding to companies and research institutions, could harm our business. If
useful genetic data is not available or if our target markets do not develop in
a timely manner, demand for our products may grow at a slower rate than we
expect, and we may not be able to achieve or sustain
profitability.


15
 Table of Contents


We
may not be able to deliver acceptable products to our customers due to the
rapidly evolving nature of genetic sequence information upon which our products
are based.





The
genetic sequence information upon which we may rely to develop and manufacture
our products is contained in a variety of public and private databases
throughout the world. These databases are rapidly expanding and evolving. In
addition, the accuracy of such databases and resulting genetic research is
dependent on various scientific interpretations, and it is not expected that
global genetic research efforts will result in standardized genetic sequence
databases for particular genomes in the near future. Although we have
implemented ongoing internal quality control efforts to help ensure the quality
and accuracy of our products, the fundamental nature of our products requires us
to rely on genetic sequence databases and scientific interpretations which are
continuously evolving. As a result, these variables may cause us to develop and
manufacture products that incorporate sequence errors or ambiguities. The
magnitude and importance of these errors depends on multiple and complex factors
that would be considered in determining the appropriate actions required to
remedy any inaccuracies. Our inability to timely deliver acceptable products as
a result of these factors would likely adversely affect our relationship with
customers, and could negatively impact our financial condition.





We
face risks associated with technological obsolescence and emergence of
standardized systems for genetic analysis.





High
throughput genetic analyses and quantitative detection methodologies (including,
for example, PCR) is undergoing rapid evolution and technological changes. New
technologies, techniques or products could emerge which might allow the
packaging and analysis of genomic information at densities similar to, or even
higher than, our existing or future technology. Other companies may begin to
offer products that are directly competitive with, or are technologically
superior to, our products. There can be no assurance that we will be able to
maintain our technological advantages over emerging technologies in the future.
Over time, we will need to respond to technological innovation in a rapidly
changing industry. Standardization of tools and systems for genetic research is
still ongoing and there can be no assurance that our products will emerge as the
standard for genetic research. The emergence of competing technologies and
systems as market standards for genetic research may result in our products
becoming uncompetitive which would have an adverse effect on our business and
prospects.





Our
success depends on the continuous development of new products and our ability to
manage the transition from our older products to new products.





We
compete in markets that are new, intensely competitive, highly fragmented and
rapidly changing, and many of our current and potential competitors have
significantly greater financial, technical, marketing and other resources than
we do. In addition, many current and potential competitors have greater name
recognition, more extensive customer bases and access to proprietary genetic
content. The continued success of our products will depend on our ability to
produce products with smaller feature sizes and create greater information
capacity at our current or lower costs. The successful development, manufacture
and introduction of our new products is a complicated process and depend on our
ability to manufacture and supply enough products in sufficient quantity and
quality and at acceptable cost in order to meet customer demand. If we fail to
keep pace with emerging technologies or are unable to develop, manufacture and
introduce new products, we will become uncompetitive, our pricing and margins
will decline, and our business will suffer.





Our
failure to successfully manage the transition between our older products and new
products may adversely affect our financial results. As we introduce new or
enhanced products, we must successfully manage the transition from older
products to minimize disruption in customers’ ordering patterns, avoid excessive
levels of older product inventories and provide sufficient supplies of new
products to meet customer demands. When we introduce new or enhanced products,
we face numerous risks relating to product transitions, including the inability
to accurately forecast demand and difficulties in managing different sales and
support requirements due to the type or complexity of the new
products.


16
 Table of Contents


Ethical,
legal and social concerns surrounding the use of genetic information could
reduce demand for our products.





Genetic
testing has raised ethical issues regarding privacy and the appropriate uses of
the resulting information. For these reasons, governmental authorities and
others may call for limits on or regulation of the use of genetic testing or
prohibit testing for genetic predisposition to certain conditions, particularly
for those that have no known cure. Similarly, such concerns may lead individuals
to refuse to use genetics tests even if permissible. Any of these scenarios
could reduce the potential markets for our products.





Risks
Related to Our Organization





Even
though we are not a California corporation, our common stock could still be
subject to a number of key provisions of the California General Corporation
Law.





Under
Section 2115 of the California General Corporation Law (CGCL), corporations not
organized under California law may still be subject to a number of key
provisions of the CGCL. This determination is based on whether the corporation
has significant business contacts with California and if more than 50% of its
voting securities are held of record by persons having addresses in California.
In the immediate future, we will continue our business and operations and a
majority of our business operations, revenue and payroll will be conducted in,
derived from, and paid to residents of California. Therefore, depending on our
ownership, we could be subject to some provisions of the CGCL. Among the more
important provisions are those relating to the election and removal of
directors, cumulative voting, standards of liability and indemnification of
directors, distributions, dividends and repurchases of shares, stockholder
meetings, approval of some corporate transactions, dissenters’ and appraisal
rights, and inspection of corporate records. If we are required to comply with
these provisions, this compliance could cause us to incur additional
administrative and legal expenses and divert our management’s time and attention
from the operation of our business.





Because
WaferGen has become public by means of a reverse merger, we may not be able to
attract the attention of major brokerage firms.





There may
be risks associated with WaferGen’s becoming a public company through a “reverse
merger.” Securities analysts of major brokerage firms may not provide coverage
of us since there is no incentive to brokerage firms to recommend the purchase
of our common stock. No assurance can be given that brokerage firms will, in the
future, want to conduct any secondary offerings on our behalf. Also, if
securities analysts do not cover our common stock, the lack of research coverage
may adversely affect its market price.





Risks
Related to Our Common Stock





Our
common stock has a limited bid history and prospective investors may not be able
to resell their shares at their purchase price, if at all.





Our
common stock is currently available for trading in the over-the-counter market
and is quoted on the OTC Bulletin Board under the symbol “WGBS.OB.” Prior to the
closing of the Merger, there was no bid history for our common stock and there
is no assurance that a regular trading market will develop or, if developed,
will be sustained. This may severely limit the liquidity of our common stock,
and may likely have a material adverse effect on the market price of our common
stock and on our ability to raise additional capital.


17
 Table of Contents


The
market price of the common stock has fluctuated significantly since it was first
quoted on the OTC Bulletin Board on June 6, 2007. Since this date, through
December 14, 2007, the price has fluctuated from a low of $1.06 to a high of
$2.60. The price of our common stock may continue to fluctuate significantly in
response to factors, some of which are beyond our control, including the
following:





·
            actual
      or anticipated variations in operating
results;





·
            the
      limited number of holders of the common stock, and the limited liquidity
      available through the OTC Bulletin
Board;





·
            changes
      in financial estimates by securities
analysts;





·
            changes
      in the economic performance and/or market valuations of other
      biotechnology companies;





·
            our
      announcement of significant acquisitions, strategic partnerships, joint
      ventures or capital commitments;





·
            additions
      or departures of key personnel; and





·
            sales
      or other transactions involving our capital
  stock.





Our
common stock may be considered “penny stock” and may be difficult to
sell.





The SEC
has adopted regulations which generally define “penny stock” to be an equity
security that has a market price of less than $5.00 per share or an exercise
price of less than $5.00 per share, subject to specific exemptions. The market
price of our common stock is currently less than $5.00 per share and therefore
is designated as a “penny
stock” according to SEC rules. This designation requires any broker or
dealer selling these securities to disclose some information concerning the
transaction, obtain a written agreement from the purchaser and determine that
the purchaser is reasonably suitable to purchase the securities. These rules may
restrict the ability of brokers or dealers to sell the common stock and may
affect the ability of investors to sell their shares. These regulations may
likely have the effect of limiting the trading activity of our common stock and
reducing the liquidity of an investment in our common stock. In addition, since
the common stock is currently traded on the OTC Bulletin Board, investors may
find it difficult to obtain accurate quotations of the common stock and may
experience a lack of buyers to purchase our stock or a lack of market makers to
support the stock price.





Stockholders
may experience dilution of their ownership interests because of the future
issuance of additional shares of our common stock and our preferred
stock.





In the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present
stockholders. We are authorized to issue an aggregate of 310,000,000 shares of
capital stock consisting of 300,000,000 shares of common stock, par value $0.001
per share, of which 23,217,846 shares were issued and outstanding as of December
31, 2007, and 10,000,000 shares of “blank check” preferred
stock, par value $0.001 per share, of which no shares are issued and
outstanding. The preferred stock will have preferences and rights as may be
determined by our board of directors at the time of issuance. Specifically, our
board of directors has the authority to issue preferred stock without further
stockholder approval. As a result, our board of directors could authorize the
issuance of a series of preferred stock that would grant to holders the
preferred right to our assets upon liquidation, the right to receive dividend
payments before dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium, prior to the
redemption of common stock. In addition, our board of directors could authorize
the issuance of a series of preferred stock that has greater voting power than
our common stock or that is convertible into common stock, which could decrease
the relative voting power of the common stock or result in dilution to our
existing stockholders. In addition, as of December 31, 2007, we have outstanding
options to purchase an aggregate of 2,268,736 shares of our common stock and
warrants to purchase an aggregate of 3,031,901 shares of our common stock. The
future exercise of these options and warrants will subject our existing
stockholders to experience dilution of their ownership interests. We may also
issue additional shares of common stock or other securities that are convertible
into or exercisable for common stock in connection with hiring or retaining
employees, future acquisitions, future sales of our securities for capital
raising purposes, or for other business purposes. The future issuance of any
additional shares of our common stock may create downward pressure on the
trading price of our common stock. There can be no assurance that we will not be
required to issue additional shares, warrants or other convertible securities in
the future in conjunction with any capital raising efforts, including at a price
(or exercise prices) below the price at which shares of our common stock are
then traded.


18
 Table of Contents


Our principal stockholders willhave significant voting power and
may take actions that may not be in the best interests of other
stockholders.





Our
officers, directors, principal stockholders and their affiliates control
approximately 41% of our outstanding common stock. If these stockholders act
together, they will be able to exert significant control over our management and
affairs requiring stockholder approval, including approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might adversely affect the market
price of our common stock. This concentration of ownership may not be in the
best interests of all our stockholders.





Stockholders
should not anticipate receiving cash dividends on our stock.





We have
never declared or paid any cash dividends or distributions on our capital stock.
We currently intend to retain future earnings to support operations and to
finance expansion and therefore do not anticipate paying any cash dividends on
our common stock in the foreseeable future.





Item
      2.
              Description
      of Property





Our
principal administrative and laboratory facility totals approximately 11,222
square feet and is located in Fremont, California. We currently lease such
facilities for $11,222 per month, which increases during the term of the lease.
The term of the lease expires on March 31, 2010.





Our
existing facility is not yet being used at full capacity and management believes
that this facility is adequate and suitable for current and anticipated
needs.





Item
      3.
              Legal
      Proceedings





From time
to time we may be involved in claims arising in the ordinary course of business.
To our knowledge, no legal proceedings, government actions, administrative
actions, investigations or claims are currently pending against us or involve us
that, in the opinion of our management, could reasonably be expected to have a
material adverse effect on our business and financial condition.





We
anticipate that we will expend significant financial and managerial resources to
the defense of our intellectual property rights in the future if we believe that
our rights have been infringed. We also anticipate that we will expend
significant financial and managerial resources to defend against claims that our
products and services infringe upon the intellectual property rights of third
parties.





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





None.


19
 Table of Contents


PART
II








Item
      5.
              Marketfor Common Equity, Related Stockholder Matters and Small
      Business Issuer Purchases of Equity
Securities





Trading Information





Our
common stock is currently quoted on the OTC Bulletin Board maintained by the
NASD under the symbol WGBS.OB. As soon as practicable, and assuming we satisfy
all necessary initial listing requirements, we intend to apply to have our
common stock listed for trading on the American Stock Exchange or The Nasdaq
Stock Market, although we cannot be certain that any of these applications will
be approved.





The
transfer agent for our common stock is ContinentalStock Transfer and Trust
Company at 17 Battery Place, New York, New York 10004.





HIGH
            
            
            LOWFiscal
      Year ended December 31, 2007Fourth
      Quarter
            
            $
            2.28
            
            
            $
            1.21Third
      Quarter
            
            $
            2.40
            
            
            $
            1.55Second
      Quarter
            
            $
            2.40
            
            
            $
            1.65








There are
no historical prices available prior to the merger with WaferGen in May 31,
2007.





As of
March 25, 2008, there were approximately 102 owners of record of our common
stock.





Trades in
our common stock may be subject to Rule 15g-9 of the Exchange Act, which imposes
requirements on broker/dealers who sell securities subject to the rule to
persons other than established customers and accredited investors. For
transactions covered by the rule, broker/dealers must make a special suitability
determination for purchasers of the securities and receive the purchaser’s
written agreement to the transaction before the sale.





The SEC
also has rules that regulate broker/dealer practices in connection with
transactions in “penny stocks.” Penny stocks generally are equity securities
with a price of less than $5.00 (other than securities listed on some national
exchanges, provided that the current price and volume information with respect
to transactions in that security is provided by the applicable exchange or
system). The penny stock rules require a broker/dealer, before effecting a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the SEC that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker/dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker/dealer
and its salesperson in the transaction, and monthly account statements showing
the market value of each penny stock held in the customer’s account. The bid and
offer quotations, and the broker/dealer and salesperson compensation
information, must be given to the customer orally or in writing before effecting
the transaction, and must be given to the customer in writing before or with the
customer’s confirmation. These disclosure requirements may have the effect of
reducing the level of trading activity in the secondary market for shares of
common stock.





Dividend
Policy




We have
never declared or paid dividends on shares of our common stock. We intend to
retain future earnings, if any, to support the development of our business and
therefore do not anticipate paying cash dividends for the foreseeable future.
Payment of future dividends, if any, will be at the discretion of our board of
directors after taking into account various factors, including current financial
condition, operating results and current and anticipated cash
needs.


20
 Table of Contents


We
consider our common stock to be thinly traded and any reported sale prices may
not be a true market-based valuation of our common stock. On December 31, 2007
the closing price of our common stock, as reported on the OTC was
$2.00.





Recent
Sales of Unregistered Securities





Sales
by WaferGen





On
January 1, 2007, WaferGen borrowed $162,000 from Alnoor Shivji in exchange
for two promissory notes. On January 30, 2007, Alnoor Shivji and WaferGen
entered into a Note and Warrant Purchase Agreement, pursuant to which
Mr. Shivji was granted the right purchase up to $300,000 of promissory
notes and warrants to purchase up to 98,684 shares of WaferGen’s common stock,
subject to adjustment. Pursuant to this Agreement, on January 30, 2007, Mr.
Shivji purchased three promissory notes in the aggregate principal amount of
$262,000, by converting his earlier loans for $162,000 and advancing $100,000 in
new funds to WaferGen, and three warrants to purchase an aggregate of 86,182
shares of WaferGen’s Series B Preferred Stock at a purchase price of $0.76 per
share until the earlier of (i) five years from the date of grant or (ii) the
date WaferGen closes its initial public offering. The notes issued to
Mr. Shivji bore interest at the rate of 7% per annum and was paid in full
on June 30, 2007.





On
February 28, 2007, Mr. Shivji and WaferGen amended the terms of the Note
and Warrant Purchase Agreement to allow for the purchase by Mr. Shivji of
up to $400,000 of promissory notes and warrants to purchase up to 131,579 shares
of WaferGen’s common stock, subject to adjustment. In connection with this
amendment, on February 28, 2007, Mr. Shivji purchased an additional
promissory note in the principal amount of $138,000 and a five-year warrant to
purchase an additional 45,397 shares of WaferGen’s Series B Preferred Stock at a
purchase price of $0.76 per share. The note issued to Mr. Shivji bore
interest at the rate of 7% per annum and was paid in full on June 30,
2007.





On March
30, 2007, Mr. Shivji and WaferGen amended the terms of the Note and Warrant
Purchase Agreement to allow for the purchase by Mr. Shivji of up to
$650,000 of promissory notes and warrants to purchase up to 213,816 shares of
WaferGen’s common stock, subject to adjustment. In connection with this
amendment, on March 30, 2007, Mr. Shivji purchased an additional promissory
note in the principal amount of $250,000 and a five-year warrant to purchase an
additional 82,237 shares of WaferGen’s Series B Preferred Stock at a purchase
price of $0.76 per share. The note issued to Mr. Shivji bore interest at
the rate of 7% per annum and was paid in full on June 30, 2007.





On May
14, 2007, Mr. Shivji made an additional loan to WaferGen in the amount of
$100,000. There were no warrants issued in connection with this loan. The note
issued to Mr. Shivji bore interest at the rate of 7% per annum and was paid
in full on June 30, 2007. Mr. Shivji is an accredited investor as defined
under Regulation D, Rule 501(a) promulgated by the SEC.





The
transactions described above were not registered under the Securities Act, or
the securities laws of any state, and were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) and Regulation D (Rule 506)
under the Securities Act and corresponding provisions of state securities laws,
which exempt transactions by an issuer not involving any public offering. None
of the securities were sold through an underwriter and accordingly, there were
no underwriting discounts or commissions involved.


21
 Table of Contents


Sales by WBSI





As of May
31, 2007, WBSI accepted subscriptions for a total of 7,178,444.33 units in a
private placement, consisting of an aggregate of 7,178,447 shares of WBSI’s
common stock and five-year warrants to purchase an aggregate of an additional
2,153,533 shares of WBSI’s common stock at an exercise price of $2.25 per share,
at $1.50 per unit, pursuant to the terms of a Confidential Private Placement
Memorandum, dated April 16, 2007. We received gross proceeds from such closing
of the private placement of $10,767,666.50 (which includes $240,000 of
outstanding indebtedness converted into units).





The
private placement was made solely to “accredited investors,” as that term is
defined in Regulation D under the Securities Act. The units and the common stock
sold in the private placement were not registered under the Securities Act, or
the securities laws of any state, and were offered and sold in reliance on the
exemption from registration afforded by Section 4(2) and Regulation D (Rule 506)
under the Securities Act and corresponding provisions of state securities laws,
which exempt transactions by an issuer not involving any public
offering.





Net
proceeds received from the private placement were to be used for research and
development, sales and marketing, an investor relations program and repayment of
debt and for working capital and other general corporate purposes.





Rodman
& Renshaw, LLC acted as the placement agent in the private placement (the
“Placement Agent”). In connection with the closing of the private placement on
May 31, 2007, the Company paid the Placement Agent: (i) a cash fee of
$683,736.66 (equal to 7% of the aggregate purchase price paid by each purchaser
of units in the private placement, other than up to $1,000,000 of units
purchased by existing stockholders of WaferGen and units issued upon the
conversion of outstanding indebtedness), (ii) five-year warrants to purchase
455,825 shares of our common stock (equal to 7% of the number of shares of our
common stock on which the cash fee is payable for units sold in the private
placement), at an exercise price of $2.25 per share, with mandatory registration
rights covering the shares of common stock underlying the warrants, and (iii)
reimbursement for all reasonable out of pocket expenses incurred in connection
with the engagement, including, but not limited to, the reasonable expenses of
counsel.





See
Exhibits 10.21(1) and 10.22(1) attached hereto for a description of WBSI
securities issued in connection with the Merger. The issuance of the securities
in the Merger was not registered under the Securities Act, or the securities
laws of any state, and were offered and sold in reliance on the exemption from
registration afforded by Section 4(2) and Regulation D (Rule 506) under the
Securities Act and corresponding provisions of state securities laws, which
exempt transactions by an issuer not involving any public offering.






Item
      6.
              Management’s Discussion and Analysis or Plan of
      Operations





This
discussion should be read in conjunction with the other sections of this Report,
including Item 1 and Item 7 and the related exhibits. The various sections of
this discussion contain a number of forward-looking statements, all of which are
based on our current expectations and could be affected by the uncertainties and
risk factors described throughout this Current Report on Form 10-KSB. See
“Cautionary Factors That May Affect Future Results.” Our actual results may
differ materially.


22
 Table of Contents


Company
Overview





WaferGen
was incorporated in Delaware on October 22, 2002. WaferGen is engaged in the
development, manufacture and sale of systems for gene expression, genotyping and
stem-cell research for the life sciences, pharmaceutical drug discovery and
biomarker discovery and diagnostic products industries. WaferGen’s products are
aimed at professionals who perform genetic analysis and cell biology, primarily
at pharmaceutical and biotech companies, academic and private research centers
and diagnostics companies involved in biomarker research. Through the SmartChipTM
System and SmartSlideTM System products, WaferGen plans to provide new
performance standards with significant savings of time and cost for
professionals in the field of gene expression research and to facilitate
biomarker discovery, toxicology and clinical research.





WaferGen’s
revenue is subject to fluctuations due to the timing of sales of high-value
products and service projects, the impact of seasonal spending patterns, the
timing and size of research projects its customers perform, changes in overall
spending levels in the life science industry and other unpredictable factors
that may affect customer ordering patterns. Any significant delays in the
commercial launch or any lack or delay of commercial acceptance of new products,
unfavorable sales trends in existing product lines, or impacts from the other
factors mentioned above, could adversely affect WaferGen’s revenue growth or
cause a sequential decline in quarterly revenue. Due to the possibility of
fluctuations in WaferGen’s revenue and net income or loss, WaferGen believes
that quarterly comparisons of its operating results are not a good indication of
future performance.





Since
inception, WaferGen has incurred substantial operating losses. As of December
31, 2007, WaferGen’s accumulated deficit was $11,952,907 and the total
stockholders’ equity was $4,598,240. Losses have principally occurred as a
result of the substantial resources required for the research, development, and
manufacturing scale-up effort required to commercialize WaferGen’s initial
products and services. WaferGen expects to continue to incur substantial costs
for research, development, and manufacturing scale-up activities over the next
several years. WaferGen will also need to increase its selling, general and
administrative costs as it builds up its sales and marketing infrastructure to
expand and support the sale of systems, other products, and
services.





Results
of Operations





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006





The
following table presents selected items in our condensed consolidated statements
of operations for the years ended December 31, 2007 and 2006,
respectively:





December
      31,2007
            
            
            2006Revenues
            
            $
            228,973
            
            
            $
            50,495Cost
      of sales
            
            
            79,116
            
            
            
            14,750Gross
      margin
            
            
            149,857
            
            
            
            35,745Operating
      expenses:Sales
      and marketing
            
            
            848,818
            
            
            
            152,405Research
      and development
            
            
            2,429,273
            
            
            
            1,624,237General
      and administrative
            
            
            2,802,938
            
            
            
            945,554Total
      operating expenses
            
            
            6,081,029
            
            
            
            2,722,196Operating
      loss
            
            
            (5,931,172
            )
            
            
            (2,686,451
            )Total
      Other income and (expenses):Interest
      income
            
            
            163,047
            
            
            
            —Interest
      expense
            
            
            (189,539
            )
            
            
            —Total
      Other income and (expenses)
            
            
            (26,492
            )
            
            
            —Net
      loss before provision for income taxes
            
            
            (5,957,664
            )
            
            
            (2,686,451
            )Provision
      for income taxes
            
            
            —
            
            
            
            —Net
      loss
            
            $
            (5,957,664
            )
            
            $
            (2,686,451
            )


23
 Table of Contents


The
following tables represent selected items in our condensed consolidated
statements of operations for the years ended December 31, 2007 and
2006:





Revenues





The
following table represents our revenue for the years ended December 31, 2007 and
2006:





December
      31,2007
            
            
            2006
            
            
            %
      Change$
            228,973
            
            
            $
            50,495
            
            
            
            353.5
            %





Revenues
for the year ended December 31, 2007 increased by $ 178,478. In 2007, WaferGen
began selling its SmartSlide products with a new team of sales personal,
allowing it to generate minimal revenues for the first time since
inception.





Costs
of Sales





The
following table represents our cost for the years ended December 31, 2007 and
2006:





December
      31,2007
            
            
            2006
            
            
            %
      Change$
            79,116
            
            
            $
            14,750
            
            
            
            436.4
            %





Cost of
sales includes the cost of product paid to third party vendors.  For
the year ended December 31, 2007, cost of sales increased by $64,366. The
increase is related to the increased sales during the year ended December 31,
2007.





Sales
and Marketing Expenses





The
following table represents our sales and marketing expense for the years ended
December 31, 2007 and 2006:





December
      31,2007
            
            
            2006
            
            
            %
      Change$
            848,818
            
            
            $
            152,405
            
            
            
            456.9
            %





Sales and
marketing expenses consist primarily of compensation cost of our sales and
marketing team and cost associated with various marketing programs. For the year
ended December 31, 2007, sales and marketing expenses increased $696,413. The
increase resulted primarily due to an increase head count resulting in greater
salaries and wages.  We expect our sales and marketing expenses to
increase in absolute dollars as we expand our staff to develop our sales and
marketing infrastructure, and incur additional costs to support the growth in
our business.





Research
and Development Expenses





The
following table represents our research and development expenses for the years
ended December 31, 2007 and 2006:





December
      31,2007
            
            
            2006
            
            
            %
      Change$
            2,429,273
            
            
            $
            1,624,237
            
            
            
            49.6
            %


24
 Table of Contents


Research
and development expenses consist primarily of salaries and personnel-related
expenses, laboratory supplies and other expenses related to the design,
development, testing and enhancement of our product. We expense our research and
development expenses as they incur.  We expect our research and
development expenses to increase in absolute dollars as we expand our product
base.





For the
year ended December 31, 2007, research and development expenses increased
$805,036.  The increase resulted primarily from an increased head
count resulting in greater salaries and wages, an increase in research and
development supplies used for product development and testing, our move to a new
facility with more lab equipment, and an increase in stock-based compensation
associated with the issuance of stock options.





General
and Administrative Expenses





The
following table represents our general and administrative expenses for the year
ended December 31, 2007 and 2006:





December
      31,2007
            
            
            2006
            
            
            %
      Change$
            2,802,938
            
            
            $
            945,554
            
            
            
            196.4
            %





Our
general and administrative expenses consist primarily of personnel costs for
finance, human resources, business development and general management, as well
as professional fees, such as expenses for legal and accounting services. We
expect our general and administrative expenses to increase in absolute dollars
as we expand our staff, develop our infrastructure and incur additional costs to
support the growth in our business.





For the
year ended December 31, 2007, general and administrative expenses increased
$1,857,384. The increase resulted primarily from an increased head count
resulting in greater salaries and wages, an increase in stock-based compensation
associated with the issuance of restricted common stock and stock options, legal
and professional fees related to the filing of a registration statement and
other documents to comply with regulations related to the Merger.





Interest
Income





The
following table represents our interest income for the year ended December 31,
2007 and 2006:





December
      31,2007
            
            
            2006
            
            
            %
      Change$
            163,047
            
            
            $
            —
            
            
            
            N/A
            %





The
increase in interest income was a result of excess cash being invested in
interest-bearing vehicles during the year ending December 31, 2007.





Interest
Expense





The
following table represents our interest expense for the year ended December 31,
2007 and 2006:





December
      31,2007
            
            
            2006
            
            
            %
      Change$
            189,539
            
            
            $
            —
            
            
            
            N/A
            %





Interest
expenses consist of $171,053 of amortization associated with the debt discount
and $18,486 of interest expense.


25
 Table of Contents


Liquidity
and Capital Resources





As of
December 31, 2007, WaferGen had cash of $5,189,858. WaferGen has historically
met its liquidity requirements through borrowings and through the sale of equity
securities. As of December 31, 2007, WaferGen had working capital of
$4,296,516.





Borrowings.From inception
through December 31, 2007, WaferGen raised a total of $3,665,991 from the
issuance of notes payable to related and unrelated parties. WaferGen issued
notes that totaled $688,412 for the twelve months ended December 31, 2007 and
$1,497,520 and $1,480,059 in 2004 and 2005, respectively. All of these notes
issued in 2004 and 2005, together with accrued but unpaid interest of $107,494,
were converted into Series A Preferred Stock in 2005.





Sales of Equity Securities.From inception through December 31, 2007, WaferGen has raised a total of
$1,137 from the sale of 6,420,000 shares of its Common Stock. From inception to
March 31, 2007, WaferGen has raised a total of $1,559,942 from the sale of
2,052,552 shares of Series B Preferred Stock.





Sales of Notes and Warrants.On January 1, 2007, WaferGen borrowed $162,000 from Alnoor Shivji in
exchange for two promissory notes. On January 30, 2007, Mr. Shivji and
WaferGen entered into a Note and Warrant Purchase Agreement, pursuant to which
WaferGen agreed to sell to Mr. Shivji (i) up to $300,000 of 7% promissory
notes and (ii) warrants to purchase up to 98,684 shares of Series B Preferred
Stock at $0.76 per share. On January 30, 2007, Mr. Shivji purchased
$262,000 of promissory notes under this Note and Warrant Purchase Agreement by
converting his earlier loans of $162,000 and advancing an additional $100,000 of
additional funds to WaferGen.





On
February 28, 2007, Mr. Shivji agreed to increase the aggregate amount
available under the Note and Warrant Purchase Agreement from $300,000 to
$400,000 and WaferGen agreed to increase the number of shares of Series B
Preferred Stock that may be purchased pursuant to the warrants issued to
Mr. Shivji from 98,684 to 131,579. In connection with this amendment to the
Note and Warrant Purchase Agreement, Mr. Shivji advanced an additional
$100,000 to WaferGen.





On March
30, 2007, Mr. Shivji agreed to increase the aggregate amount available
under the Note and Warrant Purchase Agreement from $400,000 to $650,000 and
WaferGen agreed to increase the number of shares of Series B Preferred Stock
that may be purchased pursuant to the warrants issued to Mr. Shivji from
131,579 to 213,816 shares. In connection with this amendment to the Note and
Warrant Purchase Agreement, Mr. Shivji advanced an additional $250,000 to
WaferGen.





On
February 7, 2007, Mr. Shivji exercised his warrants to purchase 471,698
shares of Series A Preferred Stock in exchange for $66,037.





Net Cash Used in Operating
Activities.WaferGen experienced negative cash flow from operating
activities for the year ended December 31, 2007 in the amounts of $4,737,175.
The cash used in operating activities in the year ended December 31, 2007 was
due to cash used to fund a net operating loss of $5,078,975, adjusted for
non-cash expenses related to depreciation and amortization, stock-based
compensation, and miscellaneous income, as off-set by cash provided from a
change in working capital of $341,800.





Net Cash Used in Investing
Activities.WaferGen use cash of $256,223 to acquire property and
equipment.





Net Cash Provided By Financing
Activities.WaferGen’s financing activities provided $10,147,098 of cash
for the year ended December 31, 2007. Cash provided by financing activities, was
primarily due to the issuance of Common Stock in the amount of $9,921,531 the
issuance of $688,412 of notes payable, and $66,037 of Series A Preferred Stock
off-set by the repayment on note payable of $510,000 and repayment of capital
lease for $18,882.





In
connection with the Merger, we sold a total of 8,008,445 shares of our Common
Stock for gross proceeds of $12,012,668 through the private placement in May
2007. In addition, these investors received five-year warrants to purchase an
additional 2,402,533 shares of our Common Stock at an exercise price of $2.25
per share. In connection with the Private Placement, we incurred placement agent
fees totaling $837,205, and issued five-year warrants to purchase an additional
455,825 shares of our Common Stock at an exercise price of $2.25 per share to
the Placement Agent. In addition, we incurred other professional fees and
expenses totaling approximately $1,080,000 in connection with the
Merger.


26
 Table of Contents


We expect
that the net proceeds could fund our operations for a period of approximately
nine months. Our operating needs include the planned costs to operate our
business, including amounts required to fund working capital and capital
expenditures. At the present time, we have no material commitments for capital
expenditures. However, our future capital requirements and the adequacy of our
available funds will depend on many factors, including, our ability to
successfully commercialize our SmartChipTM and SmartSlideTM products, competing
technological and market developments and the need to enter into collaborations
with other companies or acquire other companies or technologies to enhance or
complement our product and service offerings.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, result of operations, liquidity, capital
expenditures or capital resources that is material to stockholders.





Critical
Accounting Policies and Estimates





Deferred Tax Valuation Allowance.We believe sufficient uncertainties exist regarding the future
realization of deferred tax assets, and, accordingly, a full valuation allowance
is required, amounting to $5,056,326 at December 31, 2007. In subsequent
periods, if and when we generate pre-tax income, a tax expense will not be
recorded to the extent that the remaining valuation allowance can be used to
offset that expense. Once a consistent pattern of pre-tax income is established
or other events occur that indicate that the deferred tax assets will be
realized, additional portions or all of the remaining valuation allowance will
be reversed back to income. Should we generate pre-tax losses in subsequent
periods, a tax benefit will not be recorded and the valuation allowance will be
increased.





Stock-Based Compensation.We
measure the fair value of all stock-based awards, including stock options, on
the grant date and record the fair value of these awards as compensation expense
over the service period. The fair value is estimated using the Black-Scholes
valuation model.





The
weighted-average fair value was $0.51 for the year ended December 31, 2007 and
$1.23 for the year ended December 31, 2006. Amounts expensed were $648,988 and
$642,076 for the year ended December 31, 2007 and 2006, and $1,300,881 for the
period from inception to December 31, 2007.





The fair
value of each option grant has been estimated using the following
assumptions:





December
      31,
              2007
            
            
            December
      31,
              2006Risk
      Free Interest rate
            
            
            4.26%-4.85
            %
            
            
            4.57%-5.07
            %Expected
      Lives
            
            5
      Years
            
            
            5
      YearsExpected
      Volatility
            
            
            19%-21
            %
            
            
            21
            %Dividend
      Yields
            
            
            0
            %
            
            
            0
            %








Risk-Free Interest Rate. This
is the United States treasury rate for the day of the grant having a term
approximating the expected life of the option. An increase in the risk-free
interest rate will increase the fair value and the related compensation
expense.





Expected Life. This is the
period of time over which the award is expected to remain outstanding and is
based on management’s estimate, taking into consideration vesting term,
contractual term, and historical lives. An increase in the expected life will
increase the fair value and the related compensation expense.





Expected Volatility. This is
a measure of the amount by which the stock price has fluctuated or is expected
to fluctuate. The average daily price volatility of the Small Cap Medical
Equipment Index was used for the period corresponding to the expected life. An
increase in the expected volatility life will increase the fair value and the
related compensation expense.





Dividend Yield. We have not
made any dividend payments nor do we have plans to pay dividends in the
foreseeable future. An increase in the dividend yield will decrease the fair
value and the related compensation expense.


27
 Table of Contents


Contractual
Obligations





On April
23, 2007, we entered into a First Amendment to Lease, effective as of May 1,
2007, which amended our existing lease for approximately 11,222 square feet of
space in an office building located in Fremont, California. The leased space
serves as our only corporate office. The amendment extended the termination date
of the lease from December 31, 2007 to March 31, 2010. In addition, it increased
the basic annual rent (as defined in the lease), commencing April 31, 2007, to
$8,417 until December 31, 2007 with an increase to $11,222 until February 28,
2009, and a final increase to $11,905 until March 31, 2010.





Recently
Issued Accounting Pronouncements





In June
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (“FIN 48”), which is an interpretation of FAS No. 109, “Accounting
for Income Taxes” (“FAS 109”). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements in accordance
with FAS 109 and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 did not have a
significant effect on the Company’s financial statements.





In March
2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial
Assets-An Amendment of FASB Statement No. 140” (“FAS 156”). FAS 156 requires
that all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. The statement permits, but
does not require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. FAS 156 is effective as of the beginning of the first
fiscal year that begins after September 15, 2006, with earlier adoption
permitted. The adoption of FAS 156 did not have an effect on the Company’s
financial statements.





In
September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS
157”). FAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements. FAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company does not believe that the adoption of FAS 157
will have a significant effect on its financial statements.





In
September 2006, the SEC released SAB 108 “Considering the effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 addresses the process of quantifying financial
statement misstatements, such as addressing both the carryover and reversing
effects of prior year misstatements on the current year financial statements.
SAB 108 became effective for our fiscal year ended December 31, 2006. The
adoption of this statement had no impact on our financial position or results of
operations.





In
February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" (“FAS 159”). FAS 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of FAS No. 159 on its financial position and results of operations and have not
yet elected this fair value option for any assets or
liabilities.


28
 Table of Contents


In December, 2007, the FASB issued Statement 141R, “Business
Combinations” (FAS 141R). FAS 141R replaces FAS 141.  FAS 141R
requires the acquirer of a business to recognize and measure the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree at fair value.  FAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  The effective date for the Company will be January 1,
2009.  We have not yet determined the impact of SFAS 141R related to
future acquisitions, if any, on our consolidated financial
statements.





In
February 2008, the FASB issued FASB Staff Position No. 140-3 Accounting for
Transfers of Financial Assets and Repurchase Transactions (FSP 140-3). This
position provides guidance on accounting for a transfer of a financial asset and
a repurchase financing. This statement will become effective for the Company as
of January 1, 2009, and is not expected to result in additional disclosures nor
expected to have a material effect on the Company’s results of operations or
financial condition.





In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13. This staff position amends
FASB Statement No. 157, Fair Value Measurements, to exclude FASB Statement No.
13, Accounting for Leases, and other accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
Statement 13. This statement is not expected to have a material effect on the
Company’s results of operations or financial condition.





Cautionary
Factors That May Affect Future Results





This Form
10-KSB and other written reports and oral statements made from time to time by
the Company may contain so-called “forward-looking statements,” all of which are
subject to risks and uncertainties. One can identify these forward-looking
statements by their use of words such as “expects,” “plans,” “will,”
“estimates,” “forecasts,” “projects” and other words of similar meaning. One can
identify them by the fact that they do not relate strictly to historical or
current facts. These statements are likely to address the Company’s growth
strategy, financial results and product and development programs. One must
carefully consider any such statement and should understand that many factors
could cause actual results to differ from the Company’s forward-looking
statements. These factors include inaccurate assumptions and a broad variety of
other risks and uncertainties, including some that are known and some that are
not. No forward-looking statement can be guaranteed and actual future results
may vary materially.





Information
regarding market and industry statistics contained in this Report is included
based on information available to the Company that it believes is accurate. It
is generally based on industry and other publications that are not produced for
purposes of securities offerings or economic analysis. The Company has not
reviewed or included data from all sources, and cannot assure investors of the
accuracy or completeness of the data included in this Report. Forecasts and
other forward-looking information obtained from these sources are subject to the
same qualifications and the additional uncertainties accompanying any estimates
of future market size, revenue and market acceptance of products and services.
The Company does not assume the obligation to update any forward-looking
statement. One should carefully evaluate such statements in light of factors
described in the Company’s filings with the SEC, especially on Forms 10-KSB,
10-QSB and 8-K. In various filings the Company has identified important factors
that could cause actual results to differ from expected or historic results. The
Company notes these factors for investors as permitted by the Private Securities
Litigation Reform Act of 1995. One should understand that it is not possible to
predict or identify all such factors. Consequently, the reader should not
consider any such list to be a complete list of all potential risks or
uncertainties.





Item
      7.
              Financial Statements and Supplementary
  Data





The
following financial statements are filed as a part of this report:





·
            Report
      of Independent Registered Public Accounting
  Firms





·
            Consolidated
      Financial Statements





·
            Balance
      Sheet





·
            Statements
      of Operations





·
            Consolidated
      Statements of Series B Preferred Stock and Stockholders’ Equity
      (Deficit)





·
            Consolidated
      Statements of Cash Flows





·
            Notes
      to the Consolidated Financial
Statements


29
 Table of Contents


Report
of Independent Registered Public Accounting Firm








The Board
of Directors and Stockholders of


WaferGen
Bio-systems, Inc.:





We have
audited the accompanying consolidated balance sheet of WaferGen Bio-systems,
Inc. (a development stage company) (the "Company") as of December 31,
2007, and the related consolidated statements of operations, Series B preferred
stock and stockholders’ equity (deficit), and cash flows for each of the years
in the two year period ended December 31, 2007 and for the period from October
22, 2002 (inception) to December 31, 2007. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
has determined that it is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis of
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial positions of the Company, as of December
31, 2007, and the results of their operations and their cash flows for each of
the years in the two year period ended December 31, 2007 and from October 22,
2002 (inception) to December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company has incurred net losses since its inception
and has experienced liquidity problems. Those conditions raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans
in regarding to those matters are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.








/s/
Rowbotham & Company LLP





San
Francisco, California


March 28,
2008


30
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Consolidated
Balance Sheet








December
      31,2007AssetsCurrent
      assets:Cash
      and cash equivalents
                
                $
                5,189,858Accounts
      receivables
                
                
                139,827Inventories
                
                
                62,521Prepaid
      expenses and other current assets
                
                
                87,487Total
      current assets
                
                
                5,479,693Property
      and equipment, net
                
                
                321,159Other
      assets
                
                
                54,016Total
      assets
                
                $
                5,854,868Liabilities, Series B
      Preferred Stock, and Stockholders’ Equity
      (Deficit)Current
      liabilities:Accounts
      payable
                
                $
                560,641Accrued
      rent
                
                
                19,340Accrued
      payroll
                
                
                414,519Accrued
      vacation
                
                
                156,234Current
      portion of capital lease obligations
                
                
                32,443Total
      current liabilities
                
                
                1,183,177Capital
      lease obligations, net of current portion
                
                
                73,451Commitment
      and contingencies
                
                
                —Stockholders’
      equity (deficit):Preferred
      Stock, $0.001 par value; 10,000,000 shares authorized; no shares issued
      and outstanding
                
                
                —Common
      Stock: $0.001 par value; 300,000,000 shares authorized; 23,217,846 shares
      issued and outstanding at December 31, 2007
                
                
                23,218Additional
      paid-in capital
                
                
                16,527,929Accumulated
      deficit
                
                
                (11,952,907Total
      stockholders’ equity (deficit)
                
                
                4,598,240Total
      liabilities, Series B Preferred Stock, and stockholders’ equity
      (deficit)
                
                $
                5,854,868





The
accompany notes are an integral part of these consolidated financial
statements.


31
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Consolidated
Statements of Operations





Period
      From October 22,Year
      ended
            
            
            2002
      (Inception) toDecember
      31,
            
            
            December
      31,2007
            
            
            2006
            
            
            2007Revenues
            
            $
            228,973
            
            
            $
            50,495
            
            
            $
            294,268Cost
      of sales
            
            
            79,116
            
            
            
            14,750
            
            
            
            100,866Gross
      margin
            
            
            149,857
            
            
            
            35,745
            
            
            
            193,402Operating
      expenses:Sales
      and marketing
            
            
            848,818
            
            
            
            152,405
            
            
            
            1,001,223Research
      and development
            
            
            2,429,273
            
            
            
            1,624,237
            
            
            
            6,068,128General
      and administrative
            
            
            2,802,938
            
            
            
            945,554
            
            
            
            4,786,974Total
      operating expenses
            
            
            6,081,029
            
            
            
            2,722,196
            
            
            
            11,856,325Operating
      loss
            
            
            (5,931,172
            )
            
            
            (2,686,451
            )
            
            
            (11,662,923
            )Other
      income and (expenses):Interest
      income
            
            
            163,047
            
            
            
            —
            
            
            
            163,047Interest
      expense
            
            
            (189,539
            )
            
            
            —
            
            
            
            (297,033
            )Total
      other income and (expenses)
            
            
            (26,492
            )
            
            
            —
            
            
            
            (133,986
            )Net
      loss before provision for income taxes
            
            
            (5,957,664
            )
            
            
            (2,686,451
            )
            
            
            (11,796,909
            )Provision
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            
            (5,957,664
            )
            
            
            (2,686,451
            )
            
            
            (11,796,909
            )Accretion
      on Series B Preferred Stock
            
            
            (51,998
            )
            
            
            (104,000
            )
            
            
            (155,998
            )Net
      loss applicable to common stockholders
            
            $
            (6,009,662
            )
            
            $
            (2,790,451
            )
            
            $
            (11,952,907
            )Net
      loss per share - basic and diluted
            
            $
            (0.40
            )
            
            $
            (0.81
            )Shares
      used to compute net loss per share - basic and
    diluted
            
            $
            15,119,255
            
            
            $
            3,448,260





The
accompany notes are an integral part of these consolidated financial
statements.


32
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Consolidated
Statements of Series B Preferred Stock and Stockholders’ Equity
(Deficit)





Series
      B
            
            
            Series
      A
            
            
            
            
            
            AdditionalPreferred
      Stock
            
            
            Preferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances
      as of October 22, 2002
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Balances
      as of December 31, 2002
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —








Series
      B
            
            
            Series
      A
            
            
            
            
            
            AdditionalPreferred
      Stock
            
            
            Preferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances
      as of January 1, 2003
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (533,985
            )
            
            
            (533,985
            )Balances
      as of December 31, 2003
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (533,985
            )
            
            $
            (533,985
            )








Series
      B
            
            
            Series
      A
            
            
            
            
            
            
            
            
            AdditionalPreferred
      Stock
            
            
            Preferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances
      as of January 1, 2004
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (533,985
            )
            
            $
            (533,985
            )Issuance
      of Common Stock in June for cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,483,610
            
            
            
            2,484
            
            
            
            (2,024
            )
            
            
            —
            
            
            
            460Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,242
            
            
            
            —
            
            
            
            1,242Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,124,360
            )
            
            
            (1,124,360
            )Balances
      as of December 31, 2004
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            2,483,610
            
            
            $
            2,484
            
            
            $
            (782
            )
            
            $
            (1,658,345
            )
            
            $
            (1,656,643
            )





The
accompany notes are an integral part of these consolidated financial
statements.


33
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Consolidated
Statements of Series B Preferred Stock and Stockholders’ Equity
(Deficit)





Series
      B
            
            
            Series
      A
            
            
            
            
            
            AdditionalPreferred
      Stock
            
            
            Preferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances
      as of January 1, 2005
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            2,483,610
            
            
            $
            2,484
            
            
            $
            (782
            )
            
            $
            (1,658,345
            )
            
            $
            (1,656,643
            )Issuance
      of Series A Preferred Stock in February upon conversion of notes payable
      and accrued interest
            
            
            —
            
            
            
            —
            
            
            
            5,915,219
            
            
            
            592
            
            
            
            —
            
            
            
            —
            
            
            
            3,134,481
            
            
            
            —
            
            
            
            3,135,073Issuance
      of Common Stock in September for cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            917,856
            
            
            
            918
            
            
            
            (748
            )
            
            
            —
            
            
            
            170Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,575
            
            
            
            —
            
            
            
            8,575Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,494,449
            )
            
            
            (1,494,449
            )Balances
      as of December 31, 2005
            
            
            —
            
            
            $
            —
            
            
            
            5,915,219
            
            
            $
            592
            
            
            
            3,401,466
            
            
            $
            3,402
            
            
            $
            3,141,526
            
            
            $
            (3,152,794
            )
            
            $
            (7,274
            )


34
 Table of Contents




WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)
 
 Consolidated
Statements of Series B Preferred Stock and Stockholders’ Equity
(Deficit)


Series
      B
            
            
            Series
      A
            
            
            
            
            
            
            
            
            AdditionalPreferred
      Stock
            
            
            Preferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances
      as January 1, 2006
            
            
            —
            
            
            $
            —
            
            
            
            5,915,219
            
            
            $
            592
            
            
            
            3,401,466
            
            
            $
            3,402
            
            
            $
            3,141,526
            
            
            $
            (3,152,794
            )
            
            $
            (7,274
            )Issuance
      of Common Stock in January for cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,049
            
            
            
            4
            
            
            
            (3
            )
            
            
            —
            
            
            
            1Issuance
      of Series B Preferred Stock in February for cash
            
            
            2,052,552
            
            
            
            1,559,942
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Issuance
      of restricted shares in March for services
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            24,296
            
            
            
            24
            
            
            
            (24
            )
            
            
            —
            
            
            
            —Issuance
      of Common Stock in June for cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,099
            
            
            
            8
            
            
            
            (7
            )
            
            
            —
            
            
            
            1Issuance
      of restricted shares in July for services
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            10,798
            
            
            
            11
            
            
            
            (11
            )
            
            
            —
            
            
            
            —Issuance
      of restricted shares in August for services
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            16,197
            
            
            
            16
            
            
            
            (16
            )
            
            
            —
            
            
            
            —Issuance
      of Common Stock in August for cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            17,007
            
            
            
            17
            
            
            
            (14
            )
            
            
            —
            
            
            
            3Accretions
      on Series B Preferred Stock
            
            
            —
            
            
            
            104,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (104,000
            )
            
            
            (104,000
            )Issuance
      of restricted shares in November for services
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,399
            
            
            
            5
            
            
            
            (5
            )
            
            
            —
            
            
            
            —Issuance
      of Common Stock in November for cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,639
            
            
            
            9
            
            
            
            (7
            )
            
            
            —
            
            
            
            2Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            642,076
            
            
            
            —
            
            
            
            642,076Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (2,686,451
            )
            
            
            (2,686,451
            )Balances
      as of December 31, 2006
            
            
            2,052,552
            
            
            $
            1,663,942
            
            
            
            5,915,219
            
            
            $
            592
            
            
            
            3,495,950
            
            
            $
            3,496
            
            
            $
            3,783,515
            
            
            $
            (5,943,245
            )
            
            $
            (2,155,642
            )





The
accompany notes are an integral part of these consolidated financial
statements.


35
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Consolidated
Statements of Series B Preferred Stock and Stockholders’ Equity
(Deficit)





Series
      B
            
            
            Series
      A
            
            
            
            
            
            AdditionalPreferred
      Stock
            
            
            Preferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            AccumulatedShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            TotalBalances
      as January 1, 2007
            
            
            2,052,552
            
            
            $
            1,663,942
            
            
            
            5,915,219
            
            
            $
            592
            
            
            
            3,495,950
            
            
            $
            3,496
            
            
            $
            3,783,515
            
            
            $
            (5,943,245
            )
            
            $
            (2,155,642
            )Issuance
      of Common Stock in January for cash
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            26,996
            
            
            
            27
            
            
            
            473
            
            
            
            —
            
            
            
            500Issuance
      of restricted shares in January for services
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            134,979
            
            
            
            135
            
            
            
            (135
            )
            
            
            —
            
            
            
            —Issuance
      of Series A Preferred Stock in February for cash
            
            
            —
            
            
            
            —
            
            
            
            471,698
            
            
            
            47
            
            
            
            —
            
            
            
            —
            
            
            
            65,990
            
            
            
            —
            
            
            
            66,037Issuance
      of WaferGen Bio-systems, Inc. Common Stock to Wafergen, Inc.;'s Preferred
      shareholders in May
            
            
            (2,052,552
            )
            
            
            (1,715,940
            )
            
            
            (6,386,917
            )
            
            
            (639
            )
            
            
            4,556,598
            
            
            
            4,557
            
            
            
            1,712,022
            
            
            
            —
            
            
            
            1,715,940Issuance
      of Units for cash and notes payable in May and June, net of offering costs
      of $1,917,956
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,008,448
            
            
            
            8,008
            
            
            
            10,086,704
            
            
            
            —
            
            
            
            10,094,712WaferGen
      Bio-systems, Inc. shares outstanding
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            11,277,782
            
            
            
            11,278
            
            
            
            (11,278
            )
            
            
            —
            
            
            
            —Common
      Stock cancelled in May in accordance with Split-Off
      Agreement
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (4,277,778
            )
            
            
            (4,278
            )
            
            
            4,278
            
            
            
            —
            
            
            
            —Issuance
      of warrants in May and June to a placement agent
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            66,319
            
            
            
            —
            
            
            
            66,319Issuance
      of warrants with debt in January, February, and
March
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            171,053
            
            
            
            —
            
            
            
            171,053Stock-based
      compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            648,988
            
            
            
            —
            
            
            
            648,988Accretions
      on Series B Preferred Stock
            
            
            —
            
            
            
            51,998
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (51,998
            )
            
            
            (51,998
            )Common
      Stock cancelled in July
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,129
            )
            
            
            (5
            )
            
            
            —
            
            
            
            —
            
            
            
            (5
            )Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (5,957,664
            )
            
            
            (5,957,664
            )Balance
      as of December 31, 2007
            
            
            —
            
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            23,217,846
            
            
            $
            23,218
            
            
            $
            16,527,929
            
            
            $
            (11,952,907
            )
            
            $
            4,598,240





The
accompany notes are an integral part of these consolidated financial
statements.


36
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Consolidated
Statements of Cash Flows





Period
      FromOctober
      22, 2002Year
      ended
            
            
            (Inception)
      toDecember
      31,
            
            
            December
      31,2007
            
            
            2006
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (5,957,664
            )
            
            $
            (2,686,451
            )
            
            $
            (11,796,909
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            58,653
            
            
            
            23,581
            
            
            
            126,299Non
      cash miscellaneous income
            
            
            (5
            )
            
            
            —
            
            
            
            (5
            )Stock-based
      compensation
            
            
            648,988
            
            
            
            642,076
            
            
            
            1,300,881Issuance
      of Series A Preferred Stock for legal services
            
            
            —
            
            
            
            —
            
            
            
            50,000Issuance
      of Series A Preferred Stock for interest owed
            
            
            —
            
            
            
            —
            
            
            
            107,494Amortization
      of debt discount
            
            
            171,053
            
            
            
            —
            
            
            
            171,053Change
      in operating assets and liabilities:Accounts
      receivable
            
            
            (105,398
            )
            
            
            (34,429
            )
            
            
            (139,827
            )Inventories
            
            
            (62,521
            )
            
            
            —
            
            
            
            (62,521
            )Prepaid
      expenses and other current assets
            
            
            (76,431
            )
            
            
            2,384
            
            
            
            (87,487
            )Other
      assets
            
            
            —
            
            
            
            —
            
            
            
            (2,570
            )Accounts
      payable
            
            
            167,453
            
            
            
            145,198
            
            
            
            560,641Accrued
      rent
            
            
            19,340
            
            
            
            —
            
            
            
            19,340Accrued
      payroll
            
            
            264,519
            
            
            
            150,000
            
            
            
            414,519Accrued
      vacation
            
            
            134,838
            
            
            
            2,488
            
            
            
            156,234Net
      cash used in operating activities
            
            
            (4,737,175
            )
            
            
            (1,755,153
            )
            
            
            (9,182,858
            )Cash
      flows from investing activities:Deposit
      on Equipment of property and equipment
            
            
            (51,446
            )
            
            
            —
            
            
            
            (51,446
            )Purchase
      of property and equipment
            
            
            (204,777
            )
            
            
            —
            
            
            
            (322,682
            )Net
      cash used in investing activities
            
            
            (256,223
            )
            
            
            —
            
            
            
            (374,128
            )Cash
      flows from financing activities:Advances
      from (repayments to) related party, net
            
            
            —
            
            
            
            37,519
            
            
            
            61,588Repayment
      of capital lease obligations
            
            
            (18,882
            )
            
            
            —
            
            
            
            (18,882
            )Proceeds
      from issuance of notes payable
            
            
            688,412
            
            
            
            —
            
            
            
            3,665,991Repayments
      on notes payable
            
            
            (510,000
            )
            
            
            —
            
            
            
            (510,000
            )Proceeds
      from issuance of Series A Preferred Stock
            
            
            66,037
            
            
            
            —
            
            
            
            66,037Proceeds
      from issuance of Series B Preferred Stock
            
            
            —
            
            
            
            1,559,942
            
            
            
            1,559,942Proceeds
      from issuance of Common Stock, net of offering costs
            
            
            9,921,531
            
            
            
            7
            
            
            
            9,922,168Net
      cash provided by financing activities
            
            
            10,147,098
            
            
            
            1,597,468
            
            
            
            14,746,844Net
      increase in cash
            
            
            5,153,700
            
            
            
            (157,685
            )
            
            
            5,189,858Cash
      and cash equivalents at beginning of the period
            
            
            36,158
            
            
            
            193,843
            
            
            
            —Cash
      and cash equivalents at end of the period
            
            $
            5,189,858
            
            
            $
            36,158
            
            
            $
            5,189,858





The
accompany notes are an integral part of these consolidated financial
statements.


37
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








NOTE
      1.
            The
      Company





Wafergen, Inc. wasincorporated in the State of Delaware on October 22, 2002. Scuttlebutt
Yachts, Inc. was incorporated in the state of Nevada on August 4, 2005. On June
20, 2006 the name was changed to La Burbuja Cafe', Inc. On January 1, 2007 the
name was changed to WaferGen Bio-systems,
Inc.





Merger.





On May
31, 2007, Wafergen, Inc. was acquired by WaferGen Bio-systems, Inc. In the
transactions, Wafergen, Inc. merged with a subsidiary of WaferGen Bio-systems,
Inc. and became a wholly-owned subsidiary of WaferGen Bio-systems, Inc. (the
“Merger”). The officers and board members of WaferGen Bio-systems, Inc. resigned
and were replaced by officers of Wafergen, Inc. along with newly elected board
members.





Concurrent
with the closing of the Merger, WaferGen Bio-systems, Inc. consummated a private
offering (the “Offering”) of 7,178,444 units of its securities (the “Units”), at
a purchase price of $1.50 per Unit, consisting of an aggregate of 7,178,447
shares of Common Stock and warrants to purchase an aggregate of an additional
2,153,533 share of Common Stock for a period of five years at an exercise price
of $2.25 per share (the “Investor Warrants”), which Investor Warrants are
callable by the Company under certain circumstances.





On June
12, 2007, WaferGen Bio-systems, Inc. sold an additional 830,000 Units consisting
of an aggregate of 830,001 shares of Common Stock and warrants to purchase an
aggregate of 249,000 shares of Common Stock.





Wafergen,
Inc. issued notes payable to a stockholder, our Chief Executive Officer, in the
aggregate amount of $750,000. Rather than accepting cash consideration for Units
acquired by the same individual, the Company agreed to issue at the first
closing 160,000 Units at a rate of one Unit for each $1.50 of debt in
consideration of his cancellation of $240,000 of existing notes
payable.





A summary
is as follows:





Gross
      proceeds from initial offering
            
            $
            10,767,668Gross
      proceeds from additional offering
            
            
            1,245,000Gross
      proceeds
            
            
            12,012,668Offering
      costs:Paid
            
            
            (1,851,637
            )Issuance
      of warrants to placement agent
            
            
            (66,319
            )Total
      offering costs
            
            
            (1,917,956
            )Gross
      proceeds less offering costs
            
            
            10,094,712Issuance
      of warrants to placement agent
            
            
            66,319Cancellation
      of debt
            
            
            (240,000
            )Net
      proceeds
            
            $
            9,921,031





We have
filed, within 120 days of the initial closing date of the offering, a
registration statement (the “Registration Statement”) registering for resale (i)
the shares of Common Stock included in the units sold in the offering, (ii) the
shares of Common Stock underlying the warrants  included in the units
sold and (iii) the shares of Common Stock underlying the warrants issued to the
Placement Agent in connection with the offering, consistent with the terms and
provisions of the Registration Rights Agreement from the offering, which became
effective on January18, 2008.


38
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








The
exercise price and number of shares of our common stock issuable on exercise of
the warrants may be adjusted in certain circumstances, including in the event of
a stock dividend, or our recapitalization, reorganization, merge or
consolidation. These warrants also provide the holders with weighted-average
anti-dilution price protection.





The
warrants, at the option of the holder, may be exercised by cash payment of the
exercise price or by “cashless exercise.” A “cashless exercise” means that in
lieu of paying the aggregate purchase price for the share being purchased upon
exercise of the warrants in cash, the holder will forfeit a number of shares
underlying the warrants with a “fair market value” equal to such aggregate
exercise price. WaferGen Bio-systems, Inc. will not receive additional proceeds
to the extent that warrants are exercised by cashless exercise.





Contemporaneously
with the closing of the Merger, WaferGen Bio-systems, Inc. executed a Split-Off
Agreement with certain shareholders whereby all the assets and liabilities of
WaferGen Bio-systems, Inc. just prior to the Merger were exchanged for 4,277,778
shares of common stock of WaferGen Bio-systems, Inc. In addition, Wafergen, Inc.
Series A Preferred Stock, Series B Preferred Stock, and Common Stock was
converted into Common Stock of WaferGen Bio-systems, Inc. based on an exchange
ratio of .53991522 for 1.





A summary
of the Common Stock outstanding of WaferGen Bio-systems, Inc. subsequent to the
above is as follows:





WaferGen
      Bio-systems, Inc. shares outstanding prior to the
    Merger
            
            
            11,277,782Shares
      issued to Wafergen, Inc. shareholders
            
            
            8,214,523Shares
      issued in the Offering
            
            
            8,008,448Shares
      cancelled in accordance with the Split-off Agreement
            
            
            (4,277,778
            )Total
      shares outstanding
            
            
            23,222,975





WaferGen
Bio-systems, Inc. also assumed all outstanding Wafergen, Inc.’s stock options
and warrants with proportionate adjustments to the number of underlying shares
and exercise prices based on an exchange ratio of .53991522 for 1.





The
transaction between WaferGen Bio-systems, Inc. and Wafergen, Inc. has been
treated as a reverse merger and recapitalization of Wafergen, Inc. for reporting
purposes. Wafergen, Inc. is the acquirer for accounting purposes. WaferGen
Bio-systems, Inc. is the issuer. The historical financial statements for periods
prior to the acquisition become those of the acquirer. In a recapitalization,
historical stockholders' equity of the acquirer prior to the merger is
retroactively restated for the equivalent number of shares received in the
merger after giving effect to any difference in par value of the issuer's and
acquirer's stock with an offset to additional paid-in capital. Accumulated
deficit of the acquirer is carried forward after the acquisition. Operations
prior to the merger are those of the accounting acquirer. Earnings per share for
the periods prior to the merger are restated to reflect the equivalent number of
shares outstanding.





WaferGen
Bio-systems, Inc. and subsidiaries (the “Company”) is engaged in the
development, manufacture and sales of systems for gene expression, genotyping
and stem cell research for the life sciences, pharmaceutical drug discovery and
biomarker discovery and diagnostic products industries. The Company’s products
are aimed at professionals who perform genetic analysis and cell biology,
primarily at pharmaceutical and biotech companies, academic and private research
centers, and diagnostics companies involved in biomarker research. Through the
SmartChipTM and SmartSlideTM products, the Company plans to provide new
performance standards with significant savings of time and cost for
professionals in the field of gene expression research facilitating biomarker
discovery, toxicology, and clinical research.


39
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








Management’s
Plan.The Company has incurred operating losses and negative
cash flows from operations since its inception. Management expects that revenues
will increase as a result of current and future product releases. However, the
Company also expects to incur additional expenses for the development and
expansion of its products, marketing campaigns, and operating costs as it
expands its operations. Therefore, the Company expects operating losses and
negative cash flows to continue for the foreseeable future and anticipates that
losses will increase from current levels as the Company continues to grow and
develop. It is management’s plan to obtain additional working capital through
additional financings. The Company believes that it will be successful in
expanding operations, gaining market share, and raising additional funds.
However, there can be no assurance that in the event the Company requires
additional financing, such financing will be available at terms which are
favorable, or at all. Failure to generate sufficient cash flows from operations
or raise additional capital could have a material adverse effect on the
Company's ability to achieve its intended business objectives. These factors
raise substantial doubt about the Company’s ability to continue as a going
concern.





Going Concern.The
Company's consolidated financial statements have been presented on a basis that
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company continues to face significant risks
associated with the successful execution of its strategy given the current
market environment for similar companies and failure to generate sufficient
revenues or raise additional capital could have a material adverse effect on the
Company’s ability to continue as a going concern and to achieve its intended
business objectives. These facts raise substantial doubt about the Company’s
ability to continue as a going concern, and there can be no assurance that the
Company will be successful in its efforts to enhance its liquidity situation.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.








NOTE
      2.
            Summary
      of Significant Accounting Policies





Bases of
Presentation.The accompanying
consolidated financial statements have been prepared in accordance with
accounting principals generally accepted in the United States of
America.





Principles of
Consolidation. The consolidated financial statements include the
financial statements of WaferGen Bio-systems, Inc. and its wholly-owned
subsidiaries. All significant transactions and balances between the WaferGen
Bio-systems, Inc. and its subsidiaries have been eliminated in
consolidation.





Use of
Estimates.Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, and expenses.
Actual results and outcomes could differ from these estimates and
assumptions.





Fair Value of
Financial Instruments. The carrying amounts of cash, accounts receivable,
prepaid expenses and other current assets, other assets, accounts payable,
accrued payroll, accrued vacation, and due to related party approximate fair
value due to the short-term maturities of these instruments.





Concentration of
Credit Risk.Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and accounts receivable. The Company
places its cash in a commercial bank. Accounts at the commercial bank at times
exceed $100,000. Accounts are secured by the Federal Deposit Insurance
Corporation up to $100,000.





The
Company generally requires no collateral from its customers. At December 31,
2007, three customers accounted for 32%, 32%, and 15% of accounts receivable.
For the year ended December 31, 2007, three customers accounted for 20%, 20% and
11%  of total revenues. For the year ended December 31, 2006, three
customers accounted for 70%, 20%, and 10%.





Accounts
Receivable. An allowance for doubtful accounts will be recorded based on
a combination of historical experience, aging analysis, and information on
specific accounts. Account balances will be written off against the allowance
after all means of collection have been exhausted and the potential for recovery
is considered remote. The Company has not recorded an allowance against its
receivables based on management's estimate that the balance at December 31, 2007
is fully collectible.


40
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








Inventory. Inventory is recorded at
the lower of cost (first-in, first-out) or market value. Additionally, the
Company evaluates its inventory in terms of excess and obsolete exposures.
Inventory cost includes the cost of the product the Company paid to third party
vendors.





Prepaid
Expenses. Prepaid expenses are advance payment for products or services
that will be used in operations and expensed based on usage, events, or the
passing of time.





Property and
Equipment.Property
and equipment are stated at cost and depreciated using the straight-line method
over the estimated useful lives of the assets, generally three years. Costs of
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed as incurred. Upon retirement or sale, the cost
and related accumulated depreciation are removed from the balance sheet and the
resulting gain or loss is reflected in operating expenses.





Impairment of
Long-Lived Assets.The
Company continually evaluates whether events and circumstances have occurred
that indicate the remaining estimated useful life of long-lived assets may
warrant revision or that the remaining balance of long-lived assets may not be
recoverable. When factors indicate that long-lived assets should be evaluated
for possible impairment, the Company uses an estimate of the related
undiscounted future cash flows over the remaining life of the long-lived assets
in measuring whether they are recoverable. If the estimated undiscounted future
cash flows exceed the carrying value of the asset, a loss is recorded as the
excess of the assets carrying value over its fair value. No assets were
determined to be impaired in 2007.





Income
Taxes.Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the tax consequences attributable to
differences between financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and operating loss carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance is recorded
for loss carry-forwards and other deferred tax assets where it is more likely
than not that such loss carry-forwards and deferred tax assets will not be
realized.





Revenue
Recognition.The
Company recognizes revenue based on the recognition criteria set forth in the
SEC’s Staff Accounting Bulletin 104, “Revenues Recognition”,which
is when delivery of product has occurred or services have been rendered and
there is persuasive evidence of a sale arrangement, selling prices are fixed or
determinable, and collectability from the customer is reasonable assured.
Revenue from the sale of product is recognized when title passes to the
customer. Sales are recorded net of estimated cash discount.





Expense
Recognition.Expenses are charged to
expense as incurred.





Stock-Based
Compensation. The Company measures the fair value of all stock-based
awards, including stock options, on the grant date and records the fair value of
these awards to compensation expense over the service period. The fair value is
estimated using the Black-Scholes valuation model.


41
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








The fair
value of each option grant has been estimated using the following
assumptions:





December
      31,
            
            
            December
      31,2007
            
            
            2006Weighted-average
      grant date fair value
            
            $
            0.51
            
            
            $
            1.23Risk
      free interest rate
            
            
            4.26%-4.85
            %
            
            
            4.57%-5.07
            %Expected
      lives
            
            5
      Years
            
            
            5
      YearsExpected
      volatility
            
            
            19%-21
            %
            
            
            21
            %Dividend
      yields
            
            
            0
            %
            
            
            0
            %





Amounts
expensed were $648,988 and $642,076 for the years ended December 31, 2007 and
2006 and $1,300,881 for the period from inception to December 31,
2007.





Risk-free Interest Rate. This
is the U.S treasury rate for the day of the grant having a term approximating
the expected life of the option. An increase in the risk-free interest rate will
increase the fair value and the related compensation expense.





Expected Life. This is the
period of time over which the award is expected to remain outstanding and is
based on management’s estimate, taking into consideration vesting term,
contractual term, and historical lives. An increase in the expected life will
increase the fair value and the related compensation expense.





Expected Volatility. This is
a measure of the amount by which the stock price has fluctuated or is expected
to fluctuate. The average daily price volatility of the Small Cap Medical
Equipment was used for the retrospective period corresponding to the expected
life. An increase in the expected volatility life will increase the fair value
and the related compensation expense.





Dividend Yield. The Company
has not made any dividend payments nor does it have plans to pay dividends in
the foreseeable future. An increase in the dividend yield will decrease the fair
value and the related compensation expense.





Research and
Development.Research
and development costs are charged to operations as incurred.





Comprehensive
Loss.The
Company has no components of comprehensive income (loss) other than its net loss
and, accordingly, comprehensive loss is the same as the net loss for all periods
presented.





Net Loss Per
Share.Basic
net loss per share to common stockholders is calculated based on the
weighted-average number of shares of common stock outstanding during the period
excluding those shares that are subject to repurchase by the Company. Diluted
net loss per share attributable to common shareholders would give effect to the
dilutive effect of potential common stock consisting of stock options, warrants,
and preferred stock. Dilutive securities have been excluded from the diluted net
loss per share computations as they have an antidilutive effect due to the
Company's net loss.


42
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements





The
following outstanding stock options, warrants, and preferred stock (on an
as-converted into common stock basis) were excluded from the computation of
diluted net loss per share attributable to holders of common stock as they had
an antidilutive effect as of December 31, 2007 and 2006:





December
      31,
            
            
            December
      31,2007
            
            
            2006Options
      issuable upon exercise of common stock options
            
            
            704,952
            
            
            
            399,844Shares
      issuable upon exercise of Series A preferred stock
      option
            
            
            —
            
            
            
            229,909Shares
      issuable upon exercise of Common Stock warrants
            
            
            37,931
            
            
            
            —Shares
      issuable upon conversion of preferred stock
            
            
            2,056,606
            
            
            
            4,163,396Total
            
            
            2,799,489
            
            
            
            4,793,149





Reclassification.
Certain financial statement reclassifications have been made to the period
ending December 31, 2006 to conform to the period ending December 31,
2007.





Segments.
Segments are defined as components of the Company's business for which separate
financial information is available that is evaluated by the Company's chief
operating decision maker (its CEO) in deciding how to allocate resources and
assess performance. The Company has only one overall operating segment. All
sales have been to customers located in the United States. All long-lived assets
are within the United States.





Recent Accounting
Pronouncements.In June 2006, the FASB
issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”), which is an interpretation of FAS No. 109, “Accounting for Income
Taxes” (“FAS 109”). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FAS
109 and prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of FIN 48 did not have a
significant effect on the Company’s financial statements.





In March
2006, the FASB issued FAS No. 156, “Accounting for Servicing of Financial
Assets-An Amendment of FASB Statement No. 140” (“FAS 156”). FAS 156 requires
that all separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable. The statement permits, but
does not require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. FAS 156 is effective as of the beginning of the first
fiscal year that begins after September 15, 2006, with earlier adoption
permitted. The adoption of FAS 156 did not have an effect on the Company’s
financial statements.





In
September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS
157”). FAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure of fair value measurements. FAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
and accordingly, does not require any new fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company does not believe that the adoption of FAS 157
will have a significant effect on its financial statements.


43
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








In
September 2006, the SEC released SAB 108 “Considering the effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 addresses the process of quantifying financial
statement misstatements, such as addressing both the carryover and reversing
effects of prior year misstatements on the current year financial statements.
SAB 108 became effective for our fiscal year ended December 31, 2006. The
adoption of this statement had no impact on our financial position or results of
operations.





In
February 2007, the FASB issued FAS No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" (“FAS 159”). FAS 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. FAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently assessing the impact
of FAS No. 159 on its financial position and results of operations and have not
yet elected this fair value option for any assets or liabilities.





In
December, 2007, the FASB issued Statement 141R, “Business Combinations” (FAS
141R). FAS 141R replaces FAS 141.  FAS 141R requires the acquirer of a
business to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquiree at fair
value.  FAS 141R applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008.  The
effective date for the Company will be January 1, 2009.  We have not
yet determined the impact of SFAS 141R related to future acquisitions, if any,
on our consolidated financial statements.





In
February 2008, the FASB issued FASB Staff Position No. 140-3 Accounting for
Transfers of Financial Assets and Repurchase Transactions (FSP 140-3). This
position provides guidance on accounting for a transfer of a financial asset and
a repurchase financing. This statement will become effective for the Company as
of January 1, 2009, and is not expected to result in additional disclosures nor
expected to have a material effect on the Company’s results of operations or
financial condition.





In
February 2008, the FASB issued FASB Staff Position No. FAS 157-1, Application of
FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13. This staff position amends
FASB Statement No. 157, Fair Value Measurements, to exclude FASB Statement No.
13, Accounting for Leases, and other accounting pronouncements that address fair
value measurements for purposes of lease classification or measurement under
Statement 13. This statement is not expected to have a material effect on the
Company’s results of operations or financial condition.








NOTE
      3.
            Inventories





Inventories
consisted of the following at December 31, 2007:





December
      31,2007Finished
      goods
            
            $
            62,521Inventories
            
            $
            62,521


44
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








NOTE4.
            Property
      and Equipment





Property
and equipment consisted of the following at December 31, 2007:





December
      31,2007Equipment
            
            $
            389,255Leasehold
      improvements
            
            
            41,365Furniture
      and fixtures
            
            
            16,838Total
      property and equipment
            
            
            447,458Less
      accumulated depreciation and amortization
            
            
            (126,299
            )Property
      and equipment, net
            
            $
            321,159





Depreciation
and amortization expense totaled $58,653 and $23,381 for the year ended December
31, 2007 and 2006, and $126,299 for the period from inception to December 31,
2007.





In 2007,
the Company entered into a capital lease agreement for equipment, As of December
31, 2007, equipment includes $124,776 of equipment under capital lease and
accumulated amortization of assets under capital lease was $13,441.








NOTE
      5.
            Notes
      Payable





The
activity in the notes payable to a stockholder, our Chief Executive Officer, for
the year ended December 31, 2007 is as follow:





Due
      to related party converted into a note payable
            
            $
            61,588Cash
      received in exchange for notes payable to a
    stockholder
            
            
            688,412Total
      notes payable to a stockholder
            
            
            750,000Cancellation
      of notes payable to a stockholder in exchange for
    Units
            
            
            (240,000
            )Repayment
      of notes payable to a stockholder
            
            
            (510,000
            )Notes
      payable to a stockholder outstanding at December 31,
      2007
            
            $
            —





Interest
expense totaled $189,539 for year ended December 31, 2007, none for December 31,
2006, and $297,033 for the period from inception to December 31, 2007. Interest
expense, excluding amortization of the discount on the note payable to a
stockholder was $18,486 for the year ended December 31, 2007.





In
conjunction with the issuance of the notes payable to the stockholder, the
Company issued warrants to purchase a total of 213,816 shares, 115,442 shares
post-merger, of its Series B Preferred Stock at an exercise price of $0.76 per
share, $1.41 per share post-merger. The warrants are exercisable for a period of
five years. Utilizing the Black-Scholes valuation model and the following
assumptions: estimated volatility of 21%, a contractual life of five years, a
zero dividend rate, 4.67% risk free interest rate, and the fair value of the
Series B Preferred Stock of $1.40 per share, the Company determined the
allocated fair value of the warrants to be $171,053. This amount was recorded as
a discount on the notes payable to a stockholder and is being amortized and
charged to operations as interest expense over the maturity periods of the notes
payable to the stockholder.


45
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








NOTE
      6.
            Commitments
      and Contingencies





The
Company leases its office space for use in its operations under a noncancelable
operating lease that expires in March 2010.  The Company leases some
equipment under capital leases that expire in dates through August
2011.





Aggregate
future minimum lease obligations for certain leases in effect as of December 31,
2007 are as follows:





Operating
      Lease
            
            
            Capital
      LeasesYear
      ending December 31:2008
            
            $
            134,664
            
            
            $
            39,9042009
            
            
            141,494
            
            
            
            39,9042010
            
            
            35,715
            
            
            
            31,1612011
            
            
            —
            
            
            
            9,117Total
      minimum lease obligations
            
            $
            311,873
            
            
            
            120,086Less
      amounts representing interest
            
            
            
            
            
            
            (14,192
            )Present
      value of future minimum lease payments
            
            
            
            
            
            
            105,894Less
      current portion of capital lease obligation
            
            
            
            
            
            
            (32,433
            )Capital
      lease obligation, less current portion
            
            
            
            
            
            $
            73,461





Rent
expense totaled $138,917 and $44,200 for the years ended December 31, 2007 and
2006 and $274,125 for the period from inception to December 31,
2007.








NOTE
      7.
            Common
      and Preferred Stock





Common
Stock.Each
share of Common Stock is entitled to one vote. The holders of Common Stock are
also entitled to receive dividends whenever funds are legally available and when
and if declared by the Board of Directors, subject to the prior rights of
holders of all classes of stock outstanding. Since inception, no dividends have
been declared.





Preferred
Stock. The cumulative amount of Series B Preferred Stock dividends that
are unearned and undeclared prior to the Merger were $155,998. Prior to the
Merger, the carrying amount of Series B Preferred Stock included accretions
related to the liquidation and redemption feature in the amount of
$155,998.





During
2006, the Company’s Board of Directors authorized a second amendment and
restatement of the Company’s Certificate of Incorporation. The Company’s second
amended and restated Certificate of Incorporation, authorizes the Company to
issue a total of 43,000,000 shares of stock, consisting of 26,000,000 shares of
Common Stock, 10,000,000 shares of Series A Preferred Stock and 7,000,000 shares
of Series B Preferred Stock.








NOTE
      8.
            Stock
      Options and Warrants





In 2003,
the Company’s Board of Directors adopted a 2003 Incentive Stock Plan (the “2003
Plan”). The 2003 Plan authorized the Board of Directors to grant incentive stock
options and nonstatutory stock options to employees, directors, and consultants
for up to 1,500,000 shares of common stock. Under the Plan, incentive stock
options and nonqualified stock options can be granted. Incentive stock options
are to be granted at a price that is no less than 100% of the fair value of the
stock at the date of grant. Options will be vested over a period according to
the Option Agreement, and are exercisable for a maximum period of ten years
after date of grant. Options granted to stockholders who own more than 10% of
the outstanding stock of the Company at the time of grant must be issued at an
exercise price no less than 110% of the fair value of the stock on the date of
grant.


46
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








In
November 2006, the Company increased the aggregate number of shares of Common
Stock that may be issued under the 2003 Plan to a total authorized reserve of
2,500,000 shares, a 1,000,000 share increase.





A summary
of stock option transactions is as follows:





Stock
      OptionsOptions
            
            
            Number
      of
            
            
            WeightedAvailable
      for
            
            
            Options
            
            
            AverageGrant
            
            
            Outstanding
            
            
            Exercise
      PriceShares
      originally reserved
            
            
            1,500,000
            
            
            
            —
            
            
            $
            —Granted
            
            
            (510,000
            )
            
            
            510,000
            
            
            
            0.0001Forfeited
            
            
            245,000
            
            
            
            (245,000
            )
            
            
            0.0001Balance
      at December 31, 2003
            
            
            1,235,000
            
            
            
            265,000
            
            
            
            0.0001Granted
            
            
            (185,000
            )
            
            
            185,000
            
            
            
            0.0028Forfeited
            
            
            30,000
            
            
            
            (30,000
            )
            
            
            0.0001Balance
      at December 31, 2004
            
            
            1,080,000
            
            
            
            420,000
            
            
            
            0.0013Granted
            
            
            (120,000
            )
            
            
            120,000
            
            
            
            0.0100Balance
      at December 31, 2005
            
            
            960,000
            
            
            
            540,000
            
            
            
            0.0032Additional
      shares reserved
            
            
            1,000,000
            
            
            
            —
            
            
            
            —Granted
            
            
            (356,000
            )
            
            
            356,000
            
            
            
            0.0800Exercised
            
            
            —
            
            
            
            (70,000
            )
            
            
            0.0001Forfeited
            
            
            65,000
            
            
            
            (65,000
            )
            
            
            0.0247Balance
      at December 31, 2006
            
            
            1,669,000
            
            
            
            761,000
            
            
            
            0.0376Granted
            
            
            (530,000
            )
            
            
            530,000
            
            
            
            0.2484Exercised
            
            
            —
            
            
            
            (50,000
            )
            
            
            0.0100Forfeited
            
            
            —
            
            
            
            (10,799
            )
            
            
            0.1482Exchange
      ratio adjustment
            
            
            —
            
            
            
            (570,965
            )
            
            
            —Plan
      frozen
            
            
            (1,139,000
            )
            
            
            —
            
            
            
            —Balance
      at December 31, 2007
            
            
            —
            
            
            
            659,236
            
            
            $
            0.2399





The
number of options exercisable as of December 31, 2007 and 2006 were 623,040 and
298,146. The weighted-average exercise price for options that are exercisable is
$0.0069 and $0.0012 at December 31, 2006 and 2005.





Upon
completion of the Merger, WaferGen Bio-systems, Inc. also assumed all
outstanding Wafergen, Inc's stock options with proportionate adjustments to the
number of underlying shares and exercise prices based on an exchange ratio of
..53991522 for 1. In addition, the 2003 Plan was frozen resulting in no
additional options available for grant. The number of stock options outstanding
is 410,875 (761,000 times .53991522) post Merger.





On
January, 2007 WaferGen Bio-systems, Inc’s Board of Directors and stockholders
adopted the 2007 Stock Option Plan (the “2007 Plan”). The purpose of the 2007
Plan is to provide an incentive to retain the employment of directors, officer,
consultants, advisors and employees of the Company, persons of training,
experience and ability, to attract new directors, officers, consultants,
advisors and employees whose services are considered valuable, to encourage the
sense of proprietorship, and to stimulate the active interest of such persons
into the Company’s development and financial success. Under the 2007 Plan, the
Company is authorized to issue incentive stock options intended to qualify under
Section 422 of the Code, no-qualified stock options and restricted stock. The
2007 Plan shall be administered by the Company’s Board of
Director.


47
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








A summary
of the stock option transactions under the 2007 Plan is as follows:





Stock
      OptionsOptions
            
            Number
      of
            
            WeightedAvailable
      for
            
            Options
            
            AverageGrant
            
            Outstanding
            
            Exercise
      PriceShares
      originally reserved
            
            
            2,000,000
            
            
            
            —
            
            
            $
            —Granted
            
            
            (1,609,500
            )
            
            
            1,609,500
            
            
            
            1.80Balance
      at December 31, 2007
            
            
            390,500
            
            
            
            1,609,500
            
            
            $
            1.80





The
following table Summarizes information concerning outstanding options as of
December 31, 2007:








Options
      Outstanding
            
            
            Options
      ExercisableNumber
            
            
            Weighted
            
            
            
            
            
            Number
            
            
            WeightedOutstanding
            
            
            Average
            
            
            Weighted
            
            
            Exercisable
            
            
            Average
            
            
            Weighted
            
            
            Aggregateas
      of
            
            
            Remaining
            
            
            Average
            
            
            as
      of
            
            
            Remaining
            
            
            Average
            
            
            IntrinsicExercise
            
            
            December
            
            
            Contractual
            
            
            Exercise
            
            
            December
            
            
            Contractual
            
            
            Exercise
            
            
            ValuePrice
            
            
            
            31,
      2007
            
            
            Life
      (in Years)
            
            
            Price
            
            
            
            31,
      2007
            
            
            Life
      (in Years)
            
            
            Price$
            0.000152-0.000228
            
            
            
            137,678
            
            
            
            5.79
            
            
            $
            0.0002
            
            
            
            134,079
            
            
            
            5.75
            
            
            $
            0.0002
            
            
            $
            269,925$
            0.018521-0.027782
            
            
            
            64,790
            
            
            
            7.59
            
            
            
            0.0185
            
            
            
            39,144
            
            
            
            7.59
            
            
            
            0.0185
            
            
            
            72,244$
            0.148171-0.222257
            
            
            
            173,312
            
            
            
            8.57
            
            
            
            0.1482
            
            
            
            63,192
            
            
            
            8.57
            
            
            
            0.1482
            
            
            
            102,824$
            0.463036-0.694554
            
            
            
            283,456
            
            
            
            9.02
            
            
            
            0.4630
            
            
            
            269,958
            
            
            
            9.02
            
            
            
            0.4630
            
            
            
            396,019$
            1.50-2.25
            
            
            
            1,609,500
            
            
            
            9.50
            
            
            
            1.8002
            
            
            
            116,667
            
            
            
            9.43
            
            
            
            1.5827
            
            
            
            50,1672,268,736
            
            
            
            9.07
            
            
            $
            1.3287
            
            
            
            623,040
            
            
            
            8.26
            
            
            $
            0.5390
            
            
            $
            891,179





The
Company has issued restricted Common Stock grants. The restricted Common Stock
grants offer the recipient the opportunity to receive shares of Common Stock,
rather than options that would give them the right to purchase Common Stock at a
set price. The restricted Common Stock grants entitle the holder to receive
shares of Common Stock subject to certain terms. The Company's restricted Common
Stock generally has vesting restrictions that are eliminated over a four-year
period.





The
Company determined the amount of share-based compensation in connection with the
restricted stock grants based on the fair value of the Company's Common Stock on
the respective grant dates. The restricted stock awards totaled 105,000 shares,
56,690 shares post-merger, and the fair market value at grant date ranged from
$0.75 to $1.50.





The
compensation is being charged to operations over the same period as the
restrictions are eliminated.





In
November 2006, the Company issued fully vested Series A Preferred Stock option
exercisable into 471,698 shares of Series A Preferred Stock to a founder. The
option is immediately exercisable into shares of Series A Preferred Stock at a
per share price of $0.14 and expire on any date during the earlier of (i)
calendar year 2007 and (ii) the calendar year in which a change in control has
occurred. The Company determined the fair market value of the option to be
$575,450 using the following assumptions: risk free interest rate of 4.60%, no
dividend yield, expected volatility of 21%, and an expected life of one year.
Amounts expensed were $575,450 for the year ended December 31, 2006 and the
period from inception to December 31, 2007. In February 2007, this option was
exercised.


48
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








The
following table summarizes the Company’s unvested stock option activity for the
year ended December 31, 2007:





Number
            
            
            Weighted
      Average Grantof
            
            
            Date
      FairShares
            
            
            ValueUnvested
      at January 1, 2007
            
            
            249,902
            
            
            $
            1.81Granted
            
            
            1,895,655
            
            
            
            0.66Exercised
            
            
            (10,685
            )
            
            
            0.14Forfeited
            
            
            (10,799
            )
            
            
            1.34Vested
            
            
            (478,377
            )
            
            
            1.68Unvested
      at December 31, 2007
            
            
            1,645,696
            
            
            $
            0.54





The
aggregate intrinsic value is the total pretax intrinsic value (i.e., the
difference between the Company’s estimated stock price at December 31, 2007 and
the exercise price, multiplied by the number of in-the-money options) that would
have been received by the option holders had all the option holders exercised
their options on December 31, 2007. The aggregate intrinsic value for options
outstanding was $2,777,098 at December 31, 2007 and the aggregate intrinsic
value for options exercisable was $998,271 at December 31, 2007. The aggregate
intrinsic value for options exercised was $69,500.





The
amounts expensed for stock-based compensation totaled $648,988, $642,076 for the
year ended December 31, 2007 and 2006 and $1,300,881 for the period from
inception to December 31, 2007.





At
December 31, 2007, there was $706,569 of total stock-based compensation costs
which is expected to be recognized over an estimated weighted average
amortization period from January 2008 to October 2011. No amounts related to
stock-based compensation costs have been capitalized. The tax benefit and the
resulting effect on cash flows from operations and financial activities, related
to stock-based compensation costs were not recognized as the Company currently
provides a full valuation allowance for all of its deferred taxes.





In May
2007 and June 2007, the Company issued fully vested Common Stock warrants
exercisable into 513,926 shares of Common Stock to a placement agent in
connection with the Offering. The warrants are immediately exercisable into
shares of Common Stock at a per share price of $2.25 and expire in May and June
of 2012. The Company determined the fair market value of the warrants to be
$66,319 using the following assumptions: fair market value of common stock of
$1.50 for first closing and $1.70 for second closing, risk free interest rate of
4.85%, no dividend yield, expected volatility of 20%, and an expected life of
two and one-half years. This amount was recorded as offering costs.





A summary
of outstanding Common Stock Warrants as of December 31, 2007 is as
follows:





Exercise
            
            ExpirationSecurities
      into which warrants are convertible
            
            Shares
            
            Price
            
            DateCommon
      Stock
            
            115,442
            
            $
            1.41
            
            Jan.,
      Feb., and March 2012Common
      Stock
            
            2,402,533
            
            $
            2.25
            
            May
      and June 2012Common
      Stock
            
            513,926
            
            $
            2.25
            
            May
      and June 2012Total
            
            3,031,901


49
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








NOTE
      9.
            Income
      Taxes





The
provision for income taxes consists of the following for the years ended
December 31, 2007 and 2006 and the period from inception to December 31,
2007:





Period
      FromOctober
      22,2002(Inception)
      toDecember
      31,
            
            December
      31,
            
            December
      31,2007
            
            2006
            
            2007Currently
      payable (refundable):Federal
            
            $
            —
            
            
            $
            —
            
            
            $
            —State
            
            
            —
            
            
            
            —
            
            
            
            —Total
      current
            
            
            —
            
            
            
            —
            
            
            
            —Deferred:Federal
            
            
            —
            
            
            
            —
            
            
            
            —State
            
            
            —
            
            
            
            —
            
            
            
            —Total
      deferred
            
            
            —
            
            
            
            —
            
            
            
            —Provision
      for income taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            —





A
reconciliation of the provision for income taxes with the expected provision for
income taxes computed by applying the federal statutory income tax rate (34%) to
the net loss before provision for income taxes for the years ended December 31,
2007 and 2006 and the period from inception to December 31, 2007 is as
follows:





Period
      FromOctober
      22,2002(Inception)
      toDecember
      31,
            
            December
      31,
            
            December
      31,2007
            
            2006
            
            2007Pro
      Provision for income taxes at federal statutory rate
            
            $
            (2,025,606
            )
            
            $
            (913,393
            )
            
            $
            (4,010,949
            )Federal
      research and development tax credits
            
            
            (289,179
            )
            
            
            —
            
            
            
            (289,179
            )Expenses
      not deductible
            
            
            460,507
            
            
            
            —
            
            
            
            460,507Change
      in federal valuation allowance
            
            
            1,854,278
            
            
            
            913,393
            
            
            
            3,839,621Provision
      for income taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            —


50
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








The
components of the deferred tax assets as of December 31, 2007 and 2006 are as
follows:





December
      31,
            
            
            December
      31,2007
            
            
            2006Deferred
      tax assets:Net
      operating loss carryforwards
            
            $
            3,225,483
            
            
            $
            —Capitalized
      start-up cost and research and development cost
            
            
            1,046,170
            
            
            
            2,148,836Stock-based
      compensation
            
            
            —
            
            
            
            279,271Research
      and development tax credit
            
            
            582,982
            
            
            
            —depreciation
      on property and equipment
            
            
            21,770
            
            
            
            —Accruals
            
            
            179,921
            
            
            
            73,426Total
      deferred tax asset
            
            
            5,056,326
            
            
            
            2,501,533Valuation
      allowance
            
            
            (5,056,326
            )
            
            
            (2,501,533
            )Net
      deferred tax assets
            
            $
            —
            
            
            $
            —





Deferred
income were provided for the following items for the years ended December 31,
2007 and 2006 and the period from inception to December 31, 2007:





Period
      FromOctober
      22,2002(Inception)
      toDecember
      31,
            
            
            December
      31,
            
            
            December
      31,2007
            
            
            2006
            
            
            2007Deferred
      tax assets:Net
      operating loss carryforwards
            
            $
            3,225,483
            
            
            $
            —
            
            
            $
            3,225,483Capitalized
      start-up cost and research and development cost
            
            
            (1,102,666
            )
            
            
            810,485
            
            
            
            1,046,170Stock-based
      compensation
            
            
            (279,271
            )
            
            
            275,065
            
            
            
            —Research
      and development tax credit
            
            
            582,982
            
            
            
            —
            
            
            
            582,982depreciation
      on property and equipment
            
            
            21,770
            
            
            
            —
            
            
            
            21,770Accruals
            
            
            106,495
            
            
            
            65,326
            
            
            
            179,921Valuation
      allowance
            
            
            (2,554,793
            )
            
            
            (1,150,876
            )
            
            
            (5,056,326
            )Net
      deferred income taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            —





Based on
the available objective evidence, management believes it is more likely than not
that the net deferred tax assets will not be fully realizable. Accordingly, the
Company has provided a full valuation allowance against its net deferred tax
assets. There are no prior year tax returns under audit by taxing authorities,
and management is not aware of any impending audits.





At
December 31, 2007 the Company had federal and state net operating loss
carryforwards of approximately $7,525,000. The federal and state net operating
loss carryforwards will expire in various periods through 2027.





At
December 31, 2007, the Company had federal and state research and development
tax credits of approximately $300,000. The federal research and development tax
credits will expire in various periods through 2027 and the California state
research and development tax credit can be carried forward
indefinitely.


51
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








Utilization
of net operating loss carryforwards may be subject to substantial limitation due
to the ownership change limitations provided by the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses and tax credits before
utilization.








NOTE
      10.
            Related
      Party Transactions





During
the year ended December 31, 2007, a shareholder converted $61,588 of accounts
payable to a note payable.








NOTE
      11.
            Cash
      Flow Information





Cash paid
during the years ended December 31, 2007 and 2006 and the period from inception
to December 31, 2007 is as follows:








Period
      FromOctober
      22,2002(Inception)
      toDecember
      31,
            
            December
      31,
            
            December
      31,2007
            
            2006
            
            2007Interest
            
            $
            18,486
            
            
            $
            —
            
            
            $
            18,486Income
      taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            —


52
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)





Notes
to the Consolidated Financial Statements








Supplemental
disclosure of non-cash investing and financing activities for the years ended
December 31, 2007 and 2006 and the period from inception to December 31, 2007 is
as follows:





Year ended
              December
    31,
            
            
            Period From
              October
      22, 2002
              (Inception)
      to
              December
    31,2007
            
            
            
            2006
            
            
            
            2007Accretions
      on Series B Preferred Stock
            
            $
            51,998
            
            
            $
            104,000
            
            
            $
            155,998Conversion
      of due to a stockholder to notes payable
            
            $
            61,588
            
            
            $
            —
            
            
            $
            61,588Issuance
      of warrants with notes payable
            
            $
            171,053
            
            
            $
            —
            
            
            $
            171,053Conversion
      of debt to Common Stock
            
            $
            240,000
            
            
            $
            —
            
            
            $
            240,000Conversion
      of debt to Series A Preferred Stock
            
            $
            —
            
            
            $
            —
            
            
            $
            2,977,579Property
      and equipment acquired with capital leases
            
            $
            124,776
            
            
            $
            —
            
            
            $
            124,776








NOTE
      12.
            Subsequent
      Events





On
February 26, 2008, the Company and Terry W. Osborn, the Company’s
former chief operating officer of the Company, mutually agreed to terminate the
employment of Mr. Osborn effective as of February 26,
2008.   In connection with the termination of Mr. Osborn’s
employment, the Company and Mr. Osborn entered into a mutual separation
agreement.  Pursuant to the terms of the agreement, Mr. Osborn
will receive severance in the amount of approximately $17,000.  In
addition, the Company will accelerate the vesting of (1) options to purchase
27,536 shares previously granted to Mr. Osborn with an exercise price of
$0.14817 per share, and (2) options to purchase 37,500 shares previously granted
to Mr. Osborn with an exercise price of $2.25 per share.  The
parties also have released each other from certain claims they may have against
each other.





On
January 24, 2008, the Company announced the formal opening of its new,
state-of-the-art subsidiary in Kulim Hi-Tech Park, Kedah, Malaysia. With the
opening, the subsidiary, WaferGen Biosystems (M) Sdn. Bhd., will launch various
initiatives to support a number of WaferGen's ongoing SmartChipTM Real-Time PCR
System development and commercialization goals. Most critically, this new
organization will oversee several research and development activities related to
the SmartChipTM Real-Time PCR System, pursue and establish valuable research and
development collaborations with local universities and government-run research
centers, and coordinate production of the SmartChipTM system with WaferGen's
Malaysia-based contract manufacturer.


53
 Table of Contents


WAFERGEN
BIO-SYSTEMS, INC.


(A
Development Stage Company)


Notes
to the Consolidated Financial Statements








NOTE
      13.
            Quarterly
      Financial Data





Year
      ended December 31, 2007First
            
            
            Second
            
            
            Third
            
            
            FourthRevenues
            
            $
            60,460
            
            
            $
            300
            
            
            $
            6,700
            
            
            $
            161,513Cost
      of sales
            
            
            21,774
            
            
            
            —
            
            
            
            1,770
            
            
            
            55,572Gross
      margin
            
            
            38,686
            
            
            
            300
            
            
            
            4,930
            
            
            
            105,941Operating
      expenses:Sales
      and marketing
            
            
            152,182
            
            
            
            137,788
            
            
            
            277,248
            
            
            
            281,600Research
      and development
            
            
            399,758
            
            
            
            361,948
            
            
            
            728,288
            
            
            
            939,279General
      and administrative
            
            
            424,661
            
            
            
            384,495
            
            
            
            773,656
            
            
            
            1,220,126Total
      operating expenses
            
            
            976,601
            
            
            
            884,231
            
            
            
            1,779,192
            
            
            
            2,441,005Operating
      loss
            
            
            (937,915
            )
            
            
            (883,931
            )
            
            
            (1,774,262
            )
            
            
            (2,335,064
            )Other
      income and (expenses):Interest
      income
            
            
            —
            
            
            
            15,781
            
            
            
            82,960
            
            
            
            64,306Interest
      expense
            
            
            (42,802
            )
            
            
            (143,724
            )
            
            
            (308
            )
            
            
            (2,705
            )Total
      other income and (expenses)
            
            
            (42,802
            )
            
            
            (127,943
            )
            
            
            82,652
            
            
            
            61,601Net
      loss before provision for income taxes
            
            
            (980,717
            )
            
            
            (1,011,874
            )
            
            
            1,691,610
            )
            
            
            (2,273,463
            )Provision
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            
            (980,717
            )
            
            
            (1,011,874
            )
            
            
            (1,691,610
            )
            
            
            (2,273,463
            )Accretion
      on Series B Preferred Stock
            
            
            (31,199
            )
            
            
            (20,799
            )
            
            
            —
            
            
            
            —Net
      loss applicable to common stockholders
            
            $
            (1,011,916
            )
            
            $
            (1,032,673
            )
            
            $
            (1,691,610
            )
            
            $
            (2,273,463
            )Net
      loss per share - basic and diluted
            
            $
            (0.28
            )
            
            $
            (0.10
            )
            
            $
            (0.07
            )
            
            $
            (0.10
            )Shares
      used to compute net loss per share - basic and
    diluted
            
            
            3,629,129
            
            
            
            10,107,941
            
            
            
            23,217,846
            
            
            
            23,217,846








Year
      ended December 31, 2006First
            
            
            Second
            
            
            Third
            
            
            FourthRevenues
            
            $
            10,000
            
            
            $
            —
            
            
            $
            31,500
            
            
            $
            4,995Cost
      of sales
            
            
            3,000
            
            
            
            —
            
            
            
            9,390
            
            
            
            2,360Gross
      margin
            
            
            7,000
            
            
            
            —
            
            
            
            22,110
            
            
            
            2,635Operating
      expenses:Sales
      and marketing
            
            
            30,844
            
            
            
            43,929
            
            
            
            38,632
            
            
            
            39,000Research
      and development
            
            
            231,327
            
            
            
            287,983
            
            
            
            231,793
            
            
            
            873,134General
      and administrative
            
            
            123,374
            
            
            
            156,194
            
            
            
            115,896
            
            
            
            550,090Total
      operating expenses
            
            
            385,545
            
            
            
            488,106
            
            
            
            386,321
            
            
            
            1,462,224Operating
      loss
            
            
            (378,545
            )
            
            
            (488,106
            )
            
            
            (364,211
            )
            
            
            (1,459,589
            )Other
      income and (expenses):Interest
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Interest
      expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
      other income and (expenses)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss before provision for income taxes
            
            
            (378,545
            )
            
            
            (488,106
            )
            
            
            (364,211
            )
            
            
            (1,459,589
            )Provision
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            
            (378,545
            )
            
            
            (488,106
            )
            
            
            (364,211
            )
            
            
            (1,459,589
            )Accretion
      on Series B Preferred Stock
            
            
            (26,000
            )
            
            
            (26,000
            )
            
            
            (26,000
            )
            
            
            (26,000
            )Net
      loss applicable to common stockholders
            
            $
            (404,545
            )
            
            $
            (514,106
            )
            
            $
            (390,211
            )
            
            $
            (1,485,589
            )Net
      loss per share - basic and diluted
            
            $
            (0.11
            )
            
            $
            (0.15
            )
            
            $
            (0.11
            )
            
            $
            (0.43
            )Shares
      used to compute net loss per share - basic and
    diluted
            
            
            3,535,672
            
            
            
            3,431,146
            
            
            
            3,463,072
            
            
            
            3,488,932


54
 Table of Contents


Item
      8.
              Changes In and Disagreements with Accountants on Accounting and
      Financial Disclosure.





None.





Item
      8A.
            Controls and Procedures.





As of the end ofthe period covered by this Annual Report, management
performed, with the participation of our Chief Executive Officer and Chief
Financial Officer, an evaluation of the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
Our disclosure controls and procedures are designed to ensure that information
required to be disclosed in the report we file or submit under the Exchange Act
is recorded, processed, summarized, and reported within the time periods
specified in the SEC’s forms, and that such information is accumulated and
communicated to our management including our Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required
disclosures.  Based on the evaluation and the identification of the
material weaknesses in internal control over financial reporting described
below, our Chief Executive Officer and Chief Financial Officer concluded that,
as of December 31, 2007, the Company’s disclosure controls and procedures were
not effective.





Management’s
Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act.  Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with GAAP. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projection of any evaluation of
effectiveness to future periods is subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





Management
has conducted, with the participation of our Chief Executive Officer and Chief
Financial Officer, an assessment, including testing of the effectiveness, of our
internal control over financial reporting as of December 31, 2007. Management’s
assessment of internal control over financial reporting was conducted using the
criteria in Internal Control over Financial Reporting – Guidance for Smaller
Public Companies issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely
basis.   In connection with management’s assessment of our
internal control over financial reporting as required under Section 404 of the
Sarbanes-Oxley Act of 2002, we identified the following material weaknesses in
our internal control over financial reporting as of December 31,
2007:





1.
              The
      Company has not established adequate financial reporting monitoring
      activities to mitigate the risk of management override,
      specifically:





a.
            Delegation
      of authority has not been formally
documented;





b.
            Insufficient
      oversight of accounting principle implementation;
  and





c.
            Insufficient
      oversight of external audit
functions;





2.
            There
      is a strong reliance on the external auditors to review and adjust the
      annual and quarterly financial statements, to monitor new accounting
      principles, and to ensure compliance with GAAP and SEC disclosure
      requirements;





3.
            There
      is a strong reliance on the external attorneys to review and edit the
      annual and quarterly filings and to ensure compliance with SEC disclosure
      requirements; and


55
 Table of Contents


4.
            We
      have not adequately divided, or compensated for, incompatible functions
      among personnel to reduce the risk that a potential material misstatement
      of the financial statements would occur without being prevented or
      detected.





Because of the materialweaknesses noted above, management has
concluded that we did not maintain effective internal control over financial
reporting as of December 31, 2007, based on Internal Control over Financial
Reporting – Guidance for Smaller Public Companies issued by COSO.





Remediation
of Material Weaknesses in Internal Control Over Financial Reporting





Management
is in the process of addressing its material weaknesses in an effort to improve
its system of internal control over financial reporting through the following
actions:





1.
            Our
      Chief Executive Officer and our Chief Financial Officer will prepare a
      formal documentation of delegation policy that will be reviewed and
      approved by the Board;





2.
            As
      a small business, the Company does not have the resources to install a
      dedicated staff with deep expertise in all facets of SEC disclosure and
      GAAP compliance.  As is the case with many small businesses, the
      Company will continue to work with its external auditors and attorneys as
      it relates to new accounting principles and changes to SEC disclosure
      requirements.  The Company has found that this approach worked
      well in the past and believes it to be the most cost effective solution
      available for the foreseeable
future;





3.
            The
      Company will conduct a review of existing sign-off and review procedures
      as well as document control protocols for critical accounting
      spreadsheets.  The Company will also increase management’s
      review of key financial documents and records;
  and





4.
            As
      a small business, the Company does not have the resources to fund
      sufficient staff to ensure a complete segregation of responsibilities
      within the accounting function.  However, Company management
      does review, and will increase the review of, financial statements on a
      monthly basis, and the Company’s external auditor conducts reviews on a
      quarterly basis.  These actions, in addition to the improvements
      identified above, will minimize any risk of a potential material
      misstatement occurring.





The
foregoing initiatives will enable us to improve our internal controls over
financial reporting. Management is committed to continuing efforts aimed at
improving the design adequacy and operational effectiveness of its system of
internal controls.  The remediation efforts noted above will be
subject to the Company’s internal control assessment, testing and evaluation
process.





This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.





Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal control over financial reporting during the
fourth quarter ended December 31, 2007 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





Item
      8B.
            Other
      Information.





None.


56
 Table of Contents


PART
III





Item
      9.
              Directors, Executive Officers, Promoters and Control Persons; Compliance
      with Section 16(a) of the Exchange
Act





Executive Officerand Directors




Set forth below is certain information regarding our directors, executive
officers and key personnel.




Name
            
            Age
            
            PositionAlnoor
      Shivji
            
            51
            
            Chief
      Executive Officer, President and Chairman of the BoardVictor
      Joseph
            
            55
            
            Chief
      Technical Officer, Secretary and DirectorAmjad
      Huda
            
            47
            
            Chief
      Financial Officer, Treasurer and DirectorDavid
      Gelfand
            
            63
            
            Chief
      Scientific OfficerMona
      Chadha
            
            47
            
            Vice
      President, Marketing and Business DevelopmentMakoto
      Kaneshiro
            
            49
            
            DirectorR.
      Dean Hautamaki
            
            45
            
            DirectorJoel
      Kanter
            
            51
            
            Director





Our directors hold office for one-year terms until the earlier of their
death, resignation or removal or until their successors have been elected and
qualified. Our officers are elected annually by the board of directors and serve
at the discretion of the board.  There are no family relationships
among our directors and executive officers. Our above-listed officers and
directors have neither been convicted in any criminal proceeding during the past
five years nor parties to any judicial or administrative proceeding during the
past five years that resulted in a judgment, decree or final order enjoining
them from future violations of, or prohibiting activities subject to, federal or
state securities laws or a finding of any violation of federal of state
securities laws or commodities laws. Similarly, no bankruptcy petitions have
been filed by or against any business or property of any of our directors or
officers, nor has bankruptcy petition been filed against a partnership or
business association in which these persons were general partners or executive
officers.




Biographies




Alnoor Shivji,
Chief Executive Officer,
President and Chairman of the Board.Mr. Shivji has served as our Chief
Executive Officer, President and Chairman of the Board since the closing of the
Merger. He is a co-founder of WaferGen and has served as its Chief Executive
Officer and President since April 1, 2003, and as Chairman of the Board since
October 2002. Between December 2003 and July 2006, he was also the Investment
Director at VPSA, Inc. in Paris, France, and between October 2001 and February
2002, he was the President and Chief Executive Officer of Redwave Networks, Inc.
From April 2001 to August 2001, Mr. Shivji was President of Metro Switching
Division of Ciena Corp. Between August 1998 and March 2001, he was the Founder,
President and Chief Executive Officer of Cyras Systems. He co-founded Fiberlane
Communications, Inc. and was President of Fiberlane Communications (Canada),
Inc. from December 1996 to April 1998. Mr. Shivji also co-founded Osiware, an
enterprise software company sold to Infonet Services Corporation, which was
later bought by BT Group plc. Currently, he is a General Partner with Global
Asset Capital, a venture capital firm with which he has been associated since
March 2002, and has a long history advising and investing in Silicon Valley
startups. Mr. Shivji has a BS degree from University of British
Columbia.




Victor Joseph,
Chief Technical Officer,
Secretary and Director.Mr. Joseph hasserved as our Chief
Technical Officer, Secretary and a director since the closing of the Merger. He
is a co-founder of WaferGen and has served as its Chief Technical Officer and
Secretary since April 1, 2003, and as a director since October 2002. Mr. Joseph
has over 20 years of experience working in research and development,
manufacturing, consulting and management in a variety of industries including
Semiconductor IC, inkjet, personal computers, optical communication, disk drives
and specialty chemicals. Between April 2001 and March 2003 he was the Vice
President of the Switching Products Group of Avrio Technologies. From January
2000 to April 2001 he was a Technology Assessment Manager with Cisco Systems,
Inc. and served as a Senior Business Development Manager and Senior Engineer
with Hewlett-Packard Company between November 1993 and January 2000. Throughout
his career, Mr. Joseph has maintained his intellectual property through patents,
of which he currently holds three in inkjet technology, one in fiber optic
switch technology, one in integrated biochip technology and seven in-house
pending patents. He holds a Masters of Science from the University of Toronto in
IE/OR and BS ChemE from REC Warangal, India.




Amjad Huda,
Chief Financial Officer,
Treasurer and Director.Mr. Huda has served as our Chief Financial
Officer, Treasurer and a director since the closing of the Merger. He is a
co-founder of WaferGen and has served as its Chief Financial Officer and
Treasurer since January 1, 2004, and as a director since October 2002. In
addition to his role as the Chief Financial Officer, he served as WaferGen’s
Chief Operations Officer from January 2004 to February 2007. Between September
1997 and December 2003, he worked for Nortel Networks Corporation in its
international research and development operations. Between September 1995 and
September 1997, Mr. Huda worked for KPMG, LLP; between March 1991 and August
1995, Mr. Huda worked for Coopers & Lybrand (now PriceWaterhouseCoopers);
and between September 1985 and February 1991, Mr. Huda worked for General Foods
(now Kraft Foods, Inc.). Mr. Huda holds a Bachelor of Science in Industrial
Engineering from St. Cloud State University (St. Cloud, Minnesota) and an MBA in
Finance from Golden Gate University (San Francisco, California).




57
 Table of Contents


Dr. David
Gelfand, Chief
Scientific Officer.Dr. Gelfand has served as our Chief Scientific
Officer since the closing of the Merger. He joined WaferGen in February 2007 as
Chief Scientific Officer. Since October 2005, Dr. Gelfand has worked as a
consultant in the fields of molecular diagnostics, nucleic acid amplification,
DNA sequencing and genotyping.  From December 1991 to October 2005,
Dr. Gelfand worked for Roche Molecular Systems, Inc., performing in vitro
molecular diagnostics tests, discovery research and development for molecular
research reagents. While at Roche Molecular Systems, Inc., Dr. Gelfand was Vice
President of the Discovery Research Division and a Director of the program in
Core Research. He received his Ph.D. in Biology from University of California,
San Diego.




Mona
Chadha, Vice President,
Marketing , Business Development & Corporate Communications.Ms.
Chadha has served as our Vice President of Marketing, Business Development and
Corporate Communications since the closing of the Merger. She joined WaferGen in
July 2006 as its Vice President, Marketing and Business Development. Ms. Chadha
has over 15 years of experience in global product commercialization for leading
biotechnology companies. From July 2003 through July 2006, she was the Associate
Director of Technology Marketing at Nektar Therapeutics, where she led the
company’s repositioning and branding efforts and co-marketing of inhaled
insulin. She spent nine years with Applied Biosystems Group (Applera
Corporation), from 1993 through 2001, in multiple top tier jobs, including
Product Manager, Senior Product Manager and Product Line Manager. Before joining
Applied Biosystems, she was with CLONTECH Laboratories, Inc. during 1992 and
1993 as product manager and worked between 1988 and 1992 at Pharmacia LKB
Biotechnology, Inc. as a Technical Specialist and Marketing Applications
Specialist. She holds a double Masters degree in Cell Biology and Anatomy from
Columbia University and Microbiology from India.  She also completed
the Executive Marketing Management Certificate Program at Stanford
University.




MakotoKaneshiro, Director.Mr. Kaneshiro
has served as our director since the closing of the Merger. He has also served
as a director of WaferGen since March 2005. Mr. Kaneshiro is a founding
member of Genetic Devices, Co., Ltd. in Japan and prior to that was the
Executive Director of Overseas Investment for CSK Venture Capital Co., Ltd.,
where he had been since 2001. Previously, Mr. Kaneshiro was Executive Vice
President of Sega.com and Sega of America. Before Sega, he was a member of the
business development and corporate planning team of Sony Corporation of America.
From 2003 to 2004, Mr. Kaneshiro was a member of the Board of Directors of
Sega Corporation which was a publicly traded company in Japan. He holds an MBA
from Yale University.




Dr. R. Dean
Hautamaki, Director.Dr. Hautamaki has served as our director since the closing of the Merger.
Dr. Hautamaki is a practicing physician and since January 2005 has been the
Assistant Clinical Professor of Medicine at the Florida State University College
of Medicine in Tallahassee, Florida. From September 2003 to December 2005, Dr.
Hautamaki was the Chairman of the Department of Medicine at Sarasota Memorial
Hospital in Sarasota, Florida. From September 1997 through December 2005, he was
a partner at Lung Associates of Sarasota in Sarasota, Florida. Dr. Hautamaki has
authored over 12 papers and presented in several conferences.




Joel
Kanter,Director.Joel
Kanter has been in the financial services industry for over three decades and
has focused on providing equity and bridge financing to small and mid-size
companies and institutional financing to mature enterprises. He has served as
President of Windy City, Inc., a privately held investment firm, and as the
Chief Executive Officer and President of Walnut Financial Services, Inc., a
publicly traded company. Mr. Kanter currently serves on the Board of Directors
of several public companies, including: Aquamatrix, Inc., I-Flow Corporation,
Magna-Lab, Inc., Medgenics, Inc., Modigene, Inc., and Pet DRx Corporation, as
well as a number of private concerns. Mr. Kanter has a B.A. in Political Science
and a B.S. in Psychology from Tulane University.




Board of Directors and Corporate Governance




Upon the closing of the Merger, Matthew Markin and Maria Maribel Jaramillo De La
O, the members of the board of directors of WBSI at such time, resigned and
simultaneously therewith a new board of directors was appointed,
consisting of four members designated by WaferGen (Alnoor Shivji,
Victor Joseph, Amjad Huda and Makoto Kaneshiro), and two members designated by
WBSI’s stockholders (Dr. R. Dean Hautamaki and Joel Kanter).




Section 16(a) Beneficial Ownership Reporting Compliance





We are not subject to Section 16(a) of the Exchange Act.


58
 Table of Contents


Code of Ethics




Our Company’s board of directors has adopted a Code of Business Conduct and
Ethics that applies to, among other persons, our Company’s President (our principal executive
officer) and our Chief Financial Officer (our principal financial and accounting
officer), as well as persons performing similar functions. As adopted, our Code
of Business Conduct and Ethics set forth written standards that are designed to
deter wrongdoing and promote:




(1)
            handling
      honest and ethical conduct, including the ethical of actual or
      apparent conflicts of interest between personal and professional
      relationships;


(2)
            full,
      fair, accurate, timely, and understandable disclosure in report and
      document that we file with, or submit to, the Security and Exchange
      Commission and in other public communications made by
  us;


(3)
            compliance
      with applicable government laws, rules and
  regulations;


(4)
            the
      prompt internal reporting of violations of Code of Business Conduct and
      Ethics to an appropriate person or persons identified in the Code of
      Business Conduct and Ethics; and


(5)
            accountability
      for adherence to the Code of Business Conduct and
  Ethics.




Our Code of Business Conduct and Ethics requires, among other things, that all
of our Company’s personnel shall be accorded full access to our President,
Secretary, and Chief Financial Officer with respect to any matter which may
arise relating to the Code of Business Conduct and Ethics. Further, all of our
Company’s personnel are to be accorded full access to our Company’s board of
directors if any such matter involves an alleged breach of the Code of Business
Conduct and Ethics by our president, secretary, and chief financial
officer.




In additional, our Code of Business Conduct and Ethics emphasizes that all
employees, and particularly managers and/or supervisors, have a responsibility
for maintaining financial integrity within our Company, consistent with
generally accepted accounting principles, and federal, provincial and state
security laws. Any employee who become aware of any incident involving financial
or accounting manipulation or other irregularities, whether by witnessing the
incident or being told of it, must report it to his or her immediate supervisor
or to our Company’s president, secretary, or chief financial officer. If the
incident involves an alleged breach of the Code of Business Conduct and Ethics
by the president, secretary, or chief financial officer, the incident must be
reported to the Audit Committee. Any failure to report such inappropriate or
irregular conduct of other is to be treated as a severe disciplinary matter. It
is against our Company policy to retaliate against any individual who reports in
good faith the violation or potential violation of our Company’s Code of
Business Conduct and Ethics by another.




Our Code of Business Conduct and Ethics is filed as Exhibit 10.30 to this Annual
Report on Form 10-KSB.




We will provide a copy of the Code of Business Conduct and Ethics to any person
without charge, upon request. Request can be sent to: WaferGen Biosystems, Inc.
at 46531 Fremont Blvd. Fremont, California 94538.




Board Independence and Committees




We are not currently listed on any national securities exchange that has a
requirement that the Board of Directors be independent. However, in evaluating
the independence of its members and the composition of the committees of the
Board of Directors, the Board utilizes the definition of “independence” as
that term is defined by SEC rules.




We believe that Messrs. Kaneshiro, Kanter and Dr. Hautamaki qualify as
“independent” directors, as that term is defined by SEC rules.




We have three standing committees: the audit committee; the corporate governance
committee; and the compensation committee.




Audit Committee




Our current Audit Committee was formed during September 2007.  It
attends to and reports to our Board of Directors with respect to matters
regarding our independent registered public accounting firm, including, without
limitation: reviewing the annual registration; approving the firm to be engaged
as our independent registered public accounting firm for the next fiscal year;
reviewing with our independent registered public accounting firm the scope and
results of their audit and any related management letter; consulting with our
independent registered public accounting firm and our management with regard to
our accounting methods and adequacy of our internal controls over financial
reporting; approving the professional services rendered by our independent
registered public accounting firm; reviewing the independence, management
consulting services and fees of our independent registered public accounting
firm; inquiring about significant risks or exposures and methods to minimize
such risk; ensuring effective use of audit resources; and preparing and
supervising the SEC reporting requirements.  Our Audit Committee
currently consists of Mr. Kanter (Chairman), Dr. Hautamaki, and Mr.
Kaneshiro.  The audit committee met two (2) times during the fiscal
year.  In addition, the Board of Directors believes that Mr. Kanter
meets the definition of “audit committee financial expert,” as defined by SEC
rules.




59
 Table of Contents


Corporate Governance Committee




The Corporate Governance Committee of the Board of Directors is appointed by the
Board (i) to oversee the selection of new directors, (ii) to oversee the
function of the Board in its committees, and (iii) to evaluate the Board’s
performance as well as the relationship between the Board and the Company’s
management. The Corporate Governance Committee currently consists of Mr.
Kaneshiro (Chairman), Dr. Hautamaki, and Mr. Kanter.  The Corporate
Governance Committee met one (1) time during the fiscal year.




Compensation Committee




Our Compensation Committee was formed in September 2007 to attend to and report
to our Board of Directors with respect to the appropriate compensation of our
directors and executive officers and is responsible for administering all of our
employee benefit plans.  The Compensation Committee currently consists
of Mr. Kaneshiro (Chairman), Dr. Hautamaki, and Mr. Kanter.  The
compensation committee met one (1) time during the fiscal year.




Item
10.    Executive Compensation




Summary Compensation Table




The following table summarizes all compensation recorded by us in each of fiscal
year 2007 and 2006 for (i) our principal executive officer, (ii) our two most
highly compensated executive officers other than our principal executive
officer, each of whom was serving as an executive officer at the end of fiscal
year 2007 and whose total compensation exceeded $100,000 in fiscal year 2007 and
(iii) up to two additional individuals for whom disclosure would have been
provided under (ii) above but for the fact that the individual was not serving
as one of our executive officers at the end of  fiscal year 2007. Such
officers are referred to herein as our “Named Executive Officers.”





Name and Principal Position
            Fiscal
    Year
            
            Salary
              ($)
            
            Bonus
              ($)
            
            Option Awards
      ($)
            
            Total
              ($)Alnoor
      Shivji
            2007
            
            $
            229,166
            (1)
            —
            (2)
            $
            215,308
            (4)
            $
            444,474Chief
      Executive Officer
            2006
            
            $
            200,000
            
            50,000
            (3)
            
            575,450
            (5)
            $
            825,450Amjad
      Huda
            2007
            
            $
            229,166
            (1)
            —
            (2)
            $
            215,308
            (4)
            $
            444,474Chief
      Financial Officer
            2006
            
            $
            200,000
            
            50,000
            (3)
            $
            —
            
            $
            250,000Victor
      Joseph
            2007
            
            $
            229,166
            (1)
            —
            (2)
            $
            215,308
            (4)
            $
            444,474Chief
      Technology Officer
            2006
            
            $
            200,000
            
            50,000
            (3)
            $
            —
            
            $
            250,000





(1)
            Annual
      salary of $250,000 commenced on May 31, 2007, the date of executive
      officer’s employment agreement with
WaferGen.




(2)
            Under such
      executive officer’s employment agreement, the executive officer is
      entitled to a performance-based bonus of up to 25% of his salary. 
      The
      Compensation Committee of the Board has determined that each such
      executive shall receive a bonus in 2008 for the executive’s performance in
      2007 equal to 25% of his base salary (or $62,300) upon the completion of a
      financing transaction by the Company above a certain threshold
      amount.




(3)
            Bonus
      earned in 2006 but paid in 2007.




(4)
            The
      value of the Option Award has been computed in accordance with FAS No.
      123R, “Share-Based Payment,” which requires that we recognize as
      compensation expense the value of all stock-based awards, including stock
      options granted to employees in exchange for services over the requisite
      service period, which is typically the vesting period. For more
      information, see Item 6, Notes to the Financial
  Statements.




(5)
            Represents
      the value of an option issued to Mr. Shivji as a replacement for a warrant
      to purchase 471,698 shares of WaferGen’s Series A Preferred Stock at a
      purchase price of $0.14 per share. For more information, see Note 2 to the
      Financial Statements.


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Agreements with Executive Officers




Alnoor Shivji




We have entered into an employment agreement with Alnoor Shivji to serve as our
Chairman and Chief Executive Officer, for renewable one year terms. Pursuant to
this employment agreement, Mr. Shivji is entitled to receive an annual base
salary of $250,000, subject to annual reviews by our Compensation Committee. Mr.
Shivji is also entitled to a performance-based bonus of up to 25% of his salary.
Upon execution of his employment agreement, we granted Mr. Shivji an option to
purchase 166,666 shares of our common stock at an exercise price of $1.50 per
share, which option shall vest in equal monthly installments over four years. If
we terminate Mr. Shivji’s employment without cause or if Mr. Shivji resigns for
good reason, we will pay Mr. Shivji his then current annual base salary for one
year, payable in accordance with standard payroll procedures, any earned but
unpaid base salary, any unpaid pro rata annual bonus and any amounts necessary
to reimburse Mr. Shivji for employment-related expenses and for unused, but
accrued, vacation days. Our failure to renew this agreement for any subsequent
one-year term shall be deemed to be a termination without cause. This agreement
prohibits Mr. Shivji from competing with us for the greater of (i) one year
after the termination of his employment or (ii) the length of time Mr. Shivji
receives severance payments from us.




Amjad Huda




We have entered into an employment agreement with Amjad Huda to serve as our
Chief Financial Officer and Treasurer, for renewable one year terms. Pursuant to
this employment agreement, Mr. Huda is entitled to receive an annual base salary
of $250,000, subject to annual reviews by our Compensation Committee. Mr. Huda
is also entitled to a performance-based bonus of up to 25% of his salary. Upon
execution of his employment agreement, we granted Mr. Huda an option to purchase
166,667 shares of our common stock at an exercise price of $1.50 per share,
which option shall vest in equal monthly installments over four years. If we
terminate Mr. Huda’s employment without cause or if Mr. Huda resigns for good
reason, we will pay Mr. Huda his then current annual base salary for one year,
payable in accordance with standard payroll procedures, any earned but unpaid
base salary, any unpaid pro rata annual bonus and any amounts necessary to
reimburse Mr. Huda for employment related expenses and for unused, but accrued,
vacation days. Our failure to renew this agreement for any subsequent one-year
term shall be deemed to be a termination without cause. This agreement prohibits
Mr. Huda from competing with us for the greater of (i) one year after the
termination of his employment or (ii) the length of time Mr. Huda receives
severance payments from us.




Victor Joseph




We have entered into an employment agreement with Victor Joseph to serve as our
Chief Technical Officer and Secretary, for renewable one year terms. Pursuant to
this employment agreement, Mr. Joseph is entitled to receive an annual base
salary of $250,000, subject to annual reviews by our Compensation Committee. Mr.
Joseph is also entitled to a performance-based bonus of up to 25% of his salary.
Upon execution of his employment agreement, we granted Mr. Joseph an option to
purchase 166,667 shares of our common stock at an exercise price of $1.50 per
share, which option shall vest in equal monthly installments over four years. If
we terminate Mr. Joseph’s employment without cause or if Mr. Joseph resigns for
good reason, we will pay Mr. Joseph his then current annual base salary for one
year, payable in accordance with standard payroll procedures, any earned but
unpaid base salary, any unpaid pro rata annual bonus and any amounts necessary
to reimburse Mr. Joseph for employment related expenses and for unused, but
accrued, vacation days. Our failure to renew this agreement for any subsequent
one-year term shall be deemed to be a termination without cause. This agreement
prohibits Mr. Joseph from competing with us for the greater of (i) one year
after the termination of his employment or (ii) the length of time Mr. Joseph
receives severance payments from us.




Outstanding
Equity Awards at Fiscal Year-End for Fiscal 2007




Number
      of Securities
              Underlying
      Unexercised
              Options
              (#)
            
            
            Number
      of Securities
              Underlying
      Unexercised
              Options
              (#)
            
            
            Option
      Exercise Price
            
            Option
      Expiration DateName
            
            Exercisable
            
            
            Unexercisable
            
            
            ($)Alnoor
      Shivji
            
            
            24,306
            (2)
            
            
            142,360
            (2)
            
            $
            1.50
            
            5/31/2017Amjad
      Huda
            
            
            24,306
            (3)
            
            
            142,361
            (3)
            
            $
            1.50
            
            5/31/2017134,979
            (4)
            
            
            —
            
            
            $
            0.46
            
            1/3/2017Victor
      Joseph
            
            
            24,306
            (3)
            
            
            142,361
            (3)
            
            $
            1.50
            
            5/31/2017134,979
            (4)
            
            
            —
            
            
            $
            0.46
            
            1/3/2017




(1)
            Option
      numbers and prices are presented as of December 31, 2007. Upon the Merger,
      we adopted and assumed WaferGen’s 2003 Stock Incentive Plan and the then
      outstanding options automatically converted into options to purchase
      shares of our common stock using the same exchange ratio applied to
      convert the WaferGen shares into our common stock in the merger. Upon the
      Merger, the vesting of all options issued under the 2003 Stock Incentive
      Plan was accelerated, and all the options became immediately
      exercisable.


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(2)
            Option
      to purchase 166,666 shares of our common stock at an exercise price of
      $1.50 per share granted on May 31, 2007, which option vests in equal
      monthly installments over four years and expires 10 years after the date
      of grant.





(3)
            Option
      to purchase 166,667 shares of our common stock at an exercise price of
      $1.50 per share granted on May 31, 2007, which option vests in equal
      monthly installments over four years and expires 10 years after the date
      of grant.





(4)
            Option
      to purchase 134,979 shares of our common stock at an exercise price of
      $0.46 per share granted on January 3, 2007 under the 2003 Stock Incentive
      Plan, which option became fully vested upon the Merger and expires 10
      years after the date of grant.




Director Compensation


The table below summarizes the compensation paid by the
Company to non-employee directors for the fiscal year ended December 31,
2007.





(a)
            (b)
            (c)
            (d)
            (e)
            (f)
            (g)
            (h)Name
            Fees
      Earned or
              Paid
      in Cash
              ($)
            Stock
      Awards
              ($)
            Option
      Awards
              ($)(1)
            Non-Equity
              Incentive
      Plan
              Compensation
              ($)
            Change
              in
      Pension
              Value
      and
              Nonqualified
              Deferred
              Compensation
              Earnings
              ($)
            All
      Other
              Compensation
              ($)
            Total
              ($)Makoto
      Kaneshiro
            —
            —
            —
            —
            —
            —
            —Dr.
      R. Dean Hautamaki
            —
            —
            48,000
            —
            —
            —
            48,000Joel
      Kanter
            —
            —
            —
            —
            —
            —
            —





(1)
              The
      amounts shown in column (d) represent the compensation costs of stock
      options for financial reporting purposes for fiscal year 2007 under FAS
      No. 123R, rather than an amount paid to or realized by the
      director.  The FAS No. 123R value as of the grant date for
      options is spread over the number of months of service required for the
      grant to become
non-forfeitable.


In
January 2008, the Board of Directors approved the following compensation for all
non-employee directors:





•
              Each
      non-employee director will receive an initial option grant (the “Initial
      Grant”) of 40,000 stock options upon the director’s appointment to board,
      with 50% of the options vested upon grant and the remaining 50% of the
      options vesting over one year with 25% of the options vesting every three
      months; provided, however, that the first Initial Grant made to
      non-employee directors in January 2008 was fully vested on the date of
      grant; and





•
            Immediately
      following each annual meeting of the Company’s stockholders commencing
      with the annual meeting of the Company’s stockholders in 2008, each
      non-employee director who continues as a non-employee director following
      such annual meeting shall receive an award of 15,000 stock options (the
      “Subsequent Grant”) vesting over one year with 25% of the option vesting
      every three months; provided that no
      Subsequent Grant shall be made to any non-employee director who has not
      served as a director of the Company, as of the time of such annual
      meeting, for at least six (6)
months.





Each Initial Grant and each Subsequent Grant shall provide that in the event of
a change in control of the Company, such option shall automatically become fully
vested and no longer subject to forfeiture immediately prior to the specified
effective date of such change in control.  The exercise price for all
Initial Grants and Subsequent Grants shall be the fair market value of the
Company's Common Stock in accordance with the terms of the Company’s stock
incentive plan.








Item 11.   Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters




The following tables set forth certain information regarding the beneficial
ownership of our common stock by (i) each person who, to our knowledge, owns
more than 5% of our common stock, (ii) each of our directors and executive
officers, and (iii) all of our executive officers and directors as a group.
Unless otherwise indicated in the footnotes to the following table, each person
named in the table has sole voting and investment power and that person’s
address is: c/o WaferGen Bio-systems, Inc., Bayside Technology Center, 46531
Fremont Blvd., Fremont, CA 94538. Shares of our Common Stock subject to options,
warrants, or other rights currently exercisable or exercisable within 60 days of
March 31, 2008, are deemed to be beneficially owned and outstanding for
computing the share ownership and percentage of the person holding such options,
warrants or other rights, but are not deemed outstanding for computing the
percentage of any other person.


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Name
      of Beneficial Owner
            
            Number
      of Shares Beneficially Owned
            
            
            Percentage
      Beneficially Owned(1)YA
      Global Investments, L.P.
            
            
            1,733,333
            (2)
            
            
            7.34
            %The
      Shivji Family Trust dtd June 12, 2000
            
            
            1,691,607
            (3)
            
            
            7.24
            %CSK-VC
      Life Science Investment Fund LP
            
            
            1,690,610
            (4)
            
            
            7.27
            %Directors and
      Executive Officers:Alnoor Shivji
            
            
            3,949,076
            (5)
            
            
            16.54
            %Victor Joseph
            
            
            997,317
            (6)
            
            
            4.26
            %Amjad Huda
            
            
            997,317
            (6)
            
            
            4.26
            %Joel Kanter
            
            
            137,500
            (7)
            
            
            *Raymond Dean Hautamaki
            
            
            106,833
            (8)
            
            
            *Makoto Kaneshiro
            
            
            108,164
            (9)
            
            
            *David Gelfand
            
            
            59,973
            (10)
            
            
            *Mona Chadha
            
            
            32,170
            (11)
            
            
            *Directors
      and Executive Officers as a Group (8 persons)
            
            
            6,388,350
            (5)-(11)
            
            
            26.01
            %







* Less
than 1%







(1)
            Based
      on 23,217,846 shares of our common stock issued and outstanding as of
      March 31, 2008.




(2)
            Includes
      400,000 shares of common stock issuable upon the exercise of currently
      exercisable warrants. Mark Angelo has the power to vote and dispose
      of the shares held by YA Global Investments, L.P. (formerly known as
      Cornell Capital Partners, L.P.). Its address is 101 Hudson Street, Suite
      3700, Jersey City, NJ 07302.




(3)
            Includes
      150,000 shares of common stock issuable upon the exercise of currently
      exercisable warrants. Excludes 54,821 shares of common stock that are
      being held in escrow for two years in connection with the Merger, and over
      which The Shivji Family Trust dtd June 12, 2000 does not currently have
      voting or dispositive power. Alnoor Shivji and his wife,
      Mariam Shivji, are the co-trustees of The Shivji Trust. Its address
      is 692 Hillcrest Terrace, Fremont, CA 94539.  See also
      footnote (6) in this section.




(4)
            Includes
      50,000 shares of common stock issuable upon the exercise of currently
      exercisable warrants. Excludes 77,576 shares of common stock that are
      being held in escrow for two years in connection with the Merger, and over
      which CSK-VC Life Science Investment Fund does not currently have voting
      or dispositive power. Hiromichi Tabata has the power to vote and
      dispose of the shares being registered on behalf of CSK-VC Life Science
      Investment Fund. Its address is 5th Floor,
      Riviera Minami Aoyama Building, 3-3-3, Minami-Aoyama,
      Minato-Ku,
Tokyo 107-0062 Japan.




(5)
            Includes
      (i) 329,258 shares of common stock issuable upon the exercise of currently
      exercisable warrants, (ii) 41,667 shares of common stock issuable upon the
      exercise of options that are exercisable within 60 days, (iii) 1,541,607
      shares of common stock held by The Shivji Trust and (iv) 150,000 shares of
      common stock issuable upon the exercise of currently exercisable warrants
      held by The Shivji Trust. Mr. Shivji and his wife,
      Mariam Shivji, are the co-trustees of The Shivji Trust.
      Mr. Shivji disclaims beneficial ownership of the securities held by
      The Shivji Trust, except to the extent he has a pecuniary interest
      therein. Includes an aggregate of 410,726 shares of common stock that are
      being held in escrow for two years in connection with the
      Merger. Also includes 134,979 restricted options, and over which Mr.
      Shivji currently has voting but not dispositive power pursuant to an
      escrow agreement among WGBS, Mr. Shivji and Gottbetter & Partners,
      LLP, as escrow agent. Mr. Shivji disclaims beneficial ownership of
      the shares held in escrow, except to the extent he has a pecuniary
      interest therein. Excludes options to purchase 124,999 shares of common
      stock that are not exercisable within 60
days.




(6)
            Includes
      176,646 shares of common stock issuable upon the exercise of options that
      are exercisable within 60 days. Excludes (i) options to purchase
      125,000 shares of common stock that are not exercisable within 60 days and
      (ii) 43,193 shares of common stock that are being held in escrow for two
      years in connection with the Merger, and over which the stockholder does
      not currently have voting or dispositive
power.




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(7)
            Includes
      (i) 40,000 shares of common stock issuable upon the exercise of options
      that are exercisable within 60 days Consists of (ii) 75,000 shares of
      common stock held by the Kanter Family Foundation and (iii) 22,500 shares
      of common stock issuable upon exercise of currently exercisable warrants
      held by the Kanter Family Foundation. Joel Kanter and his brother,
      Joshua Kanter, have voting and dispositive power over all of the
      securities held by the Kanter Family Foundation. Mr. Kanter disclaims
      beneficial ownership of the securities held by the Kanter Family
      Foundation, except to the extent he has a pecuniary interest
      therein.




(8)
            Consists
      of (i) 37,500 shares of common stock issuable upon the exercise of options
      that are exercisable within 60 days, (ii) 53,333 shares of common stock
      held by Cojack Investment Opportunities, LLC (“Cojack”) and (iii) 10,000
      shares  and 6,000 shares of common stock issuable upon the
      exercise of currently exercisable warrants held by Cojack and
      Mr. Hautamaki. Mr. Hautamaki has voting and dispositive power
      over the securities held by Cojack. Excludes options to purchase
      112,500 shares of common stock that are not exercisable within 60
      days.




(9)
            Consists
      of 108,164 shares of common stock issuable upon the exercise of options
      that are exercisable within 60 days. Excludes options to purchase 50,618
      shares of common stock that are not exercisable within 60
      days.




(10)
            Includes
      37,500 and 7,086 of restricted shares of common stock issuable upon the
      exercise of options that are exercisable within 60 days. Excludes (i)
      options to purchase 112,500 and 9,111 shares of common stock that are not
      exercisable within 60 days and (ii) 810 shares of common stock that are
      being held in escrow for two years in connection with the Merger, and over
      which Mr. Gelfand does not currently have voting or dispositive
      power.




(11)
            Consists
      of 32,170 shares of common stock issuable upon the exercise of options
      that are exercisable within 60 days. Excludes options to purchase 38,019
      shares of common stock that are not exercisable within 60
      days.




Securities Authorized for Issuance Under Stock Option Plan




The following table sets forth information regarding our compensation plans
under which equity securities are authorized for issuance to our employees, as
of December 31, 2007:







Plan
      category
            
            Number
      of securities to
              be
      issued upon exercise
              of
      outstanding options,
              warrants
      and rights
              (a)
            
            
            Weighted-average
              exercise
      price of
              outstanding
      options,
              warrants
      and rights
              (b)
            
            
            Number
      of securities
              remaining
      available for
              future
      issuance under
              equity
      compensation
              plans
      (excluding
              securities
      reflected
              in
      column (a))
              (c)Equity
      compensation plans approved by security holders
            
            
            2,000,000
            
            
            $
            1.80
            
            
            
            390,500Equity
      compensation plans not approved by security holders
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            
            2,000,000
            
            
            $
            1.80
            
            
            
            390,500







Item 12.     Certain Relationships and Related
Transactions, and Director Independence




Transactions with WaferGen Founders and Executive Officers




On January 3, 2007, WaferGen granted 250,000 shares of restricted common stock
to each of Alnoor Shivji, Amjad Huda and Victor Joseph under the 2003 Plan for
their services to WaferGen as officers and directors. Messrs. Huda and Joseph
did not accept the grant of restricted shares and in lieu of such grants of
restricted stock, WaferGen granted each of them options to purchase 250,000
shares of WaferGen’s common stock at an exercise price of $0.25 per share under
the 2003 Plan (which were exchanged for options to purchase 134,979 shares of
WBSI’s common stock by each of such holders at an exercise price of $0.46 per
share upon the Merger). The restricted shares held by Mr. Shivji and the options
held by Messrs. Huda and Joseph vest monthly over a period of four years.
However, upon the closing of the Merger, these options and shares of restricted
stock became immediately vested.




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On January 1, 2007, WaferGen borrowed $162,000 from Mr. Shivji in exchange for
two promissory notes. On January 30, 2007, Mr. Shivji and WaferGen entered into
a Note and Warrant Purchase Agreement, pursuant to which Mr. Shivji was granted
the right purchase up to $300,000 of promissory notes and warrants to purchase
up to 98,684 shares of WaferGen’s common stock, subject to adjustment. Pursuant
to this Agreement, on January 30, 2007, Mr. Shivji purchased three promissory
notes in the aggregate principal amount of $262,000 by converting his earlier
loans for $162,000 and advancing $100,000 of additional funds to WaferGen, and
three warrants to purchase an aggregate of 86,182 shares of WaferGen’s Series B
Preferred Stock, at a purchase price of $0.76 per share until the earlier of (i)
five years from the date of grant or (ii) the date WaferGen closes its initial
public offering. The notes issued to Mr. Shivji bore interest at the rate of 7%
per annum and were paid in full on March 30, 2007.




On February 28, 2007, Mr. Shivji and WaferGen amended the terms of the Note and
Warrant Purchase Agreement to allow for the purchase by Mr. Shivji of up to
$400,000 of promissory notes and warrants to purchase up to 131,579 shares of
WaferGen’s common stock, subject to adjustment. In connection with this
amendment, on February 28, 2007, Mr. Shivji purchased an additional promissory
note in the principal amount of $138,000 and a five year warrant to purchase an
additional 45,395 shares of WaferGen’s Series B Preferred Stock at a purchase
price of $0.76 per share. The note issued to Mr. Shivji bore interest at the
rate of 7% per annum and was paid in full on March 30, 2007.




On March 30, 2007, Mr. Shivji and WaferGen amended the terms of the Note and
Warrant Purchase Agreement to allow for the purchase by Mr. Shivji of up to
$650,000 of promissory notes and warrants to purchase up to 213,816 shares of
WaferGen’s common stock, subject to adjustment. In connection with this
amendment, on March 30, 2007, Mr. Shivji purchased an additional promissory note
in the principal amount of $250,000 and a five year warrant to purchase an
additional 82,237 shares of WaferGen’s Series B Preferred Stock at a purchase
price of $0.76 per share. The note issued to Mr. Shivji bore interest at the
rate of 7% per annum and was paid in full on April 30, 2007.




On March 30, 2007, pursuant to several Allonges between WaferGen and Mr. Shivji,
the maturity date of each outstanding note issued pursuant to the Note and
Warrant Purchase Agreement, as amended, was extended from March 30, 2007 to
April 30, 2007. Similarly, on May 14, 2007, pursuant to several Second Allonges
between WaferGen and Mr. Shivji, the maturity date of each outstanding note
issued pursuant to the Note and Warrant Purchase Agreement, as amended, was
further extended from April 30, 2007 to June 30, 2007.




On May 14, 2007, Mr. Shivji made an additional loan to WaferGen in the amount of
$100,000. There were no warrants issued in connection with this loan. The note
issued to Mr. Shivji bore interest at the rate of 7% per annum and was paid in
full on June 30, 2007.




In connection with the Offer, Mr. Shivji converted $240,000 of his indebtedness
from WaferGen at Closing into 160,000 units, $150,000 was repaid out of the
proceeds, and the balance of $360,000 (plus accrued and unpaid interest) will be
or has been repaid in accordance with the terms of the notes. In addition,
following the Offer and the Merger, Mr. Shivji’s warrants to purchase 213,816
shares of WaferGen’s common stock with an exercise price of $0.76 per share,
were converted into warrants to purchase 115,442 shares of WBSI’s common stock
at an exercise price of $1.41 per share.




In accordance with the Merger Agreement, 5% of the shares of common stock
issuable to the former stockholders of WaferGen in the Merger are being held in
escrow for two years, pursuant to the terms of an Escrow Agreement among WBSI,
Alnoor Shivji and Gottbetter & Partners, LLP, as Escrow Agent, in order to
secure certain indemnification obligations under the Merger Agreement. The
Escrow Agreement provides that Mr. Shivji shall have the right to direct the
Escrow Agent in writing as to the exercise of any voting rights pertaining to
the escrow shares.




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Item
13. Exhibits




Exhibit
      No.
            Description2.1
      (1)
            Agreement
      and Plan of Merger and Reorganization, dated as of May 31, 2007, by and
      among WBSI, Wafergen Acquisition Corp., and WaferGen,
      Inc.2.2
      (1)
            Certificate
      of Merger, dated as of May 31, 2007, of Wafergen Acquisition Corp. with
      and into WaferGen, Inc.3.1
      (2)
            Certificate
      of Incorporation of WBSI3.2
      (3)
            Certificate
      of Amendment to Certificate of Incorporation of WBSI, changing name to
      WaferGen Bio-Systems, Inc. and increasing the authorized
      capital3.3
      (4)
            Bylaws
      of WBSI10.1
      (1)*
            WaferGen
      Bio-Systems, Inc. 2007 Stock Option Plan10.2
      (1)
            Note
      and Warrant Purchase Agreement between WaferGen, Inc. and
      Alnoor Shivji, dated as of January 30, 200710.3
      (1)
            Form
      of 7% Promissory Notes, in the aggregate principal amount of $262,000,
      issued pursuant to the Note and Warrant Purchase Agreement, dated January
      30, 2007,10.4
      (1)
            Form
      of Warrants, made as of January 30, 2007, to purchase up to an aggregate
      of 86,182 shares of WaferGen’s Series B Preferred
    Stock10.5
      (1)
            Amendment,
      dated February 28, 2007, to Note and Warrant Purchase Agreement, dated
      January 30, 200710.6
      (1)
            7%
      Promissory Note, dated February 28, 2007, in the principal amount of
      $138,000, issued pursuant to the Note and Warrant Purchase Agreement,
      dated January 30, 2007, as amended10.7
      (1)
            Warrant,
      made as of February 28, 2007, to purchase up to 45,395 shares of
      WaferGen’s Series B Preferred Stock, issued pursuant to the Note and
      Warrant Purchase Agreement, dated January 30, 2007, as
      amended10.8
      (1)
            Second
      Amendment, dated March 30, 2007, to Note and Warrant Purchase Agreement,
      dated January 30, 200710.9
      (1)
            7%
      Promissory Note, dated March 30, 2007, in the principal amount of
      $250,000, issued pursuant to the Note and Warrant Purchase Agreement,
      dated January 30, 2007, as amended10.10
      (1)
            Warrant,
      made as of March 30, 2007, to purchase up to 82,237 shares of WaferGen’s
      Series B Preferred Stock, issued pursuant to the Note and Warrant Purchase
      Agreement, dated January 30, 2007, as amended10.11
      (1)
            Form
      of Allonge to Promissory Notes, dated as of March 31,
      200710.12
      (1)
            Third
      Amendment, dated May 14, 2007, to Note and Warrant Purchase Agreement,
      dated January 30, 200710.13
      (1)
            7%
      Promissory Note, dated May 14, 2007, in the principal amount of $100,000,
      issued pursuant to the Note and Warrant Purchase Agreement, dated January
      30, 2007, as amended10.14
      (1)
            Form
      of Second Allonge to Promissory Notes, dated as of May 14,
      200710.15
      (1)
            Letter
      from Matthew Markin dated as of May 31, 2007, resigning as a director
      and officer of WBSI and its direct and indirect
      subsidiaries10.16
      (1)
            Letter
      from Maria Maribel Jaramillo De La O dated as of May 31, 2007, resigning
      as a director and officer of WBSI and its direct and indirect
      subsidiaries10.17
      (1)
            Placement
      Agency Agreement dated April 12, 2007, between WaferGen, Inc. and Rodman
      & Renshaw, LLC10.18
      (1)
            Form
      of Lockup Agreement10.19
      (1)
            Form
      of Subscription Agreement10.20
      (1)
            Form
      of Registration Rights Agreement10.21
      (1)
            Form
      of Warrants issued to investors in a private placement the initial closing
      of which was held on May 31, 200710.22
      (1)
            Form
      of Warrant issued to Placement Agent in connection with a private
      placement the initial closing of which was held on May 31,
      200710.23
      (1)
            Escrow
      Agreement, dated as of May 31, 2007, among WBSI, Alnoor Shivji and
      Gottbetter & Partners, LLP, as Escrow Agent10.24
      (1)
            Split-Off
      Agreement, dated as of May 31, 2007, between WBSI, WaferGen, Inc., La
      Burbuja Leaseco, Inc. and Maria Maribel Jaramillo de La
      O10.25
      (1)
            General
      Release Agreement, dated as of May 31, 2007, among WBSI, Maria Maribel
      Jaramillo De La O, La Burbuja Leaseco, Inc. and WaferGen,
    Inc.10.26
      (1)*
            Employment
      Agreement dated May 31, 2007, between WBSI and
      Alnoor Shivji10.27
      (1)*
            Employment
      Agreement dated May 31, 2007, between WBSI and
      Amjad Huda10.28
      (1)*
            Employment
      Agreement dated May 31, 2007, between WBSI and
      Victor Joseph10.29
      **
            Mutual
      Separation Agreement, dated February 26, 2008, between the Company and
      Terry Osborn10.30
      **
            Code
      of Business Conduct and Ethics21.1
      **
            Subsidiaries23.1
            Letter
      of Consent From Independent Registered Public Accounting Firm, Rowbotham
      &Company, LLP31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
      Officer31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
      Officer32.1
            Section
      1350 Certification of Chief Executive Officer32.2
            Section
      1350 Certification of Chief Financial
  Officer





(1)
            Incorporated
      herein by reference to the identically numbered Exhibit to the Company’s
      current Report on Form 8-K filed on June 5,
  2007.





(2)
            Incorporated
      herein by reference to Exhibit 3.1 to the Company’s Registration Statement
      on Form SB-2 filed with the Commission on August 9,
  2006.





(3)
            Incorporated
      herein by reference to Exhibit 3.1 to the Company’s current Report on Form
      8-K filed with the Commission January 31,
2007.





(4)
            Incorporated
      herein by reference to Exhibit 3.2 to the Company’s Registration Statement
      on Form SB-2 filed with the Commission on August 9,
  2006.





*
            Indicates
      a management contract or compensatory plan or
  arrangement.


**
              Previously
      filed.


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 Table of Contents


Item
      14.
            Principal Accountant Fees and
Services





Set forth below isa summary of aggregate fees billed by Rowbotham
& Company LLP, our independent registered public accounting firm, for
services during the fiscal years ended December 31, 2007 and 2006.





2007
            
            
            2006Audit
      fees
            
            $
            162,068
            
            
            $
            ---Audit
      related fees
            
            
            54,110
            
            
            
            ---Tax
      fees
            
            
            15,711
            
            
            
            ---All
      other fees
            
            
            ---
            
            
            
            ---Total
      Fees
            
            $
            231,889
            
            
            $
            ---





Audit
Fees




Audit fees consist of fees and reimbursement of expenses for professional
services provided in connection with the audit of the Company’s financial
statements and review of the Company’s quarterly financial
statements.




Audit
Related Fees




Audit related fees consist of accounting consultation and services provided in
connection with other statutory or regulatory filings that are not included
under audit fees.




Tax
Fees




Tax fees consist of fees and reimbursement of expenses for professional services
provided in connection with the preparation of the Company’s federal and state
tax returns.




Pre-Approval
Policies and Procedures




We have implemented pre-approval policies and procedures related to the
provision of audit and non-audit services. Under these procedures, our board of
directors pre-approves all services to be provided by Rowbotham & Company
LLP and the estimated fees related to these services.




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 Table of Contents


SIGNATURES




Pursuant tothe requirements of Section 13 or 15(d) 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.








WAFERGEN
      BIO-SYSTEMS, INC.By:
            /s/  ALNOOR SHIVJIDate:
      April 29, 2008
            
            Alnoor ShivjiChairman,
      President and Chief Executive
Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





SIGNATURE
            
            TITLE
            
            DATE/s/  ALNOOR SHIVJIAlnoor Shivji
            
            Chairman,
      President and Chief Executive Officer (Principal Executive
      Officer)
            
            April
      29, 2008/s/  AMJAD
      HUDAAmjad Huda
            
            Chief
      Financial Officer (Principal Financial Officer) and
    Director
            
            April
      29, 2008/s/
      VICTOR JOSEPHVictor Joseph
            
            Chief
      Technology Office and Director
            
            April
      29, 2008/s/  DR. R.
      DEAN HAUTAMAKIDr. R.
      Dean Hautamaki
            
            Director
            
            April
      29, 2008/s/  JOEL KANTERJoel Kanter
            
            Director
            
            April
      29, 2008/s/ MAKOTO
      KANESHIROMakoto Kaneshiro
            
            Director
            
            April 29,
      2008






68