UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-KSB






[X]
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For the fiscal year
      ended  December 31,
      2007[  ]
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACTFor
      the transition period from _________ to ________Commission
      file number:333-136372


Znomics,
      Inc.(Name
      of small business issue in its charter)Nevada
              52-2340974(State
      or other jurisdiction of incorporation or organization)
              (I.R.S. Employer
      Identification No.)2611 SW Third Avenue, Suite 200
      Portland, OR
              97201(Address
      of principal executive offices)
              (Zip
      Code)






Issuer’s telephone
      number:  503-827-5271




Securities
      registered under Section 12(b) of the Exchange Act:Title
      of each class
            Name
      of each exchange on which registerednone
            not
      applicableSecurities
      registered under Section 12(g) of the Exchange Act:Title
      of each class
            Name
      of each exchange on which registerednone
            not
      applicable





Check
whether the Issuer (1) filed all reports required to be 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
[   ]





Check if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is not
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 [   ]





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes [ ]   No
[X]





State
issuer’s revenue for its most recent fiscal year.  $636,000





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the average bid and asked price of such
common equity, as of a specified date within the past 60 days:$20,378,570 based
on $2.90 per share as of February 11, 2008 (7,027,093 shares held by
non-affiliates).





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 11,072,560 as of February 18,
2008.





Transitional
Small Business Disclosure Format (Check One):  Yes: __; NoX




Table of Contents





TABLE OF
CONTENTS





PagePART
      IItem 1.
            Description of Business
            3Item 2.
            Description of Property
            12Item 3.
            Legal Proceedings
            12Item 4.
            Submission of Matters to a Vote of Security
      Holders
            12PART
      IIItem 5.
            Market for Common Equity and Related Stockholder Matters and
      Small Business Issuer Purchases of Equity Securities
            13Item 6.
            Management’s Discussion and Analysis or Plan of
      Operation
            15Item 7.
            Financial Statements
            19Item 8.
            Changes In and Disagreements With Accountants on Accounting and
      Financial Disclosure
            20Item 8A.
            Controls and Procedures
            21PART
      IIIItem 9.
            Directors, Executive Officers, Promoters and Control Persons;
      Compliance With Section 16(a) of the Exchange Act
            23Item 10.
            Executive Compensation
            26Item 11.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            28Item 12.
            Certain Relationships and Related Transactions, and Director
      Independence
            29Item 13.
            Exhibits
            30Item 14.
            Principal Accountant Fees and Services
            30





2
 Table of Contents





PART I


Item 1.   Description of Business





Business
Development





We were
originally incorporated on March 20, 2006 in Nevada, as Pacific Syndicated
Resources, Inc. We were an exploration stage company that was set up to engage
in the exploration of mineral properties. On November 5, 2007, we completed a
reverse merger (the “Merger”) with a private Delaware corporation, Znomics, Inc.
(“Znomics Delaware”), originally incorporated in 2000.  As a result of that
transaction, we changed our name to Znomics, Inc. and began to pursue the
business of Znomics Delaware as our sole business.  We reported the Merger
and the related transactions on a current report on Form 8-K, filed November 8,
2007.





We are
primarily engaged in the business of utilizing both our technology platform and
the expertise of our researchers to provide new approaches to drug development
for the pharmaceutical industry and for general medical research. Central to our
activities is the zebrafish, a tropical fish belonging to the minnow family that
has 80-90% of the same or similar genes as humans.  It is an
increasingly important model organism in scientific research. This trend was
recognized by a Wall Street
Journal article of August 8, 2003 which reported the following: “Edging
aside the trusty laboratory mouse in certain genetic studies is the tiny
zebrafish....  Researchers are using the striped creature to reveal
the secrets of diseases of the heart, brain, and aorta, as well as leukemia,
muscular dystrophy and vision and hearing disorders.”





We have
leveraged the zebrafish in the development of our primary technology, the
ZeneMark ®Library (our “Library”), a repository of retrievable zebrafish lines with
identified gene mutations. To make the library, we utilize a process known as
retroviral insertional mutagenesis to cause mutations in zebrafish. Mutations
are changes induced in one or more genes of the organism. Retroviral mutations
are genetic changes engineered by placing into the fish embryo’s DNA a small
amount of foreign DNA taken from a virus. DNA (deoxyribonucleic acid) is a
nucleic acid that contains the genetic instructions used in the development and
functioning of all known living organisms. After injection of retrovirus into a
fish embryo, the fish are later analyzed to determine which genes have been
disrupted from this gene altering process. The results of this analysis are then
used by scientists in further research to study the effects of the mutated
gene(s) for disease causation, to find potential drug targets, and to create
animal models of diseases for drug discovery work. Currently our Library
contains insertions representing about 50% of the zebrafish genes and we hope to
increase the number of mutated genes to nearly 90% over the next few years. No
other company or scientific organization, to our knowledge, has accomplished an
equivalent mutant library in a vertebrate.





Industry
Background





Despite
the tremendous technological advances in genetics and functional genomics of the
past three decades, including the development of recombinant DNA technologies
and the completion of the Human Genome Project, productivity in the drug
discovery industry has declined. According to the Pharmaceutical Research and
Manufacturers of America (PhRMA), the total




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research
and development budget for the pharmaceutical industry has increased 20-fold
over the last two and a half decades, from $2 billion in 1980 to $40 billion
annually in 2005, but the number of new drugs launched has remained relatively
constant, in the range of 10 to 20 per year. Many factors underlie this decrease
in productivity, including the establishment of higher safety and efficacy
standards for FDA approval and the increased biological complexity of the
diseases for which adequate treatments have not yet been found. Decreasing
productivity in a high-risk, high-reward endeavor such as drug discovery puts a
premium on new technologies and approaches, and is the commercial force driving
the genomics and functional genomics industries.





Experimentation
to identify safe and effective drugs is conducted first using in vitro (outside
a living organism) systems, so all early drug discovery is conducted using model
systems. Since scientists must identify laboratory proxies that are related to
human physiology, these model systems can be highly indirect and
simplified.  Much of the biopharmaceutical industry is based largely
on a reductionist model that assumes that modulating the activity of a single
drug target (for example, a receptor, ion channel, or enzyme – protein receptors
in cells that stimulate or block specific biological actions) is the best
approach to finding new drugs. Typically, the chosen disease target is expressed
in tissue culture cells, and the cells are then used to screen huge chemical
compound libraries in high-throughput assays to find compounds that stimulate
(agonize) or inhibit (antagonize) the target protein.





Problems
with this approach include the fact that targets can only be screened one at a
time, efficacy and non-toxicity must be determined in follow-up on animal
studies, and many diseases are complex and may be better treated by drugs that
act on more than one target. According to PhRMA, only one in 1,000 lead
compounds (chemical compounds that have pharmacological or biological activity
and whose chemical structures are used as a starting point for chemical
modifications in order to improve potency, selectivity, or pharmacokinetic
parameters) identified today, largely through the single drug target approach,
are sufficiently safe and effective in animal trials to proceed to human
testing, and only one in five of these compounds that enter clinical development
survives human testing and receives FDA approval.





In the
early days of the pharmaceutical industry, compounds were sometimes initially
screened in whole animal models of disease. Compounds that were identified, by
virtue of their activity in vivo (within the whole, living organism), were known
to have sufficient efficacy and the minimal pharmacokinetic properties necessary
to be reasonable lead drug candidates. A major problem with this approach was
the extremely time consuming, inefficient and expensive process of screening
compound banks in rodents in vivo.





A
solution that addresses the deficiencies inherent in the two approaches
described above is the development of a drug discovery method that combines the
power of whole (live) animal drug testing for finding safe and effective
compounds with the speed and high-throughput capabilities of drug screening
against single targets in cultured cells. We believe that high-throughput, in
vivo drug screening in the zebrafish is such a method.




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Zebrafish
as the Key Model Organism – Solving Key Problems with Current Drug
Discovery




We
believe that the zebrafish provides an excellent vertebrate model for drug and
drug target discovery for the following reasons:





·
            Vertebrate
      physiology in a small organism with a short life cycle. Zebrafish
      are small, develop ex utero, and have a short generation time. Female fish
      lay approximately 200 eggs per week, year-round. At three to five days
      post-fertilization, each fish is a free-swimming, free-feeding organism
      complete with almost all of the organ systems found in mammals, including
      heart, brain, blood, and pancreas. It is estimated that zebrafish have
      80-90 percent of the genes found in
humans.


·
            Robotic
      screening. The zebrafish is suited for robotic screening as a live
      animal. The three-to-five day old fish is approximately 1 to 2 mm in
      length, and can be examined using high-throughput screening assays. In
      addition, live zebrafish can be quantified and sorted automatically on the
      basis of fluorescent intensity using modified fluorescence-activated cell
      sorting (FACS) machines.


·
            Simple
      and efficient drug administration. The zebrafish is an excellent
      organism with regard to drug dosing, since the gill system of the fish
      efficiently transports many small molecules into its
      bloodstream.


·
            Direct
      observation of internal organs. The zebrafish is transparent for
      approximately the first seven days of its development. Thus, in contrast
      to the mouse, the structure and function of internal organs, cells, and
      tissues in the zebrafish can be readily observed, and direct visualization
      can thus form the basis for automated drug and drug target
      screens.





Drug
Discovery Utility





Based on
these properties, the use of zebrafish provides a new approach to drug
discovery. For example, Type II diabetes results from the progressive
desensitizing of peripheral tissues to the hormone insulin. Research on several
potential drug targets for the treatment of Type II diabetes has led to the
discovery of compounds that are only partially effective. To test compounds for
their ability to stimulate insulin responsiveness in a rodent, one would have to
inject compounds intravenously, and then draw blood to measure glucose and/or
insulin levels. The time and expense involved in breeding and assaying the
hundreds of thousands of mice necessary to screen a typical compound library
make this approach impractical. In contrast, use of the zebrafish as a model
system for diabetes is expected to allow robotic screening of hundreds of
thousands of compounds in live fish within a matter of weeks, using a
fluorescent marker that will indicate quantitatively the degree of peripheral
insulin sensitivity in the transparent zebrafish.





Within
the last ten years, mutant zebrafish lines isolated from large-scale chemical
mutagenesis screens have been utilized to advance understanding of vertebrate
development.  Chemical mutagenesis, however, has not proven to be an
efficient method to produce mutant fish.  More recent work
demonstrates that the zebrafish is also an excellent model for studying human
disease, since conservation of genes across vertebrate species has been
well-documented, and conservation of sites and mechanisms of drug actions have
been demonstrated in the zebrafish. For example, in multiple cases, new human
disease genes have been discovered through research in the zebrafish; examples
include genes causing deafness and anemia.  Other investigators have




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demonstrated
that well-known human pharmaceuticals are active in the zebrafish. For example,
the cholesterol-lowering drug Lipitor (atorvastatin) blocks cholesterol
accumulation in the zebrafish (Dr. Marnie Halpern, Carnegie Institute of
Washington, Washington, D.C.), and the anti-inflammatory cyclo-oxygenase
inhibitor Indocin (indomethacin) blocks prostaglandin synthesis in the zebrafish
as it does in humans (Dr. Garret FitzGerald, University of Pennsylvania,
Philadelphia).  Novartis, Genentech and Merck have all initiated
aspects of drug discovery or drug target discovery research programs utilizing
the zebrafish.





Drug
Target Discovery Utility





Drug
targets are molecular components in the organism to which a drug compound binds
to produce its pharmacological effect. In addition to their use in whole animal
drug discovery, zebrafish are highly suitable for drug target
discovery.  Since a great deal of pharmaceutical company research is
directed towards identifying new drug targets, which may then be used for
high-throughput, single-target drug screening, there is a significant financial
incentive in the industry to develop new methods for drug target discovery. We
have developed a novel drug target discovery platform, based upon our retroviral
insertional mutagenesis (RIM) technology in the zebrafish. Using an assay for a
disease process, we can employ a single genetic screen of a large number of fish
with different mutated genes to find which disrupted genes have effect in the
assay.   This approach is known as “forward genetics”, defined as
the cloning of genes corresponding to mutations affecting key steps in
physiological processes, in order to build genetic models of a given process or
disease.  This “forward genetics” approach is used in our proprietary
drug target discovery activities and will be utilized in collaborative drug
discovery relationships with companies interested in conventional target-based
drug discovery as well.  We expect to capitalize on the essentially
unrealized promise that genomics and functional genomics will bolster the
productivity of drug target discovery.





Sale
of Mutant Fish Lines and Services





Our
ZeneMark ®Library is a searchable catalogue of mutated zebrafish lines that can be
viewed at our website (Znomics.com). Ancillary to our drug discovery business,
we sell mutant fish lines to university researchers. More than 100 scientists at
different universities have ordered mutant fish lines from Znomics. We have
developed good relationships with many researchers in the zebrafish academic
community through scientific meetings and collaborative contacts including those
who have acquired our lines. Through these relationships we expect to be able to
license new disease models, assays and drug compounds developed in academic
laboratories to strengthen our drug discovery effort. We attempt to acquire the
right to negotiate for an exclusive license to inventions resulting from use of
our fish lines by university researchers. This negotiation takes place when
scientists submit a Material Transfer Agreement to become eligible to order
zebrafish either online or by calling our office. Due to the long lead times on
research, none of these agreements have yet resulted in a license.





We ship
our mutant fish line products to customers primarily using standard overnight
delivery services such as FedEx. Sales of our mutant fish line products are
currently via web page introduction followed by customer service support of
customer calls or emails. Our website has on-line ordering capability. No sales
agents or inside sales people are utilized.





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Services
to pharmaceutical customers are sold via direct contact by the Company’s
management to the customer’s research management.





Status
of New Products and Services





Our
revenue for 2007 was generated exclusively through the sale of zebrafish, the
receipt of NIH grants for research, and by conducting drug target discovery
research for a publicly-held pharmaceutical company, Merck, Inc. We plan to
continue the mutant fish sales and to apply for additional research grants to
provide revenue in support of our internal research activities.  As of
December 31, 2007, we have completed the work contemplated by this
agreement.





Our
primary business goal moving forward is to identify new lead drug compounds for
human diseases such as obesity, diabetes, neurodegeneration and cancer through
compound screening in vivo. We intend to partner with pharmaceutical and
biotechnology companies in finding new drug targets and lead compounds for
diseases that are ready for clinical testing. We believe that such partnerships
will provide the most significant source of revenue for us moving forward if we
are able to negotiate upfront and ongoing research payments, payments on
achieving certain progress milestones, and royalties from drugs that are
marketed. Negotiating such terms is not unusual in the pharmaceutical
industry.  At present, we do not have any such contracts in
place.





The
Company has engaged in two phases of the drug discovery process, finding drug
targets and developing assays or disease models. The Company has not yet
performed the third phase, compound screening. We plan to hire an experienced
drug development director, acquire compounds and access to compound libraries,
and to dedicate technician level employees to this aspect of drug discovery in
2008. We also have recently hired employees and engaged consultants to focus on
business development with pharmaceutical companies in the first half of 2008. We
have recently leased additional space and will make capital expenditures,
primarily laboratory equipment, in the first half of 2008 to support our drug
discovery effort.




Competition





Competition
in genome mapping and the related fields of drug discovery and drug target
discovery is intense and is expected to increase. Our future activities may
include identifying and patenting drug candidates and drug targets, and to
secondarily develop reagent products and services, activities in which we will
experience significant competition from pharmaceutical and biotechnology
companies. At this time, we are not aware of any other commercial entity that is
researching or developing a retroviral insertional mutagenesis library in the
zebrafish. Different methods of mutagenesis are being used or developed in a
variety of organisms including zebrafish, but to our knowledge these have
disadvantages in cost or efficacy. Chemical mutagenesis is a prevalent technique
but it is markedly less efficient. The following are functional genomics
companies known to us to focus on and have experience with the
zebrafish.





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Public
Companies





Charles
River Laboratories (NYSE:CRL), Wilmington, Massachusetts





Charles
River Laboratories is a global provider of rodent strains and services for the
drug discovery and development process. In addition to research models and
services, Charles River Laboratories supports every step of the drug development
pipeline with divisions dedicated to preclinical and clinical services.
Recently, they have created a zebrafish division that offers genetic mapping
services for the zebrafish.





Summit
plc (AIM:SUMM), United Kingdom





Summit is
a chemical genomics company that provides services to the pharmaceutical,
biotech and agrochemical industries. Utilizing model organisms, such as
zebrafish, Summit enables customers to assess compounds in a high throughput in
vivo screen. Summit plans to offer this in vivo screening to drug discovery as
well as toxicology partners. Additionally, it plans to use this platform
internally for high throughput chemical screens for the development of novel
drugs, focusing on neurodegenerative and neuromuscular disease, cancer,
ophthalmic disease and regenerative medicine. On March 22, 2007, Summit acquired
zebrafish company Danio Labs (U.K.) for 16.5 million pounds. Danio Labs was a
privately-held zebrafish company doing compound screening, and a competitor to
Znomics. Danio was about twice the size of Znomics in terms of employees and was
focused on disease areas in ophthalmology and neurology. Danio intended to
pursue a strategy of repositioning known drugs (and drug combinations) for new
indications, and had built a portfolio of pre-clinical and clinical candidates.
In addition to using these technologies for its own research, the company also
planned to provide drug discovery services to other pharmaceutical companies, in
the areas of safety pharmacology, embryotoxicology and compound activity
screening, as well as through target validation and collaborative research
programs.





Private
Companies





Phylonix
Pharmaceuticals, Inc., Cambridge, Massachusetts





Phylonix
is concentrating on developing and marketing proprietary, in vivo
zebrafish-based assays for contract screening for cancer, cardiovascular
disease, immune function, and organ toxicity. Phylonix is a contract research
organization, rather than a drug-discovery company, and is privately owned.
Phylonix owns several issued United States patents on research tools including
methods for drug screening in zebrafish using microtiter plates (Patent #
6,299,858), transplantation of human cells in zebrafish (Patent # 6,761,876),
and methods for assessing drug candidates for angiogenesis and vasculogenesis in
zebrafish (Patent # 7,041,276).





ZF
BioLabs, Madrid, Spain





ZF
BioLabs maintains breeding stocks of zebrafish and continuously produces eggs
and embryos that are available at different stages of development for research
activities. The company plans to offer toxicity studies using zebrafish embryos
and larvae for early stage drug assessments and ecotoxicity studies. Also, ZF
BioLabs is collaborating with Spanish universities in research and development
projects to develop a proprietary zebrafish technology platform for drug
discovery.





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Zygogen,
LLC, Atlanta, Georgia





Zygogen,
LLC, founded in 1999, focuses on the development of proprietary zebrafish models
of human disease for preclinical drug discovery. Zygogen’s two broad proprietary
technologies are Z-Tag SMand
Z-Lipotrack SM.
Zygogen is the exclusive licensee of the Medical College of Georgia Research
Institute Patent No. 6,380,458 and submitted subsequent patent application No.
2002/0178461.  Other patent applications include No. 2004/0143865, No.
2005/0120392 and 2005/017789 (University of California).  The Z-Tag
SMsystem enables Zygogen to design transgenic zebrafish with
physiologically relevant expression of modified genes and markers, such as
fluorescent proteins, to model human disease. Z-Lipotrack SMtechnology enables Zygogen to track lipid metabolism in real-time. Areas
of focus include angiogenesis, neurodegeneration, lipid metabolism, thrombosis
and toxicity testing. The company also offers morpholino injection and analysis
services based on exclusively licensed patented technology from the University
of Minnesota.





Luminomics,
Inc., St. Louis, Missouri





Luminomics
was founded in 2002 and creates degenerative disease models in zebrafish that
reveal how particular cells and tissue types regenerate in vertebrates. Their
disease models enable high-throughput genetic and pharmacological screens to
identify candidate drug targets. They have submitted a patent application on a
transgenic zebrafish model system for discovery of molecular pathways that
stimulate cell type specific regeneration. Their in-house research emphasis is
on degenerative diseases.





Sources
and availability of raw materials and the names of principal
suppliers





We
utilize various lab supplies which are widely available from multiple
sources.  Currently, our only significant contractor, 454 Life
Sciences, provides deoxyribonucleic acid (DNA) sequencing services to
us.  Deoxyribonucleic acid (DNA) is a nucleic acid that contains the
genetic instructions used in the development and functioning of all known living
organisms. DNA sequencing is an important step in our ongoing research that
enables us to build our Library and develop additional gene mutated fish lines.
Although we currently contract all of our outsourced DNA sequencing processes to
454 Life Sciences, our management believes alternate suppliers exist for this
service.





Dependence
on limited customers





We sell
genetically mutated zebrafish to more than 100 investigators at state and
private universities, both nationally and internationally.  All of our
current and prospective customers for the sale of zebrafish are university-based
research labs. There are no other major customers for mutant fish products. If
another equally effective but easier or less costly means of mutating genes in
fish is discovered or is marketed by another company, there would likely be a
significant decrease in this segment of our business.





We have
provided services to Merck, Inc. (“Merck”), a large pharmaceutical company,
since




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December,
2005, pursuant to a written contract that expired in December 2007.





Our
intention is to negotiate additional drug target discovery and/or drug discovery
contracts with Merck in the next twelve months.  We also intend to
pursue other pharmaceutical companies in our business development efforts.
However, no service contracts have been secured since inception with any
pharmaceutical company other than Merck. We expect that contracts with
biotechnology or pharmaceutical companies will be our major source of revenue in
the next two to five years.





Patents,
Trademarks and Licenses





Intellectual
Property





We
believe that we are establishing a strong proprietary position in the commercial
use of zebrafish gene mutants through the ZeneMark® Library. We have filed a
patent application with multiple claims on our proprietary retroviral
mutagenesis technology and the ZeneMark® Library.  Our patent
applications are numbered No. 60/514754, No. 10/678,949 and No. 11/594,810 and
were filed October 4, 2002, October 6, 2003 and November 9, 2006,
respectively.   We intend to file other patent applications as
discoveries are made.  Thus far, we have not been granted any
patents.  Our intellectual property strategy is to establish strong
proprietary positions in four areas:





·
            zebrafish
      disease models;·
            methodology
      and use of zebrafish retroviral insertional mutagenesis (gene disruption),
      including our ZeneMark® Library of mutated and marked
    genes;





·
            drug
      targets based on discovered or functionally defined genes and proteins;
      and·
            proteins
      or chemical compounds to serve as therapeutic drugs for human
      diseases.





Additionally,
we have registered “Znomics” and “ZeneMark” as trademarks.





Licensing
Arrangements





We expect
to license patentable technology from universities and university scientists
that have obtained mutant fish lines or technical services from us, as well as
from other universities and scientists who have not obtained fish lines.
Discoveries made by a university scientist while using our technology are
usually eligible for acquisition, and we normally sign agreements with the
scientist and the university to obtain the first right to negotiate for an
exclusive license. We currently have more than 100 such agreements in place, and
expect to enter into more.  Due to the long lead times on research,
none of these agreements have yet resulted in a license.





Need
for Governmental Approval





Drug
products such as those proposed to be developed by us or in partnership with our
collaborators are subject to an extensive regulatory approval process by the FDA
and comparable agencies in other countries.  The regulation of new
therapeutic products and diagnostics is extensive, and the required pre-clinical
and clinical testing is lengthy and expensive.





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Should
our drug discovery program find indications of the efficacy of a substance for
the treatment of a human disorder, we may undertake further testing of the
substance. The conduct of these studies must comply with national statutory or
regulatory requirements for Good Laboratory Practice (GLP). GLP regulations
describe a quality system concerned with the organizational process and the
conditions under which nonclinical laboratory studies are planned, performed,
monitored, recorded, archived and reported. GLP compliance is required by such
regulatory agencies as the FDA, United States Environmental Protection Agency,
European Agency for the Evaluation of Medicinal Products, Medicines and
Healthcare Products Regulatory Agency (MHRA) in the United Kingdom, Health
Canada, and the Japanese Ministry of Health and Welfare. GLP requirements are
significantly harmonized throughout the world and our laboratories, or
laboratories we may contract with for such testing, will be capable of
conducting studies in compliance with all appropriate requirements. To assure
our compliance obligations, we will establish quality assurance units (QAU) in
each of our nonclinical laboratories. The QAUs will operate independently from
those individuals that direct and conduct studies and monitor each study to
assure management that the facilities, equipment, personnel, methods, practices,
records, and controls are in compliance with GLP. Our laboratory managers will
use the results of QAU monitoring as part of a continuous process improvement
program to assure our nonclinical studies meet client and regulatory
expectations for quality and integrity.





Effect
of Governmental Regulations





The
distribution of research animals for genetic testing, both nationally and
internationally, is subject to a variety of national, regional, and local laws
and regulations, which establish the standards for the humane treatment, care
and handling of animals by dealers and research facilities. Many such
regulations do not apply to us and such regulations generally exclude fish. We
do, however, maintain the necessary certificates, licenses, detailed standard
operating procedures and other documentation required to comply with applicable
regulations for the humane treatment of the animals in our custody.





Because
of the diversity of species and research situations, regulatory agencies have
charged the Institutional Animal Care and Use Committees (“IACUC”) with
complying with the Animal Welfare Act (“AWA”) and Public Health Service (“PHS”)
Policy on Humane Care and Use of Animals. Although fish and other poikilotherms
are excluded from the AWA, PHS-supported activities related to any live
vertebrate require IACUC review and Institutional Assurance. Due to Znomics’
close relationship with Oregon Health and Science University (“OHSU”), we were
able to arrange IACUC review by OHSU for our zebrafish research protocols
required for our NIH grant applications. The IACUC approved our fish protocols
which apply to the key aspects of handling and care of our fish.





Research
and Development





We have
incurred expenditures related to research and development in the amount of $17
thousand  for the year ended December 30, 2007, $0 for the year ended
December 31, 2006 and $770 thousand for the period from inception (September 13,
2001) to December 31, 2007.  We have also incurred grant expenses,
funded by grant revenue, to further the development of the




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zebrafish
genetic library totaling $438 thousand, $746 thousand and $2.0 million for the
years ended December 31, 2007 and 2006 and inception (September 13, 2001) to
December 31, 2007, respectively.





Employees





As of
December 31, 2007, we employed a total of nineteen (19) employees,
including sixteen (16) full-time employees, including management, administrative
and research staff.   None of our employees were represented by a
collective bargaining agreement. We consider our relations with employees to be
good and we have not experienced a work stoppage due to labor
issues.  We also utilize several consultants; including five (5)
Scientific Advisory Board members, who review the feasibility of research and
development programs under consideration, provide advice concerning advances in
areas related to our technology and aid in recruiting personnel.  All
of our scientific advisors are employed by academic institutions or other
entities, and may have commitments to, or agreements with, other entities that
may limit their availability.





Item 2.   Description of Property





We
conduct our operations from our principal office located at 2611 SW Third Ave.,
Suite 200, Portland, OR 97201. We lease approximately 4,700 square feet of space
in this off-campus facility of Oregon Health Science University (OHSU) on a
quarter-to-quarter basis for our corporate offices and laboratories. Our rent is
approximately $7 thousand per month.   In February 2008,
we  entered into a another lease with OHSU for on-campus research and
office space to augment our current space by approximately 1,600 square feet,
including additional fish tank capacity for a one year period.  We
anticipate that this additional space will cost us approximately $4 thousand per
month.  We do not have an agreement in place with OHSU for the rental
of additional space and there can be no assurance that we will be successful in
obtaining additional space on acceptable terms.





Item 3.   Legal Proceedings





We are
not a party to any pending legal proceedings.  We are not aware of any
pending legal proceeding to which any of our officers, directors, or any
beneficial holders of 5% or more of our voting securities are adverse to us or
have a material interest adverse to us.





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





No
matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 2007.




12
 Table of Contents




PART II





Item 5.    Market for Common Equity and Related
Stockholder Matters and Small Business Issuer Purchases of Equity
Securities





Market
Information




The
Company's authorized capital stock consists of 100,000,000 shares of common
stock, $.001 par value per share. The Company has no classes of preferred stock
at December 31, 2007.




The
Company's common stock trades on the OTC Bulletin Board under the symbol of
"ZNOM.OB."  Prior to January 4, 2008, the common stock traded under on the
OTC Bulletin Board under the symbol of “PSRI.OB.”  As of February 11,
2008, the closing sale prices of the common stock was $2.90 per share. The
following are the high and low sale prices for the common stock by quarter as
reported by the OTC Bulletin Board since January 1, 2005.




Fiscal
      Year Ending December 31, 2006Quarter
      Ended
            
            High
      $
            
            Low
      $March
      30
            
            0
            
            0June
      30
            
            0
            
            0September
      30
            
            0
            
            0December
      31
            
            0
            
            0





Fiscal
      Year Ending December 31, 2007Quarter
      Ended
            
            High
      $
            
            Low
      $March
      30
            
            0
            
            0June
      30
            
            0
            
            0September
      30
            
            0
            
            0December
      31
            
            3.20
            
            2.65





The
quotations and ranges listed above were obtained from OTCBB.  The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.





Holders
of Our Common Stock


As of
December 31, 2007, we had 11,072,560 shares of our common stock issued and
outstanding, held by 97 shareholders of record.





Dividends





The
Company has not declared, or paid, any cash dividends since inception and does
not anticipate declaring or paying a cash dividend for the foreseeable
future.





Nevada
law prohibits our board from declaring or paying a dividend where, after giving
effect to such a dividend, (i) we would not be able to pay our debts as they
came due in the ordinary




13
 Table of Contents




course of
our business, or (ii) our total assets would be less than the sum of our total
liabilities plus the amount that would be needed, if the corporation were to be
dissolved at the time of distribution, to satisfy the rights of any creditors or
preferred stockholders.





Securities
Authorized for Issuance Under Equity Compensation Plans





Equity
      Compensation Plan Information
              As
      of December 31, 2007Plan
      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
            882,948
            
            $
            1.10
            
            825,374Equity
      compensation plans not approved by security holdersTotal
            882,948
            
            $
            1.10
            
            825,374




(a)
            Includes
      882,948 stock options  outstanding as of December 31,
      2007.(b)
            No
      stock rights exist at December 31, 2007.(c)
            Stock
      options authorized at December 31, 2007 total 1,708,322. Stock options
      authorized but not yet issued total 825,374 at December 31,
      2007.  As a result of the Merger with Znomics Delaware, we
      assumed The 2001 Znomics, Inc. Stock Incentive Plan (the “Plan”) and the
      outstanding options under the Plan were converted into options to purchase
      our common stock, post-merger, on comparable terms as the existing option.
      The Plan is our only equity compensation
  plan.


14
 Table of Contents




We
believe that it is important and beneficial to give employees and key
consultants and advisors the opportunity to participate in ownership. Equity
compensation, in addition to regular salaries, enables us to attract and retain
highly qualified employees, consultants and advisors in an extremely competitive
market.





The Plan
is administered by the Board of Directors. Each person receiving an option
receives an option grant certificate which sets forth the terms and conditions
of the option. Options are exercisable for a set period of time not to exceed
ten years from the date of the grant, and may be subject to a vesting schedule,
becoming incrementally exercisable over a period of time. Options may be
exercised only while the recipient is employed or is serving as a director, or
within 90 days after termination of an employee’s service unless the person is
disabled, in which case all options terminate after one year from the date of
the disability or expiration, whichever is greater. Options are not transferable
except by will or the laws of descent and distribution.





Options
are designated as either “incentive stock options,” as defined in section 422 of
the Internal Revenue Code, or “nonqualified stock options,” and are exercisable
at a per share price not less than 100% of the fair market value of our Common
Stock on the date of grant. Incentive stock options granted to any person with a
beneficial ownership of 10% or more of our outstanding shares must be
exercisable at a price per share not less than 110% of the fair market value of
our Common Stock on the date of grant. The Plan permits, at the discretion of
the Board of Directors, the option holder to pay the exercise price of any
options with cash, a promissory note, or company securities held by the option
holder. The Plan also permits broker-assisted cashless exercises of stock
options.





Restricted
stock grants are grants of shares to an employee, director or consultant at no
cost with a provision that if the grantee quits or is terminated, the shares can
be repurchased by us for nominal value. While the grantee holds the shares, they
are entitled to receive dividends, if any, and to vote the shares. Until the
shares vest, the employee cannot transfer the shares. Either over time or as a
result of us or the grantee achieving certain pre-established performance goals,
the restrictions are removed and the employee is free to dispose of the shares
at market value. The committee will determine whether or not a restricted stock
grantee must make a payment to us for all or some portion of the fair market
value of the shares covered by the award.





All
option numbers and exercise prices have been retroactively adjusted for all
forward or reverse stock splits.




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





Forward-Looking
Statements





This
Annual Report on Form 10-KSB contains forward-looking statements, as defined in
the Private Securities Litigation Reform Act of 1995. To the extent that any
statements made in this Report contain information that is not historical, these
statements are essentially forward-looking. Forward-looking statements can be
identified by the use of words such as “expects,” “plans,”




15
 Table of Contents




“will,”
“may,” “anticipates,” believes,” “should,” “intends,” “estimates,” and other
words of similar meaning. These statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties are outlined in “Risk
Factors” and include, without limitation:






·
            Our
      limited and unprofitable operating history;·
            the
      ability to raise additional capital to finance our
    activities;·
            legal and regulatory
      risks associated with the Merger;·
            the future trading
      of our common stock;·
            our ability to
      operate as a public company;·
            general economic and
      business conditions;·
            the volatility of
      our operating results and financial condition; and·
            our
      ability to attract or retain qualified senior scientific and management
      personnel.



















The
foregoing factors should not be construed as exhaustive and should be read in
conjunction with the other cautionary statements that are included in this
Annual Report on Form 10-KSB.





Information
regarding market and industry statistics contained in this Report is included
based on information available to us that we believe is accurate. It is
generally based on industry and other publications that are not produced for
purposes of securities offerings or economic analysis. We have 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. We
do not undertake any obligation to publicly update any forward-looking
statements. As a result, investors should not place undue reliance on these
forward-looking statements.





Plan of Operation in the Next 12
Months





Our plan
of operation for 2008 is to primarily focus marketing, research and operations
efforts to support drug target and lead compound discovery efforts.





In 2008
we plan to pursue licenses with academic or biotechnology partners to secure new
disease models, assays and drug compounds developed in their laboratories to
strengthen our drug discovery efforts.





We intend
to continue mutant fish sales in 2008, although the Company’s marketing and
operational emphasis will be drug discovery and collaborative partnerships with
pharmaceutical and biotechnology companies.





We also
plan to pursue National Institute of Health grants in the future to develop
disease models and improve technology further the number of mutant zebrafish
lines in the ZeneMark© library.  Due to the timing of the grant
application and approval process, it is likely grant revenue for




16
 Table of Contents




2008 will
be nominal or even zero.





Results
of Operations for the Years Ended December 31, 2007 and December 31,
2006





Sales
and Revenue


Sales and
revenue decreased from $1.0 million to $636 thousand, or 38%, from the year
ended December 31, 2007 compared to the year ended December 31,
2006.   The decrease was primarily due to $308 thousand less
revenue from National Institute of Health grants in 2007 compared to
2006.  Grant funding from the last grant awarded in 2006 ceased August
31, 2007.


Revenue
related to products and services decreased from $274 thousand for the year ended
December 31, 2006 to $198 thousand for the year ended December 31, 2007, or $76
thousand (28%).   The decrease was primarily due a decrease of
$90 thousand, or 45%, in contract services to Merck in 2007 compared to
2006.  Partially offsetting the decrease was an increase in sales of
mutant fish lines of $14 thousand, or 19%, in 2007 over 2006 due to higher unit
shipments.





Operating
expenses


Operating
expenses increased to $1.8 million from $1.1 million, or 67%, from the year
ended 2007 compared to 2006.  The increase was primarily due to
increases in the cost of products and services, as well as selling, general and
administrative expenses, partially offset by a decrease in grant
expense.





The cost
of products and services increased in 2007 $685 thousand, to $1.0 million,
compared to 2006.  The increase in 2007 was due to less grant subsidy,
increased salaries due to additional headcount and stock compensation
expense.





Grant
expense decreased $308 thousand to $438 thousand in 2007, or 41%, compared to
2006 due to the expiration of the National Institute of Health grant in August
2007.





Selling,
general and administrative expense increased $337 thousand to $345 thousand in
2007 compared to $8 thousand in 2006.  The increase is primarily due
to less grant subsidy, additional headcount and stock compensation expense in
2007 compared to 2006.





Income taxes


No income
tax provision is recorded for 2007 or 2006 due to net operating losses and a
valuation allowance preventing the recognition of deferred tax
benefits.





Liquidity
and Capital Resources





As of
December 31, 2007, our cash and cash equivalents increased $3.5 million to
$3.6 million from $138 thousand at December 31, 2006. The net increase in
cash and cash equivalents was primarily due to the $4.3 million net cash from
the issuance of common stock in November 2007, $634 thousand in cash used from
operations, and $169 thousand of capital expenditures.





The $634
thousand of cash used by operations in 2007 represented a $808 thousand increase
in cash used from the $174 thousand of cash provided by operations in 2006. In
2007, we recorded a net cash outflow of $738 thousand from our loss from
operations, net of $294 thousand from




17
 Table of Contents




stock
based compensation, $87 thousand from depreciation and $37 thousand from stock
warrants.  In 2006, we recorded a net cash outflow of $12 thousand
from our net loss of $75 thousand net of depreciation of $63
thousand.  This $808 thousand increase in cash used in 2007 compared
to 2006 is primarily due to an increase in net loss of $1.1
million.  The $1.1 million variance in 2007 as compared to 2006 was
primarily due to a decrease in revenue of $384 thousand and $695 thousand in
increased operating expenses.





At
December 31, 2007 our net property plant and equipment balance increased by
$83 thousand to $321 thousand, from $238 thousand at December 31, 2006.
This increase was due to capital expenditures ($169 thousand), primarily for lab
equipment to increase capacity less depreciation expense of $87
thousand.





We
anticipate capital expenditures of approximately $300 thousand in 2008,
primarily for lab related equipment for our drug discovery
business.





We have
incurred a net loss of $2.1 million for the period from our inception to
December 31, 2007. Our future is currently dependent upon our ability to obtain
financing and upon future profitable operations from drug discovery, contracts
with pharmaceutical companies and sales of mutant fish lines.





We
believe that the approximately $3.6 million in cash and cash equivalents which
we had as of December 31, 2007, will provide sufficient liquidity through
2008.  We anticipate that we will likely seek to raise additional
equity capital of $8 to $10 million in the fourth quarter of 2008 or first half
of 2009 to fund cash used for operating activities.




Off
Balance Sheet Arrangements





As of
December 31, 2007, there were no off balance sheet arrangements.





18
 Table of Contents




Item 7.   Financial Statements





Index to
Financial Statements:





Audited
      Financial Statements:F-1
            Report of Independent Registered Public Accounting
      FirmF-2
            Consolidated Statements of Operations – Years Ended December
      31, 2007 and 2006 and period from September 13, 2001 (Inception) to
      December 31, 2007F-3
            Balance Sheets as of December 31, 2007 and 2006F-4
            Statement of Stockholders’ Equity  for period from
      September 13, 2001 (Inception) to December 31, 2007F-5
            Statements of Cash Flows - Years Ended December 31,
      2007  and 2006 and period from September 13, 2001 (Inception) to
      December 31, 2007F-6
            Notes to Consolidated Financial
    Statements


19
 Table of Contents




MOORE
& ASSOCIATES, CHARTERED
 ACCOUNTANTS AND
ADVISORS
 PCAOB REGISTERED
 
 
 REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
the Board of Directors
 Znomics,
Inc.
 (A
Development Stage Enterprise)
 
 We have
audited the accompanying balance sheet of Znomics, Inc. (A Development Stage
Enterprise) as of December 31, 2007 and December 31, 2006, and the related
statements of operations, stockholders’ equity and cash flows for the years
ended December 31, 2007 and December 31, 2006 and the period from inception
September 13, 2001 through December 31, 2007. These financial statements are the
responsibility of the Company’s management.  Our responsibility is to
express an opinion on these financial statements based on our
audits.
 
 We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
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 financial statements referred to above present fairly, in all
material respects, the financial position of Znomics, Inc. (A Development Stage
Enterprise) as of December 31, 2007 and December 31, 2006 and the results of its
operations and its cash flows for the years ended December 31, 2007 and December
31, 2006 and the period from inception September 13, 2001 through December 31,
2007, in conformity with accounting principles generally accepted in the United
States of America.
  
 /s/
Moore & Associates, Chartered
 Moore
& Associates Chartered
 Las
Vegas, Nevada
 February
11, 2008
 
 
 2675 S. Jones Blvd. Suite
109, Las Vegas, NV 89146 (702) 253-7499 Fax (702) 253-7501
  F-1
 Table of Contents


ZNOMICS,
INC. (A
Development Stage Enterprise)
 Statements of Operations($ in thousands except per share
data)
 For the Years Ended December 31, 2007 and 2006 and the
Period from September 13, 2001 (Date of Inception) to December 31,
2007


Year
      EndedDecember
      31,2007
              
              Year
      EndedDecember
      31,2006
              
              September
      13,
                    2001
      (Inception)to December
      31,2007Sales
      related to products and services
              $
              198
              
              $
              274
              
              $
              678Grant
      revenue
              
              438
              
              
              746
              
              
              2,006Total
      sales and revenue
              
              636
              
              
              1,020
              
              
              2,684Operating
      expenses:Cost
      of products and services
              
              1,023
              
              
              338
              
              
              1,455Grant
      expense
              
              438
              
              
              746
              
              
              2,006Selling,
      general and administrative
              
              345
              
              
              8
              
              
              505Research
      and development
              
              17
              
              
              -
              
              
              770Total
      operating expenses
              
              1,823
              
              
              1,092
              
              
              4,736Loss
      from operations
              
              (1,187)
              
              
              (72)
              
              
              (2,052)Other
      income (expense):Investment
      income
              
              38
              
              
              2
              
              
              47Interest
      expense
              
              (5)
              
              
              (5)
              
              
              (52)Other
      expense, net
              
              (38)
              
              
              -
              
              
              (34)Total
      other income (expense)
              
              (5)
              
              
              (3)
              
              
              (39)Loss
      before income tax
              
              (1,192)
              
              
              (75)
              
              
              (2,091)Income
      tax
              
              -
              
              
              -
              
              
              -Net
      loss
              $
              (1,192)
              
              $
              (75)
              
              $
              (2,091)Loss
      per common share data:Basic
              $
              (0.35)
              
              $
              (0.05)Diluted
              $
              (0.35)
              
              $
              (0.05)Weighted
      average common shares outstanding:Basic
      and Diluted
              
              3,414,509
              
              
              1,500,000


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




F-2
 Table of Contents


ZNOMICS,
INC.
 Balance
Sheets  ($ in thousands except per share
data)
 For the
Years Ended December 31, 2007 and 2006


Assets
              2007
              
              2006Current
      assets:Cash
      and cash equivalents
              $
              3,659
              
              $
              138Accounts
      receivable
              
              106
              
              
              72Prepaid
      and other expenses
              
              74
              
              
              15Total
      current assets
              
              3,839
              
              
              225Property
      and equipment, net of accumulated depreciation
              
              321
              
              
              238Total
      asssets
              $
              4,160
              
              $
              463Liabilities
      and Stockholders' EquityCurrent
      liabilities:Accounts
      payable
              $
              154
              
              $
              5Accrued
      liabilities
              
              30
              
              
              113Deferred
      grant revenue and expense
              
              -
              
              
              23Deferred
      revenue
              
              460
              
              
              284Current
      portion of long term liabilities
              
              10
              
              
              17Total
      current liabilities
              
              654
              
              
              442Long
      term liabilities:Capital
      leases, net of current portion
              
              -
              
              
              1Notes
      payable, net of current portion
              
              -
              
              
              9Total
      long term liabilities
              
              -
              
              
              10Total
      liabilities
              
              654
              
              
              452Stockholders'
      equity:Convertible
      preferred stock:Series
      A, $0.01 par value; 660,000 shares authorized; 657,405
      shares issued and outstanding
              
              -
              
              
              7Series B, $0.01 par value, 130,000 shares authorized  and
      126,675 shares issued and outstanding
              
              -
              
              
              1Common
      stock, $0.001 and $0.01 par value,100,000,000
      and 9,340,000 shares authorized,11,072,560
      and 1,500,000 shares issued and outstanding at
      December 31, 2007 and 2006, respectively
              
              11
              
              
              15Additional
      paid-in capital
              
              5,625
              
              
              926Deficit
      accumulated during the development stage
              
              (2,130)
              
              
              (938)Total
      stockholders' equity
              
              3,506
              
              
              11Total
      liabilities and stockholders' equity
              $
              4,160
              
              $
              463


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




F-3
 Table of Contents


ZNOMICS,
INC.
 Statement
of Stockholders' Equity (in thousands)
 For the
Period from September 13, 2001 (Date of Inception) to December 31,
2007


Series
      A convertible
                preferred
      stock
                SharesAmount
              
              Series
      B convertible
                preferred
      stock
                Shares      Amount
              
              Common
      stock
                Shares           Amount
              
              Additional

                  paid-in capital
              
              Deficit
                  accumulated
                  during
      develop-ment
      stage
              
              TotalBalance
      at September 13, 2001
              
              
              $
              -
              
              
              
              $
              -
              
              
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -Issuance
      of common stock to founders- September 13,
      2001
              
              
              
              
              
              
              
              
              
              
              1,500
              
              
              15
              
              
              
              
              
              
              
              
              15Issuance
      of Series A convertiblepreferred stock -
      January 30, 2002
              657
              
              
              7
              
              
              
              
              
              
              
              
              
              
              
              
              650
              
              
              
              
              
              657Issuance
      of Series B convertiblepreferred
      stock - April 13, 2005
              
              
              
              
              
              127
              
              
              1
              
              
              
              
              
              
              
              253
              
              
              
              
              
              254Contribution
      of laboratory equipment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              23
              
              
              
              
              
              23Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (863)
              
              
              (863)Balance
      at December 31, 2005
              657
              
              
              7
              
              127
              
              
              1
              
              1,500
              
              
              15
              
              
              926
              
              
              (863)
              
              
              86Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (75)
              
              
              (75)Balance
      at December 31, 2006
              657
              
              
              7
              
              127
              
              
              1
              
              1,500
              
              
              15
              
              
              926
              
              
              (938)
              
              
              11Cancellation
      of preferred and commonstock on
      merger
              (657)
              
              
              (7)
              
              (127)
              
              
              (1)
              
              (1,500)
              
              
              (15)
              
              
              
              
              
              
              
              
              (23)Issuance
      of new common stock on merger
              
              
              
              
              
              
              11,073
              
              
              11
              
              
              4,198
              
              
              
              
              
              4,209Issuance
      of stock warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              207
              
              
              
              
              
              207Stock
      option valuation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              294
              
              
              
              
              
              294Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,192)
              
              
              (1,192)Balance
      at December 31, 2007
              -
              
              $
              -
              
              -
              
              $
              -
              
              11,073
              
              $
              11
              
              $
              5,625
              
              $
              (2,130)
              
              $
              3,506


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




F-4
 Table of Contents


.


Statements
of Cash Flows ($ in thousands)


For the
Years Ended December 31, 2007 and 2006


and the
Period from September 13, 2001 (Date of Inception) to December 31,
2007


Year
      EndedDecember
      31,2007
              
              Year
      EndedDecember
      31,2006
              
              September
      13,
                    2001
      (Inception) to December
      31,2007Cash
      flows from operating activities:Net
      loss
              $
              (1,192)
              
              $
              (75)
              
              $
              (2,091)Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation
              
              87
              
              
              63
              
              
              257Stock-based
      compensation charges
              
              294
              
              
              -
              
              
              294Stock
      warrants, expense
              
              37
              
              
              -
              
              
              37Issuance
      of stock for licensing and services
              
              -
              
              
              -
              
              
              42Changes
      in operating assets and liabilities:Accounts
      receivable
              
              (34)
              
              
              (20)
              
              
              (106)Prepaid
      and other expenses
              
              (60)
              
              
              (6)
              
              
              (380Accounts
      payable
              
              148
              
              
              4
              
              
              153Accrued
      liabilities
              
              (83)
              
              
              40
              
              
              30Deferred
      grant revenue and expense
              
              (23)
              
              
              (116)Deferred
      revenue
              
              177
              
              
              284
              
              
              461Net
      cash provided (used) by operating activities
              
              (649)
              
              
              174
              
              
              (961)Cash
      flows from investing activities:Capital
      expenditures
              
              (169)
              
              
              (131)
              
              
              (511)Net
      cash used by investing activities
              
              (169)
              
              
              (131)
              
              
              (511)Cash
      flows from financing activities:Proceeds
      from issuance of common stock, net
              
              4,356
              
              
              -
              
              
              4,356Proceeds
      from issuance of preferred stock
              
              -
              
              
              -
              
              
              860New
      borrowings
              
              160
              
              
              -
              
              
              190Principal
      payments, capital leases and notes payable
              
              (177)
              
              
              (26)
              
              
              (275)Net
      cash provided (used) by financing activities
              
              4,339
              
              
              (26)
              
              
              5,131Net
      increase in cash and cash equivalents
              
              3,521
              
              
              17
              
              
              3,659Cash
      at beginning of period
              
              138
              
              
              121
              
              
              -Cash
      at end of period
              $
              3,659
              
              $
              138
              
              $
              3,659Supplemental
      disclosures:Cash
      paid for interest
              $
              5
              
              $
              5
              
              $
              12Cash
      paid for income taxes
              $
              -
              
              $
              -
              
              $
              -


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




F-5
 Table of Contents


ZNOMICS,
INC.
 (A
Development Stage Enterprise)
 Notes to Financial Statements
 For the
Years Ended December 31, 2007 and 2006
 (in
thousands except share data)
  NOTE
A.  THE COMPANY
  Znomics,
Inc. (the Company) is a biotechnology company possessing proprietary gene
mutatgenesis technology used to create a significant mutational library for the
zebrafish.  The Company’s focus is to create a capability for in vivo
drug discovery and lead compound discovery, develop specialized zebrafish
technologies for discovery of new drug targets for human diseases, to partner in
the development of environmental toxicology screens and to develop unique
reagents for sale to the zebrafish research market.  The Company’s
current market is pharmaceutical companies for collaborative contracts and
academic research institutions for the sale of reagents.  The
Company’s prospective market for drug discovery is large domestic pharmaceutical
companies.
  The
Merger
  The
Company was formed as a result of a merger agreement entered into on November 5,
2007.  Znomics, Inc., previously a privately held Delaware corporation
(“Znomics Delaware”), Pacific Syndicated Resources, Inc., an inactive public
company (“PSRI”), and Znomics Acquisition, Inc., a newly formed wholly-owned
Nevada subsidiary (“Acquisition Sub”), entered into anAgreement of Merger and
Plan of Reorganization (the “Merger Agreement”).  In connection with
the closing of this merger transaction, Znomics Delaware merged with and into
Acquisition Sub (the “Merger”) on November 6, 2007, with the filing of Articles
of Merger with the Nevada and Delaware Secretaries of
State.  Subsequently, on November 6, 2007, PSRI merged with
Acquisition Sub in a short-form merger transaction under Nevada law and, in
connection with this short form merger, changed the name to Znomics, Inc.,
effective November 6, 2007.
  In
addition, pursuant to the terms and conditions of the Merger
Agreement:
  ·
              Each
      share of Znomics Delaware common stock issued and outstanding immediately
      prior to the closing of the Merger was converted into the right to receive
      one share of common stock.  As a result, the shareholders of
      Znomics Delaware received 5,740,849 newly issued shares of common
      stock.
  ·
              3,253,333
      shares of common stock were issued to investors as a result of closing a
      private offering exempt from registration under Rule 506 of Regulation D
      of the Securities Act of 1933.
  F-6
 Table of Contents
  NOTE
A.  THE COMPANY (Continued)
  ·
              Outstanding
      options under the Znomics Delaware stock option plan to purchase 672,346
      shares of Znomics Delaware common stock   have been
      converted into options to purchase 672,346 shares of common stock on the
      same terms and conditions, including varying exercise prices between $0.41
      per share to $1.11 per share and exercise termination dates between June
      2015 and September 2017.  The assumed stock option plan allows
      the issuance of options to purchase a maximum of 2,193,258 shares of our
      common stock, inclusive of these
issuances.
  ·
              Outstanding
      warrants of Znomics Delaware entitling holders to purchase 65,893 shares
      of Znomics Delaware common stock were assumed.  These warrants
      will be converted into warrants to acquire 65,893 shares of common
      stock.  Of these warrants, 56,131 shares are held at an exercise
      price of $0.82 per share and exercisable until October 17, 2008 and 9,762
      shares are held at an exercise price of $1.50 per share and exercisable
      until June 30, 2012.  In addition, the Company issued warrants
      to purchase 227,733 shares of common stock at a price of $1.50 per share
      to the placement agent in the private offering, as partial payment, in
      exchange for their services.
  ·
              Following
      the closing of the merger, in a separate transaction, the former PSRI
      Chief Executive Officer and sole director and certain other shareholders
      agreed to cancel and return a portion or all of their PSRI common stock
      into treasury.  In total, these shareholders retired 4,731,085
      shares of common stock.
  ·
              As
      a result, following these events, there were 11,072,560 shares of the
      Company’s common stock issued and outstanding at November 5,
      2007.
  ·
              Theboard
      of directors was reconstituted to consist of Roger D. Cone, Richard
      A.  Sessions, Stephen E. Kurtz, and Dwight A. Sangrey, who prior
      to the Merger were the directors of Znomics
  Delaware.
  ·
              Znomics
      Delaware provided customary representations and warranties and closing
      conditions, including approval of the Merger by a majority of its voting
      stockholders.
  As of the
date of the Merger Agreement and currently, there are no material relationships
between the Company and PSRI and affiliates, other than in respect of the Merger
Agreement.  All prior operations of PSRI have been ceased effective as
of the Merger date.
  F-7
 Table of Contents
  NOTE
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  The
Merger
  The
Merger is accounted for as a “reverse merger,” as the stockholders of Znomics
Delaware owned a majority of the outstanding shares of common stock following
the Merger and controlled the Board of Directors.  Znomics Delaware is
deemed to be the accounting acquirer in the reverse
merger.  Consequently, the assets and liabilities and the historical
operations of Znomics Delaware prior to the Merger are reflected in the
financial statements and are recorded at the historical cost basis of Znomics
Delaware.  The financial statements include the assets and liabilities
of Znomics Delaware and PSRI, the historical operations of Znomics Delaware, and
the Company’s operations from the date of the Merger.
  Basis of
Presentation
  As a
start-up, the Company has not yet generated significant revenue and its
activities have consisted primarily of developing the proprietary gene knock-out
technology and building the mutational gene library, raising capital and
recruiting personnel.  Accordingly, the Company is considered to be in
the development stage as of December 31, 2007 as defined by Statement of
Financial Accounting Standards, or SFAS No. 7, Accounting and Reporting by
Development Stage Enterprises.
  As
required for development stage companies, cumulative statements of operations
and cash flows from September 13, 2001 (date of inception) through December 31,
2007 have been presented along with the statements of operations and cash flows
for the years ended December 31, 2007 and 2006.  These cumulative
statements have not been audited in their entirety.
  Use of
Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expenses during the
reporting period.  Actual results could differ from those
estimates.  Significant estimates made by management of the Company
include the useful lives of property and equipment, fair value of financial
instruments and the assessment of the realizability of its deferred tax
assets.
  F-8
 Table of Contents
  NOTE
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Fair Value of Financial
Instruments
  The
Company’s financial instruments consist of cash and cash equivalents, money
market funds, trade receivables and payables. At December 31, 2007, the Company
also had leases and notes payable outstanding.  The fair value of the
notes is sensitive to fluctuations in the general level of the U.S. interest
rates.  Fair value estimates are made at a specific point in time,
based on relevant market information about the financial
instrument.  These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision.
  Cash
Equivalents
  The
Company considers all highly liquid debt and other instruments purchased with an
original maturity of three months or less to be cash equivalents. These
investments include money market funds. At December 31, 2007 and 2006, the
Company’s cash equivalents held in a money market fund at US Bank were $3,612
and $0, respectively.
  Technology License
Agreements
  The
Company enters into technology license agreements with universities upon their
purchase of fish lines.  These agreements typically give the Company
the right of first refusal to exclusively license university inventions arising
from the use of the fish lines.  The terms of these agreements are
usually one year; however, the licensing rights carry forward for multiple
years.  Research contract agreements with pharmaceutical companies
typically provide the pharmaceutical company with technology licensing rights to
discoveries coming out of the contracted work.  The costs of the
agreements are expensed to research and development as incurred.  (See
Note G)
  Revenue
Recognition
  The
Company derives revenues from the sales of reagent mutant fish, collaborations
with pharmaceutical companies and research grants.  The Company’s
markets during 2007 and 2006 included educational research institutions,
pharmaceutical companies and research grant sponsors.  Sales and
distribution are executed via internal marketing and sales efforts.
  Revenues
from the sale of reagent mutant fish are recognized when title passes to the
customer.  Customers initially pay for one-half the
order.  Deferred revenue is recorded upon receipt of the cash until
the title passes to the customer.  (See Notes I and J).
  F-9
 Table of Contents
  NOTE
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  The
Company allows customers to return reagent mutant fish only for warranty reasons
within seven days of shipment.    If the Company is unable
to replace a reagent mutant fish line returned under warranty, a credit for a
warranty return is issued.
  Revenues
from collaborative research projects with a pharmaceutical company are
recognized when earned.
  Revenues
from grant sponsors are recognized when earned according to the
contract.  Grant expenses are identified and classified to each
specific grant.
  Accounts
Receivable
  Receivables
are carried at their estimated collectible amounts.  Accounts are
periodically evaluated for collectibility based on past credit history with
customers and their current financial condition and are written off when deemed
to be uncollectible.  No allowance for doubtful accounts is recorded
when management expects all receivables to be collected.
  Property and
Equipment
  Property
and equipment is recorded at cost.  Donated equipment, for which a
fair value is readily determinable, is recorded at its fair
value.  Depreciation is computed using the straight-line method over
the estimated useful life from two to ten years.  Repairs and
maintenance costs are expensed as incurred.  At the time of retirement
or other disposal of equipment, the cost and related accumulated depreciation
are removed from their respective accounts and any resulting gain or loss is
included in operations.
  Impairment of Long-Lived
Assets
  The
Company periodically evaluates the recoverability of long-lived
assets.  If expected future undiscounted cash flows exceed the
carrying amount of the asset, no impairment is recognized.  No
impairment losses were recorded from the period September 13, 2001 (date of
inception) to December 31, 2007.
  Research and
Development
  Research
and development costs are charged to expense as incurred.
  F-10
 Table of Contents
  NOTE
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Net Income (Loss) Per
Share
  Basic net
income (loss) per share is calculated by dividing the net income (loss) for the
period by the weighted-average number of common shares outstanding during the
period.  Diluted net income (loss) per share is calculated by dividing
net income (loss) for the period by the weighted-average number of common shares
outstanding during the period, increased by potentially dilutive common shares
(“dilutive securities”) that were outstanding during the
period.  Dilutive securities include options granted pursuant to the
Company’s stock option plan and stock warrants.
  Income
Taxes
  The
Company accounts for income taxes using the asset and liability method of
accounting for income taxes.  Under this approach, deferred income
taxes are calculated for the expected future tax consequences of temporary
differences between the book and tax bases of the Company’s assets and
liabilities.  Valuation allowances are provided if, based upon the
weight of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
  Impairments of Long-lived
Assets
  Long-lived
assets, such as property, plant, and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.  Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the
asset.  If the carrying amount of an asset exceeds its estimated
future undiscounted cash flows, an impairment charge is recognized in the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
Fair value is determined by reference to market prices or through discounted
cash flow analysis, depending on the asset.
  Stock-Based
Compensation
  The
Company has a stock-based employee compensation plan, which is described in Note
F.  The Company accounts for rights under these plans under Statement
of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment. SFAS No.
123(R) requires the measurement and recognition of compensation expense for all
stock-based payment awards made to employees and directors.  The
compensation expense for the Company’s stock-based payments is based on
estimated fair values at the time of the grant.
  F-11
 Table of Contents
  NOTE
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  Consistent
with SFAS No. 123, SFAS No. 123(R) requires companies to estimate the fair value
of stock-based payment awards on the date of grant using an option pricing
model.  These option pricing models involve a number of assumptions,
including the expected lives of stock options, the volatility of the public
market price for the Company’s common stock and interest rates.  The
Company is using the Black-Scholes option pricing model.  Stock-based
compensation expense recognized during the period is based on the value of the
portion of stock-based payment awards that are ultimately expected to
vest.
  The
following table summarizes the average estimates the Company used in the
Black-Scholes option-pricing model during 2007 to determine the fair value of
employee stock options granted during the year:
   Risk free interest
      rate
              4.1%Expected life in
      years
              8.4Expected dividend
      yield
              0.0%Expected
      volatility
              49.0%Estimated annualized
      forfeiture rate
              0.0%
  The
Company determines its risk-free rate assumption based upon the U. S. Treasury
yield for obligations with contractual lives similar to the expected lives of
the Company’s option grants.  The expected life represents
the weighted average period the options are expected to remain outstanding,
based upon historical experience.  The dividend yield assumption is
based on the Company’s historical and anticipated dividend
distributions.  The expected volatility is based upon a blend of the
historical stock price volatility of public companies with a similar
business.  Forfeitures are estimated based upon historical
experience.  Based upon these assumptions, the Company has estimated
the per share weighted-average grant fair value of its options granted during
2007 at $1.45.
 
 The table
below summarizes the stock-based compensation expense:
   Year
      Ended
                December 31,
      2007Cost of sales and
      services
              $
              199General and
      administrative
              
              95Total stock-based
      compensation expense included in loss from operations
              $
              294
  F-12
 Table of Contents
  NOTE
B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
  There was
no stock-based compensation expense related to employee stock options recognized
in the Company’s financial statements for 2006 based upon the assumptions and
liquidation preferences of the preferred stock outstanding.
  Recent Accounting
Pronouncements
  SFAS 155 Accounting for Certain Hybrid
Financial Instruments
 Amends
FASB Statements No. 133 and No. 140, which permits fair value remeasurement for
hybrid financial instruments containing embedded derivatives and clarification
of requirements, concentrations of credit risk and
prohibitions.  Effective for periods beginning after September 15,
2007.
  SFAS 156 Accounting for Servicing of
Financial Assets
 Amends
FASB No. 140 and clarifies requirements for accounting for mortgage servicing
assets and servicing liabilities and the use of derivative instruments to
mitigate the risks inherent in such activities.  Effective for periods
beginning after September 15, 2007.
  SFAS 157 Fair Value
Measurements
 Defines
fair value, establishes a framework for measuring fair value in accordance with
GAAP, and expands disclosures about fair value measurements but does not require
any new fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal
years.  The Company will adopt SFAS No. 157 effective January 1,
2008.
 
 SFAS 159 The Fair Value Option for Financial
Assets and Financial LiabilitiesUnder SFAS No. 159 entities will have
the option to measure certain financial instruments and other items at fair
value that are not currently required to be measured at fair
value.  This statement expands the use of fair value measurement and
applies to entities that elect the fair value option at a specified election
date. SFAS 159 is effective for fiscal years beginning after November 15,
2007.
 
 Adoption
of these pronouncements is not expected to have a material effect on the
Company’s financial statements.
  NOTE
C.  ACCOUNTS RECEIVABLE
  The
Company’s accounts receivable consist of the following:
   December
      312007
              
              
              2006Receivable for fish
      lines
              $
              100
              
              
              $
              72Receivable -
      Harvard
              
              5
              
              
              
              -Other
              
              1
              
              
              
              -$
              106
              
              
              $
              72
 
 The
Company expects to receive full payment of its receivables and, therefore, has
not recorded an allowance for doubtful accounts.
  F-13
 Table of Contents
  NOTE
D.  PROPERTY AND EQUIPMENT
  Property
and equipment consists of the following:
   UsefulLives
                
                December
      31,
                  20072006Compound
      Library
                3
    years
                
                $
                17
                
                $
                -Office
      equipment
                2-3
      years
                
                
                91
                
                
                47Laboratory equipment
                3-5
      years
                
                
                366
                
                
                257Donated laboratory
      equipment
                2-5
      years
                
                
                23
                
                
                23Equipment under
      capital leases
                5
    years
                
                
                40
                
                
                40537
                
                
                367Less accumulated
      depreciation
                
                
                
                (216)
                
                
                (129)Property and
      equipment, net
                
                
                $
                321
                
                $
                238
  Depreciation
expense was $87 and $63 for the years ended December 31, 2007 and 2006,
respectively.  For 2007, the $87 in depreciation expense was
classified in the statement of operations to grant expense.  In 2006,
the $63 depreciation expense was classified in the statement of operations as
$33 to cost of products and services and $30 to grant
expense.  Accumulated depreciation on equipment under capital leases
was $30 and $24 at December 31, 2007 and 2006, respectively.
  NOTE
E.   STOCKHOLDERS’ EQUITY
  Common
stock
  On
September 13, 2001, the Company issued 1,500,000 shares of common stock at $0.01
par value to the founders of the Company in exchange for services provided,
including the development of a business plan and management of the
company.
  Convertible preferred
stock
  Series
A
  Under its
Amended Articles of Incorporation, the Company was authorized to issue an
additional 8,500,000 shares for a total of 10,000,000 shares of stock, of which
660,000 shares was designated Series A convertible preferred
stock.  On January 30, 2002, the company sold 630,000 shares of Series
A preferred stock at $1.00 per share, the issue price.  In addition,
the Company issued 15,625 shares of Series A preferred stock to Oregon Health
and Sciences University for a one-year technology license and 11,780 shares of
Series A preferred stock to founders to reimburse expenses incurred
  F-14
 Table of Contents
  NOTE
E.  STOCKHOLDERS’ EQUITY (Continued)
 on behalf
of the Company.
 
 Series
B
  Under its
Second Amended Articles of Incorporation, the Company was authorized to issue
10,000,000 shares (no change in total number of shares) of stock, of which
790,000 shares (an additional 130,000 shares) was designated convertible
preferred
   Series
    A
              660,000
    sharesSeries
    B
              130,000
    shares
  The
Company executed a convertible bridge loan offering in December 2003 in which
the purchasers received the following in exchange for cash in the amount of
$230,000:
  Convertible
secured promissory note with interest at 8.0% per annum to be repaid as of the
maturity date of January 31, 2005 or the principal plus interest to be converted
into Series B convertible preferred stock at $2.00 per share upon the next
financing or upon the option of the holders.  The holders of the notes
were granted a security interest in all of the Company’s current and future
personal property and general intangibles in which the Company has any right,
title or interest.  The holders of the notes were granted a stock
purchase warrant to purchase a certain number of shares of common stock at $2.00
per share before the end of November 30, 2008.
  Effective
February 1, 2005, the convertible bridge loan conversion to series B preferred
stock was completed at a conversion price of $2.00 per share for a total of
126,665 shares.  Interest due Series B shareholders was converted into
shares and interest expense of $23,350 was recorded as part of the
conversion.
  Rights and preferences of
preferred stock
  Dividends.  Holders
of Series A and B preferred stock are entitled to receive dividends at a rate of
6% per annum when declared by the Board of Directors and payable in cash or
common stock.  Series A preferred stockholders receive preference in
any declaration of dividends.  The dividends are not cumulative and no
dividends have been declared in the period from September 13, 2001 (date of
inception) to December 31, 2006.
  F-15
 Table of Contents
  NOTE
E.   STOCKHOLDERS’ EQUITY (Continued)
  Liquidation
preference.  Upon liquidation, dissolution, winding up or
qualified consolidation or merger of the Company, whether voluntary or
involuntary, each stockholder will receive an amount equal to the issue price
plus any declared but unpaid dividends.  If the assets and funds to be
distributed are insufficient to pay the full amount due, all available assets
shall be distributed ratably to the stockholders in the following preferential
order:  Series A preferred stockholders to receive senior rank in
liquidation order.  Series B preferred stockholders rank junior to
Series A but senior to common or any other capital stockholders.
  Voting.  Each
preferred stockholder receives a number of votes equal to the number of whole
shares of common stock into which the shares of Series A and Series B preferred
stock are convertible.
  Conversion
rights.  Each share of preferred stock is convertible, at the
option of the holder, into the number of shares of common stock as is determined
by dividing the issue price by the conversion price in effect at the time and is
subject to an anti-dilution adjustment if the company issues additional common
stock at less than the conversion price in effect.   No
fractional shares will be issued on conversion and all converted stock is to be
retired and not reissued.  The Company must keep available enough
common stock to cover conversion of all outstanding preferred
stock.  All preferred stock will be automatically converted upon
issuance of a qualified initial public offering.
  As a
result of the November 5, 2007 Merger (see Note A), the common stock, Series A
and B preferred stock of Znomics Delaware were converted into common stock of
the Acquisition Sub.  The Acquisition Sub was then renamed Znomics,
Inc.  At December 31, 2007, common stock is the only stock issued and
outstanding.
  NOTE
F.  STOCK OPTIONS AND WARRANTS
  The
Company has a Stock Incentive Plan to promote the Company’s long-term growth and
profitability by awarding incentives to employees, officers, directors and
consultants.  The plan permits the granting of stock options, stock
appreciation rights, restricted or unrestricted stock awards or other
stock-based awards.  The Board of Directors has authorized up to
1,708,322 shares to be issued under the stock option plan.  To date
grants have consisted primarily of incentive stock options (ISOs) but
non-employees receive non-qualified options.
  The
options expire on the last business day prior to the tenth anniversary of the
grant award date, currently 2012 to 2017, unless fully exercised or terminated
earlier.  The options vest and become exercisable either 25% on the
award date and 25% ratably thereafter, or, vest ratably commencing one year from
the award date.  The options vest over periods of three to five
years.
  F-16
 Table of Contents
  NOTE
F.  STOCK OPTIONS AND WARRANTS (Continued)
  The
Company has warrants outstanding which are convertible into common stock. In
2007, 237,495 warrants, expiring in 2012 and exercisable at $0.82 to $1.50 per
share, were granted.  Included in the 2007 grants were 227,733
warrants, exercisable at $1.50 per share, granted to placement agents in the
Company’s November 2007 private placement as a partial fee.
  The Board
of Directors approved a repricing of the exercise price, and an additional grant
of outstanding stock options and warrants, to existing stock option and warrant
holders effective as of the November 2007 merger date.  The exercise
prices were adjusted to approximately 41% of the original exercise
price.  The original number of options were increased approximately
2.4 times, resulting in 410,571 additional stock options and 33,131 warrants
granted.
  The
following schedules present stock options and warrants awarded and unexercised
for the years ended December 31, 2007 and 2006:
   Number
      of
                Options                                  
      Warrants
              
              Exercise
                Price
      per
                ShareOutstanding
      at December 31, 2005
              212,500
              
              23,000
              
              $
              1.00 –
  2.25Granted
              32,500
              
              -
              
              
              2.50Exercised
              -
              
              -Expired
              -
              
              -Forfeited
              (20,000)
              
              -Outstanding
      atDecember
      31, 2006
              225,000
              
              23,000
              
              
              0.82 –
  2.50Granted
              296,189
              
              237,495
              
              
              1.00 –
  2.80Repriced
              410,571
              
              33,131
              
              
              0.41-1.15Exercised
              -
              
              -Expired
              -
              
              -Forfeited
              (48,812)
              
              -
              
              
              0.98Outstanding
      atDecember
      31, 2007
              882,948
              
              293,626
              
              $
              0.41 –
  1.50
 
 No stock
options or warrants have been exercised to date.
  F-17
 Table of Contents
  NOTE
G.  RESEARCH AND DEVELOPMENT
  The
Company is a party to certain contracts and has received grants under which it
is obligated to perform research and development activities.  Under
the terms of certain agreements, the Company received fees for providing
research and development services.  The Company also received federal
grants to fund research and development costs for its library
database.
  The
following schedule summarizes certain information with respect to research and
development contracts and grants for the years ended December 31, 2007 and
2006:
   2007
              
              2006Research expenses
      paid by contracts
              $
              110
              
              $
              338Research expenses
      paid by grants
              $
              383
              
              $
              746Costs charged to
      operations
              $
              17
              
              $
              -
 
 NOTE
H.  ACCRUED LIABILITIES
  Accrued
liabilities consist of the following:
 December 31,
                  2007 2006Payroll
      liabilities
                $
                23
                
                $
                19Accrued
      vacation
                $
                7
                
                $
                10Legal fees
      payable
                
                -
                
                
                84$
                30
                
                $
                113
 NOTE
I.  DEFERRED REVENUE
  In 2006
the Company entered into a contract agreement to provide 1,000 fish line
products to Harvard University for a total of $450.  One-half, or
$225, was  received, including a nonrefundable portion of $50, by the
Company in 2006.  No deliveries were made to Harvard until 2007,
resulting in deferred revenue at December 31, 2007 and 2006 of $221 and $225,
respectively.
  The
Company requires at least a 50% cash deposit on its other sales orders of fish
line products to all other customers.  These cash deposits are
recorded as deferred revenue and subsequently recognized as current revenue as
delivery of the orders are made.  Cash deposits on undelivered fish
line product orders recorded as deferred revenue at December 31, 2007 2006
totaled $240 and $59, respectively.
  F-18
 Table of Contents
  NOTE
J.   DEFERRED GRANT REVENUE AND EXPENSE
  The
Company has received grant monies from the National Institute of Health (NIH) to
fund the costs and expenses associated with the generation of a zebrafish
insertional mutation library.  The grants are cost support grants for
specific project periods only.  Funding dollars unutilized at the end
of the grant period may be carried over into future periods with the consent of
the NIH.  In 2006 the Company received supplemental NIH funding for
the grant, extending the period of performance to August 31, 2007.
  As of the
year ended December 31, 2006, the Company had received grant funds in excess of
recorded, uncapitalized expenses in the amount of $140.  As of the
year ended December 31, 2007, the company had expended all its grant
funds.
  NOTE
K.  INCOME TAXES
  The
provision (benefit) for income taxes differs from the amount of income tax
determined by applying the statutory federal rate to pretax income as a result
of the following differences:
   December
      312007
              
              2006Tax computed
      at the federal statutory rate
              $
              (405)
              
              $
              (25)State income
      taxes, net of federal benefit
              
              (58)
              
              
              (5)Stock-based
      compensation
              
              99
              
              
              -Permanent
      differences and other
              
              13
              
              
              -Change in
      valuation allowance
              
              351
              
              
              30Income tax
      provision
              $
              
              
              $
              -
 
 Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax basis of assets and liabilities, and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.  Significant components of the deferred tax
assets are as follows:
  F-19
 Table of Contents
  NOTE
K.  INCOME TAXES (Continued)
   December
      312007
              
              2006Deferred
      tax assets:Accrued expenses and
      other
              $
              182
              
              $
              133Net operating loss
      carryforwards
              
              563
              
              
              250Valuation
      allowance
              
              (712)
              
              
              (361)Total deferred tax
      assets, net of valuation allowance
              
              33
              
              
              22Deferred tax
      liabilities:Fixed
      assets
              
              33
              
              
              22Net deferred tax
      assets
              $
              -
              
              $
              -
  Valuation
allowance of $712 and $361 at December 31, 2007 and 2006, respectively, has been
recorded to offset net deferred tax assets as the Company is unable to conclude
that it is more likely than not that such deferred tax assets will be
realized.
  At
December 31, 2007, the Company has federal, state, and local net operating loss
carryforwards of approximately $1,373, $1,390, and $761, respectively, which
begin to expire in 2024, 2019, and 2009, respectively.
  Utilization
of net operating losses, credit carryforwards, and certain deductions may be
subject to a substantial annual limitation due to ownership change limitations
provided by the Internal Revenue Code of 1986, as amended, and similar state
provisions.  The tax benefits related to future utilization of federal
and state net operating losses, tax credit carryforwards, and other deferred tax
assets may be limited or lost if cumulative changes in ownership exceeds 50%
within any three-year period.  Additional limitations on the use of
these tax attributes could occur in the event of possible disputes arising in
examinations from various taxing authorities.  Currently, the Company
is not under examination.
  FIN 48
Disclosure
  In June
2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement 109 (“FIN
48”).  FIN 48 establishes a single model to address accounting for
uncertain tax positions.  FIN 48 clarifies the accounting for income
taxes by prescribing a minimum recognition threshold a tax position is required
to meet before being recognized in the financial statements.  FIN 48
also provides guidance on derecognition, measurement, classification, interest
and penalties, accounting in interim periods, disclosure and
transition.
  F-20
 Table of Contents
  NOTE
K.  INCOME TAXES (Continued)
  The
Company adopted the provisions of FIN 48 on January 1, 2007.  As of
the date of adoption, the Company had no unrecognized tax
benefits.  The adoption of FIN 48 did not result in an adjustment to
retained earnings.  The Company will recognize interest and penalties
related to unrecognized tax benefits as a component of income tax
expense.  The Company has recognized no interest or penalties upon the
adoption of FIN 48.  The Company does not expect any significant
increases or decreases to its unrecognized tax benefits within twelve months of
this reporting date.
  The
Company is subject to U.S. federal and Oregon state income tax.  The
Company is no longer subject to U.S. federal or Oregon income tax examinations
for years before 2004.  However, to the extent allowed by law, the tax
authorities may have the right to examine prior periods where net operating
losses or tax credits were generated and carried forward, and make adjustments
up to the amount of the net operating loss or credit carryforward
amount.
  The
Company is not currently under Internal Revenue Service (IRS) or Oregon tax
examinations.
  At
January 1, 2007, the Company had net deferred tax assets of $22 .  A
significant component of the Company’s deferred tax assets are federal and state
tax net operating loss (“NOL”) carryfowards.  Due to uncertainties
surrounding the Company’s ability to generate sufficient future taxable income
to realize these assets, a full valuation has been established to offset its net
deferred tax asset. Additionally, the future utilization of the Company’s NOL
carryforwards to offset future taxable income may be subject to a substantial
annual limitation as a result of ownership changes that may have occurred
previously or that could occur in the future.  Until the Company has
determined whether such an ownership change has occurred, and until the amount
of any limitation becomes known, no amounts are being presented as an uncertain
tax position in accordance with FIN 48.  The Company believes that the
amount subject to limitation could be significant.  Any carryforwards
that will expire prior to utilization as a result of such limitations will be
removed from deferred tax assets with a corresponding reduction of the valuation
allowance.
  F-21
 Table of Contents
  NOTE
L.  LONG TERM DEBT
   December 31,
                2007                                 
      2006Loan from Washington
      Mutual Bank for
      a fish tank system payable inmonthly
      principal installments of $833plus
      computed interest at a variable rateadjusted
      daily of the prime rate plus 2%maturing
      January 1, 2009, guaranteed by

                two
      officers
              $
              9
              
              $
              19
 
 Following
are maturities of long-term debt :
   2008
              $
              92009 and
      thereafter
              
              -$
              9
 
 NOTE
M.  CAPITAL LEASE COMMITMENTS
  The
Company leases laboratory and communication equipment under the following
capital leases:
    December 31,
                  20072006Capital lease from
      US Filter for a pump system
      and maintenance contract payablein
      monthly installments of $211 maturingDecember
      31, 2007 with $1 buyout,secured
      by the equipment.
                $
                -
                
                $
                2Capital
      lease from Beckman Coulterfor
      a centrifuge payable in monthly installments
      of $687 maturing May 15, 2007 with
                  $1
      buyout, secured by the equipment.
                
                -
                
                
                3Capital
      lease from Integra for an NECtelephone
      system payable in monthly installments
      of $183 maturing May 2008 with $1buyout,
      secured by the
      equipment.
                
                1
                
                
                3$
                1
                
                $
                8
 F-22
 Table of Contents
  NOTE
M.  CAPITAL LEASE COMMITMENTS (Continued)
  Following
are maturities of capital leases:
  2008
              $
              12009 and
      thereafter
              
              -$
              1
  In
February 2006, the Company transferred the lease and all rights and obligations
of a DNA Sequencer to the Molecular MD Company, eliminating a capital lease
obligation of $82.  As part of the lease transfer agreement, the
Company retained certain rights to use the equipment at no additional cost until
March 1, 2008.  The estimated value of these equipment usage rights at
the time of the transfer was $7 and there were no remaining rights as of
December 31, 2007.
  NOTE
N.  OPERATING LEASE
  The
Company leases office and laboratory facilities under an operating
lease.  The term of the lease is quarter-to-quarter.  Rent
expense for the years ended December 31, 2007 and 2006 was $71 and $54,
respectively.
  NOTE
O.  BANK LINE OF CREDIT
  The
Company has a $250 bank line of credit available from US Bank until August 21,
2008.  The line of credit interest rate is prime plus
1%.  The line of credit is personally guaranteed by three of the
Company’s Directors and Officers, the Chairman of the Board, Chief Executive
Officer and President.  There was no balance outstanding on the line
of credit at December 31, 2007.
  NOTE
P.  RELATED PARTY TRANSACTIONS
  The Chief
Executive Officer has agreed to work for the Company on a part-time consulting
basis without benefit of a salary.  Consulting expense of $12 in 2007
and 2006 was paid and no amounts have been accrued for unpaid salary at December
31, 2007 and 2006.
  A
Director, Stephen Kurtz, served as Manager of Marketing and Product Development
on a part-time basis for a salary of $22 and $11 in 2007 and 2006,
respectively.  He has been promoted to Director of Operations
effective March 1, 2008.
  The Chief
Executive Officer and President personally guaranteed the loan from Washington
Mutual Bank to purchase the fish tank system.  (See Note
L)
  F-23
 Table of Contents
  NOTE
Q.  SUBSEQUENT EVENTS
  In
February 2008, the Company  entered into another lease, for a one year
period, with OHSU for on-campus research and office space.  The
additional space will cost  approximately $4 per month, or $52
annually.  The approximately 1,600 square feet of laboratory, fish
facility and offices will support the Company’s drug discovery
operations.  As of January 8, 2008, the Company has an order backlog
for sales of 363 mutant fish lines.  The order backlog totals
approximately $372.  It can take an extended period of time, up to six
months or more, to operationally complete and ship a mutant fish
line.
  The
Company’s Board of Directors has approved the implementation of a qualified
retirement plan under Section 401(k) of the Internal Revenue Code covering all
employees.  The Company’s contribution, to commence January 2008, will
be 3% of employee compensation and will immediately vest.  The Company
may, at the discretion of its Board of Directors, make additional contributions
on behalf of the plan participants.  Participants in the plan may
defer up to the maximum annual amount allowable under IRS
regulations.  The plan is expected to be completed in the first
quarter of 2008.
  NOTE R.
RECLASSIFICATIONS
  Certain
reclassifications of prior year amounts have been made to conform to the 2007
presentation.


F-24
 Table of Contents




Item
8.   Changes In and Disagreements with Accountants on Accounting
and FinancialDisclosure





As
previously reported on Form 8-K first filed December 11, 2007, as amended
December 18, 2007, and January 10, 2008, Dale Matheson Carr-Hilton Labonte, LLP,
the independent registered public accounting firm who had been engaged as the
principal accountant to audit the Company’s financial statements, was dismissed
effective December 7, 2007. On December 7, 2007, the Board of Directors of the
Company approved the engagement of Moore & Associates, Chartered,
Independent Registered Public Accounting Firm, as the new independent registered
public accounting firm.





The
decision to change the Company’s independent registered public accounting firm
from Dale Matheson Carr-Hilton Labonte, LLP, to Moore & Associates,
Chartered, Independent Registered Public Accounting Firm, was approved by the
Board of Directors of the Company.





The Dale
Matheson Carr-Hilton Labonte, LLP reports on the Corporation’s financial
statements for the years ended May 31, 2006 and ended May 31, 2007 did not
contain adverse opinions or disclaimers of opinion, nor were such reports
qualified or modified as to uncertainty, audit scope or accounting principle,
except as follows:





1.
            The
      audit reports for the years ended May 31, 2006 and May 31, 2007 contained
      an uncertainty about the Company’s ability to continue as a going
      concern.





During
the year ended May 31, 2007 and through December 7, 2007, there have been no
disagreements with Dale Matheson Carr-Hilton Labonte, LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which disagreements, if not resolved to the satisfaction of
Dale Matheson Carr-Hilton Labonte, LLP, would have caused it to make a reference
to the subject matter of the disagreements in its reports on the Corporation’s
financial statements for such years. During the year ended May 31, 2007 and
through November 28, 2007, there were no “reportable events”, as described in
Item 304(a)(1)(v) of Regulation S-K.





During
the fiscal years for the Company ended May 31, 2006 and May 31, 2007, the
Company did not consult Moore & Associates, Chartered, regarding any of the
matters outlined in Item 304(a)(2) of Regulation SB.





Our
auditors issued an unqualified opinion for 2007.  We believe that the
approximately $3.6 million in cash and cash equivalents which we had as of
December 31, 2007, will provide sufficient liquidity through 2008.  We
anticipate that we will likely seek to raise additional equity capital of $8 to
$10 million in the fourth quarter of 2008 or first half of 2009 to fund cash
used for operating activities.





20
 Table of Contents




Item 8A.  Controls and Procedures





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 Rule 13a-15(f) under the Exchange Act.
This rule defines internal control over financial reporting as a process
designed by, or under the supervision of, the Company’s Chief Executive Officer
and Chief Financial Officer, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. GAAP. Our internal control over
financial reporting includes those policies and procedures that:




•
            Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;




•
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. GAAP, and that
      receipts and expenditures of the Company are being made only in accordance
      with authorizations of management and directors of the
      Company; and




•
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any evaluation of
effectiveness to future periods are 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.


With the
participation of the Chief Executive Officer and the Chief Financial Officer,
our management conducted an evaluation of the effectiveness of our internal
control over financial reporting.   Based on this evaluation, our
management has concluded that our internal control over financial reporting was
not effective as of December 31, 2007 as the result of a material
weakness.   The material weakness results from significant
deficiencies in internal control that collectively constitute a material
weakness.





A
significant deficiency is a deficiency, or combination of deficiencies, in
internal control over financial reporting that is less severe than a material
weakness, yet important enough to merit attention by those responsible for
oversight of the registrant’s financial reporting.   The Company
had the following significant deficiencies at December 31, 2007:





·
            The
      financial statement closing process lacked adequate prevent controls
      including timely general ledger account
  reconciliation.


·
            No
      stock compensation accounting processes
existed.





Remediation
of Material Weakness


We have
implemented and will continue to implement changes to our processes to improve
our internal control over financial reporting. The following steps have been
taken subsequent to December 31, 2007, or are planned for the first quarter of
2008, to remediate the conditions leading to the above stated material
weaknesses:





21
 Table of Contents




Remediation
Efforts on the Internal Controls Surrounding the Financial Statement Closing
Process





·
            Use
      of standard general ledger entries.


·
            Creation
      of procedures for subsidiary accounting system
  cut-off.


·
            Use
      of a disclosure control checklist.


·
            Completion
      of timely general ledger reconciliations in standard
  form.





Remediation
Efforts on the Internal Controls Surrounding Stock Compensation
Accounting





·
            Use
      of an independent consultant to establish tools for use of the
      Black-Scholes valuation model and review of management analysis and
      assumptions.


·
            Improvement
      of detail stock option activity
records.





Changes
In Internal Control Over Financial Reporting





The
following changes in internal control over financial reporting occurred during
the fourth quarter of 2007:





·
            A
      Chief Financial Officer was hired during November 2007 experienced in
      internal control environment evaluation and
  improvement.


·
            A
      fixed asset accounting software was implemented automating a previously
      manual process.


·
            A
      Disclosure Control Committee was formed to ensure all business events are
      communicated timely.


·
            Certain
      steps to further the segregation of duties were
    implemented.


·
            Improvements
      in documentation of accounting transactions were
    implemented.





Limitations
on the Effectiveness of Internal Controls





Our
management, including our Chief Executive Officer and our Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal control over financial reporting are or will be capable of preventing
or detecting all errors or all fraud. Any control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the control system’s objectives will be met. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements, due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns may occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of controls. The design of any system of controls is based
in part on certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risk.




22
 Table of Contents




PART III





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





The
following information sets forth the names of our current directors and
executive officers, their ages as of February 15, 2008 and their present
positions.




Name
            Age
            Position
      Held with the CompanyDwight
      A. Sangrey
            67
            Chairman
      of the Board of DirectorsRichard
      A. Sessions
            68
            Director,
      Chief Executive OfficerRoger
      D. Cone
            50
            Director,
      President and Chief Scientific OfficerStephen
      E. Kurtz
            51
            Director,
      Director of OperationsKerry
      D. Rea
            49
            Chief
      Financial Officer





Set forth
below is a brief description of the background and business experience of our
significant employees, executive officers and directors.





Roger D. Cone, Ph.D. is a
co-founder of the Company and has served as a Director, President and Chief
Scientific Officer since 2001. Dr. Cone is currently Director of the Center for
the Study of Weight Regulation and a Senior Scientist at the Vollum Institute at
OHSU in Portland, Oregon, and devotes approximately 20 percent of his time and
effort to our business. Dr. Cone was also a co-founder of Northwest NeuroLogic,
along with Mr. Sessions. He has served as a scientific advisory board member to
Neurocrine Biosciences, Lexicon Genetics and Trega Biosciences, and is a current
scientific advisor to the public biopharmaceutical company, Mannkind
Corporation. He has authored over 130 publications in the field of
neuroendocrinology and obesity, and is the recipient of national and
international awards for his research in this area. Dr. Cone earned his B.A.,
summa cum laude, in Biochemistry from Princeton University, where he graduated
Phi Beta Kappa, and his Ph.D. in Biology from the Massachusetts Institute of
Technology (MIT).





Richard A. Sessions, M.B.A.is
a co-founder of the Company and has served as a Director and its Chief Executive
Officer on a consulting basis since 2001. Mr. Sessions brings extensive
experience in research management to the Company. He co-founded Northwest
NeuroLogic and served as its Chief Executive Officer from 1993 to 1996. From
1990 to 2001 he served as Administrative Director of the privately endowed ($40
million) Vollum Institute at OHSU. Prior to that he spent nineteen years in
engineering and medical research management at UCLA, including positions as the
Executive Officer of the UCLA School of Engineering and Applied Sciences and
Administrative Director of the School of Medicine’s Center for Ulcer Research
and Education. Mr. Sessions holds a B.A. from California State University,
Fresno, an M.S.W. from the University of Southern California and an M.B.A. from
the UCLA Graduate School of Management.





23
 Table of Contents




Stephen E. Kurtz, Ph.D. is a
co-founder of the Company and is to serve as Director of Operations effective
March 1, 2008.  Dr. Kurtz is our Corporate Secretary and a
Director  He served part time as its Manager of Marketing and Product
Development since 2006.. He is also presently employed as a researcher at the
Veteran’s Administration Hospital in Portland, Oregon. He served full time as a
Senior Scientist of the Company in 2002. He was previously Chief Scientific
Officer at Northwest NeuroLogic. From 1992 to 1997 Dr. Kurtz was a Senior
Scientist in the Department of Microbial Molecular Biology at the Bristol-Myers
Squibb Research Institute, Princeton, New Jersey. Dr. Kurtz received his B.A. in
Biology from Brown University, and his Ph.D. in Molecular Genetics and Cell
Biology from the University of Chicago.





Dwight A. Sangrey, Ph.D., P.E. is a co-founder of the Company and has served on the Board of Directors
since its inception in 2001 and as Chairman since 2007. He has over 40 years of
experience in management, engineering, higher education and public policy.
Practicing experience includes more than 30 years in project management or more
senior responsibilities, including 10 years as Division or Chief Operating
Officer and 12 years as Chief Executive Officer. Dr. Sangrey has been involved
for more than 25 years in the process of developing viable businesses based on
technology research and the leadership of university/industry/government
economic development organizations. He has served as a member of the Board of
Directors of 10  corporations, including two public companies,
Precision Castparts Corp. (PCP) and Northwest Natural Gas Company (NWN). He is
the author of more than 120 technical publications. Dr. Sangrey has a Ph.D. in
engineering from Cornell University.





Kerry D. Rea,has served as Chief
Financial Officer since November 2007.   Mr. Rea was a consultant from 2006
to November 2007. From 2004 to 2006 he served as Vice-President and Controller
of AccessLine Communications, serving in various consulting roles from 2003 to
2006. From 1997 to 2002 he was Vice President of Finance and Vice President and
Controller for Electric Lightwave. Mr. Rea has been a CPA with two public
accounting firms, holding a Bachelor of Science of Business Administration from
Oregon State University and a Masters of Taxation from Portland State
University.





Family
Relationships





There are
no family relationships between or among the directors, executive officers or
persons nominated or chosen by us to become directors or executive
officers.





Involvement
in Certain Legal Proceedings





To  the
best of our knowledge, during the past five years, none of the
following  occurred  with  respect  to a
present or former director, executive officer, or  employee: (1) any
bankruptcy petition filed by or against any business  of which such
person was a general partner or executive officer either
at  the  time  of the bankruptcy or within two
years prior to that time; (2) any conviction in a
criminal  proceeding  or  being subject to a
pending criminal
proceeding  (excluding  traffic  violations and
other minor offenses); (3) being subject  to  any order,
judgment or decree, not subsequently reversed, suspended
or  vacated,  of  any  court  of  competent  jurisdiction,  permanently  or
temporarily enjoining, barring, suspending or otherwise limiting his or her
involvement in  any  type of business, securities or banking
activities; and (4)




24
 Table of Contents




being
found
by  a  court  of  competent  jurisdiction  (in  a  civil
action), the SEC or the
Commodities  Futures  Trading  Commission  to  have  violated
a federal or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.





Audit
Committee





The Audit
Committee is served by Dwight A. Sangrey as Chairman and Stephen E.
Kurtz.  Currently no written Audit Committee charter
exists.  The Audit Committee approves the selection of our independent
accountants and interacts with the independent accountant to discuss issues
related to financial reporting.  In addition, the Audit Committee
reviews the scope and results of the audit with the independent accountants,
reviews with management and the independent accountant our annual operating
results, considers the adequacy of our internal accounting procedures and
considers other auditing and accounting matters including fees to be paid to the
independent auditor.





Section
16(a) Beneficial Ownership Reporting Compliance





To the
best of our knowledge, no officer, director or beneficial owners of more than
ten percent of our common stock failed to timely file reports required by
Section 16(a) during the most recent fiscal year or prior years.





Code
of Ethics Disclosure





As of
December 31, 2007, we have not adopted a Code of Ethics for Financial
Executives, which include our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions. Our management believes that the size of our company and
current operations at this time do not require a code of ethics to govern the
behavior of our sole officer. We anticipate that we will adopt a code of ethics
once we are in a position to do so.





25
 Table of Contents





Item 10.  Executive Compensation





Summary
Compensation Table





The table
below summarizes all compensation awarded to, earned by, or paid to our officers
and to our directors for all services rendered in all capacities to us for our
fiscal years ended December 31, 2007 and 2006.






SUMMARY
      COMPENSATION TABLEName
      and
              principal
              position
            Year
            Salary
              (1)
            Bonus
            Stock
              Awards
            
            Option
              Awards
              (2)
            
            Non-Equity
              Incentive
      Plan
              Compensation
            Nonqualified
              Deferred
              Compensation
            All otherCompensation
    (3)
            
            TotalRichard
      Sessions
            2007
            
            
            
            
            
            
            
            
            $
            12,000
            
            $
            12,000Chief Executive
      Officer
            2006Roger Cone
            2007President and
      Chief Science Officer
            2006Kerry Rea
            2007
            $
            21,288
            
            
            
            $
            79,986
            
            
            
            
            
            
            $
            101,274Chief Financial
      Officer
            2006Stephen
    Kurtz
            2007
            $
            21,700
            
            
            
            
            
            
            
            
            
            
            
            $
            21,700Secretary and
      Director of Operations
            2006
            $
            10,717
            
            
            
            
            
            
            
            
            
            
            
            $
            21,700




(1)
            Roger Cone serves on
      an approximate 20% part-time basis and has agreed to do so without
      compensation.(2)
            Amounts
      reflect the expense recognized for accounting purposes calculated in
      accordance with SFAS 123R.Assumptions used in
      calculating expense as required by SFAS 123R are described in Note B to
      our Consolidated Financial Statements included in our 2007
      Form 10-KSB. Additional details regarding the terms of awards under
      the Stock Option Plan are described in the following table “Outstanding
      Equity Awards at Fiscal Year-End.”Mr.
      Rea’s options are exercisable ratably over 5 years on the option
      anniversary date, beginning on 12/14/08.(3)
            Richard
      Sessions received $12,000 as consulting fees in 2007 and 2006 based upon a
      verbal agreement approved by the Board of
  Directors.




Narrative
Disclosure to the Summary Compensation Table





We do not
have employment contracts with any of our executive officers.  During
the period ended December 31, 2007, we paid our CEO, Mr. Sessions, a consulting
fee of $12,000 based upon a verbal agreement approved by the Board of
Directors.




26
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Stock
Option Grants





During
the fiscal year ended December 31, 2007, Mr. Rea received a stock option award
valued at $79,986, consisting of options to acquire 100,000 shares of our common
stock at an average exercise price of $1.50 per share.





Outstanding
Equity Awards at Fiscal Year-End





The table
below summarizes all unexercised options, stock that has not vested, and equity
incentive plan awards for each named executive officer as of December 31,
2007.





OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-ENDOPTION
      AWARDS
            STOCK
      AWARDSName
            Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
            
            Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
            
            Equity
              Incentive
              Plan
      Awards:
              Number
      of Securities Underlying Unexercised Unearned
              Options
      (#)
            
            Option
              Exercise
              Price
      ($)
            
            Option
              Expiration
              Date
            Number
      of Shares or Units of Stock that have Not Vested (#)
            Market
              Value
              of
              Shares
              or
      Units
              of
      Stock
              that
              have
              Not
      Vested
              ($)
            Equity
              Incentive
              Plan
      Awards:
              Number
      of Unearned Shares,
              Units
      or
              Other
              Rights
      that have Not Vested
              (#)
            Equity
              Incentive
              Plan
      Awards:
              Market
      or Payout
              Value
      of Unearned Shares,
              Units
      or
              Other
              Rights
              that
      have
              Not
              Vested
              ($)Richard
      Sessions
            
            73,218
            
            
            
            
            
            $
            0.82
            
            7/2/2015Richard
      Sessions
            
            48,812
            
            
            
            
            
            $
            0.92
            
            7/3/2015Kerry
      Rea
            
            -
            
            
            100,000(1)
            
            
            
            $
            1.50
            
            12/14/2017(1) Options
      vest as follows: one-fifth annually on December 14, 2008, 2009, 2010,
      2011 and 2012.








27
 Table of Contents




Compensation
of Directors





The table
below summarizes all compensation of our directors as of December 31,
2007.





DIRECTOR
      COMPENSATIONName
            Fees
      Earned

                or
      paid

                  in
      cash(1)
            
            Stock

                Awards
            Option

                Awards
            Non-Equity

                Incentive
      Plan

                  Compensation
            Nonqualified

                Deferred

                  Compensation
            All
      other

                Compensation
            TotalRichard
      Sessions
            $
            -
            
            
            
            
            
            
            $
            -Roger
      Cone
            $
            -
            
            
            
            
            
            
            $
            -Stephen
      Kurtz
            $
            -
            
            
            
            
            
            
            $
            -Dwight
      Sangrey
            $
            -
            
            
            
            
            
            
            $
            -





Narrative
Disclosure to the Director Compensation Table





Our
directors are not compensated for their service in that role.





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






Name
      and Address of Beneficial Owner (1)
            Amount
      and Nature of Beneficial
      Ownership (2)
            Percent
      of Class (3)Roger
      Cone (4)
            909,428
            8.2%Richard
      Sessions (5)
            896,916
            8.1%Stephen
      Kurtz (6)
            762,645
            6.9%Dwight
      Sangrey
            744,340
            6.7%Kerry
      Rea
            -
            -5
      Officers and Directors as a Group-Total
            3,313,329
            29.9%Wenbiao
      Chen
            732,138
            6.6%5%
      Shareholders-Total
            732,138
            6.6%




(1)
            The
      following table sets forth certain information regarding beneficial
      ownership of our common shares as of February 15, 2008, by
      (i) each person or entity who is known by us to own beneficially more
      than 5% of our common shares, (ii) each of our directors,
      (iii) each of the named executive officers listed in the Summary
      Compensation Table on page (state page number), and (iv) all our
      directors and executive officers as a
group.




28
 Table of Contents






(2)
            Includes shares
      issuable upon exercise of currently vested stock options and stock options
      that will vest within 60 days of February 15, 2008, as
      follows:  Roger Cone, 12,000, Richard Sessions, 125,630, Stephen
      Kurtz, 24,406, and all officers and directors as a group,
    162,036.(3)
            All percentages are
      based on 11,072,560 shares issued and outstanding as of February 15,
      2008.(4)
            Includes a
      warrant to purchase 12,215 shares that is exercisable at $0.82 per
      share.(5)
            Includes options to
      purchase 73,214 shares of Common Stock and a warrant to purchase 3,666
      shares of Common Stock at an exercise price of $0.82 per share and an
      option to purchase 48,809 shares of Common Stock at an exercise price of
      $0.9220 per share, all of which are vested.(6)
            Includes options to
      purchase 24,405 shares at an exercise price of $0.82 per share, all of
      which are vested.




Item 12.   Certain Relationships and Related
Transactions





The
Company has a $250 thousand bank line of credit available from US Bank until
August 21, 2008.  The line of credit interest rate is prime plus
1%.  The line of credit is personally guaranteed by three of the
Company’s Directors and Officers, Dwight Sangrey, Chairman of the Board, Richard
Sessions, Director and CEO and Roger Cone, President and Chief Scientific
Officer.





The
Company has a loan from Washington Mutual Bank maturing in January
2009.  The loan has $9 thousand outstanding at December 31, 2007 and
an interest rate of prime plus 2%.  The loan is guaranteed by Richard
Sessions, Chief Executive Officer and Director and Roger Cone, President, Chief
Scientific Officer and Director.





29
 Table of Contents




Item 13.   Exhibits





Exhibit
      Number
            Description3.1
            Articles
      of Incorporation, as amended (1)3.2
            Bylaws,
      as amended (1)10.1
            Research and License Agreement, dated November 15,
      2005(2)31.1
            Certification of Chief Executive Officer pursuant to
      Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2
            Certification of Chief Financial Officer pursuant to
      Securities Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1
            Certification of Chief Executive Officer and Chief
      Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
  2002





(1)
            Incorporated
      by reference to the Registration Statement on Form SB-2 filed with the
      Securities and Exchange Commission on August 14, 2006.  On
      November 6, 2007, we further amended our articles and bylaws solely to
      reflect the change in the Company’s name to “Znomics,
  Inc.”(2)
            Certain
      portions of this Exhibit have been omitted pursuant to a request for
      confidential treatment and those portions have been filed separately with
      the SEC.





Item 14.   Principal Accountant Fees and
Services





Below is
the table of Audit Fees (amounts in US$) billed by our auditors in connection
with the audit of the Company’s annual financial statements for the years
ended:





Financial
      Statements for the Year Ended December 31
            Audit
      Services
            
            Audit
      Related Fees
            
            Tax
      Fees
            
            Other
      Fees2007
      (1)
            $
            11,500
            
            $
            0
            
            $
            0
            
            $
            02006
      (2)
            $
            21,000
            
            $
            0
            
            $
            0
            
            $
            0





(1)
            2007
      audit services billed by Moore & Associates, the Company’s current
      independent auditor.


(2)
            Includes
      $15,000 billed by Moore & Associates, the Company’s current
      independent auditor and $6,000 billed to PSRI by Dale Matheson Carr-Hilton
      Labonte, LLP.




30
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SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Znomics,
Inc.





By:
            /s/Richard A.
      SessionsRichard
      A. Sessions
              Chief
      Executive OfficerFebruary
      27, 2008





In accordance with Section 13 or 15(d)
of the Exchange Act, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated:





By:
            /s/Kerry D.
  ReaKerry
      D. Rea
              Chief
      Financial OfficerFebruary
      27, 2008