Znomics, Inc.

BEACON EQUITY RESEARCH Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008 ZNOM daily

09/10/08 3.00 2.75 2.50 2.25 2.00 1.75 1.50

volume

Phone: 503-827-5271 Fax: 503-228-3290

3 2

E-mail: info@znomics.com Website: www.znomics.com

1

Thousands

Znomics, Inc. 2611 SW 3rd Ave, Suite 200 Portland, OR 97201

0

Jul

Aug

Sep

Market Data Symbol / Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .OTC .

BB: ZNOM Current Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.80 Price Targe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.00 .

Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Speculative . . . . . . . . . . . . Buy Outstanding Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11.1M ..

Market Cap. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.0M

Company Introduction Znomics Inc. (OTCBB: ZNOM) is a biotechnology company leveraging its proprietary zebrafish genetic technology platform with strong medicinal chemistry and in-vivo compound screening for development of advanced preclinical drugs. The Company is partnering with leading academic research institutions to discover new pharmaceutical compounds for treating obesity, cancer and inflammation. ZNOM’s drug discovery methodology combines genetic technology in zebrafish, a new approach to medicinal chemistry, and high throughput, in-vivo drug screening against human disease models in live zebrafish. Zebrafish models are ideal for drug discovery since these fish mature quickly, are highly fertile, and share approximately 80% to 90% of the genes found in humans. ZNOM’s methodology screens against all potential drug targets in zebrafish, and improves the speed and efficacy of drug discovery. The Company’s approach enables much higher throughput than the single target screens generally employed in pharmaceutical research. ZNOM’s zebrafish assay platforms are expected to yield targets and drugs that cannot be obtained by the industry standard cell-based assays and are used in ways Please carefully read the risks and disclaimer section at the end of this report.

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

that are unique compared to other animal models used in drug discovery.

The Company created the ZeneMark® Library, the first proprietary screenable mutations library in a vertebrate. The ZeneMark® Library contains 11, 000 mutational lines, approximately 50% of the estimated zebrafish genes.

In recent years, the Company has established collaborative agreements with Merck Inc. for drug target discovery and with the National Institute of Health, which awarded ZNOM $1.6 million in Small Business Innovation Research (SBIR) grants. ZNOM also sells mutant fish strains to university researchers in return for exclusive licensing rights to new discoveries from their research using ZNOM zebrafish lines. To date, the Company has negotiated more than 110 material transfer agreements with leading research institutions, including Harvard University, the National Institutes of Health, Johns Hopkins University, Max Planck Institute, University of North Carolina -Chapel Hill and the Victor Chang Cardiac Research Center.

In the second quarter of 2008, ZNOM announced a drug discovery program in obesity based on a zebrafish obesity model developed by Company co-founder Roger Cone, Ph.D. Also during the second quarter, the Company established a collaborative drug discovery program with Nikolaus Trede, M.D., Ph.D. of the University of Utah to develop compounds, and evaluate existing hit compounds for the treatment of T-cell diseases, including leukemia, lymphoma and autoimmune disorders. These program initiatives were followed in July by the announcement of a collaborative research program with Oregon Health and Science University and Thomas Scanlan, Ph.D., Director of its Chemical Biology Program, to design and develop preclinical compounds to treat inflammatory diseases such as rheumatoid arthritis, asthma and inflammatory bowel syndrome. Dr. Scanlan has a proven record of success in designing new compounds that have progressed from university settings to clinical studies.

With these programs, ZNOM has achieved its 2008 objective of establishing three de novo drug discovery programs and advances its goal of having three preclinical lead compounds in different disease areas in 2010/2011.

In August 2008, the Company appointed Mark A, Philip, Ph.D. as ZNOM’s new president and CEO. Dr. Philip succeeds Richard Sessions, the Company’s co-founder and interim CEO, who will continue to serve ZNOM as a consultant and board member. Dr. Philip brings more than 25 years senior executive experience in the biotechnology and pharmaceutical industries to the Company. From 2004 to 2008, Dr. Philip was president of Stryker Biotech, a division of Stryker Inc. where he helped to grow sales more than five-fold globally. From 1997 to 2004, Dr. Philip was president and CEO of Zycos Inc., a start-up biotech focused on DNA-based therapeutics for oncology and infectious diseases. At Zycos, he grew the staff from six to 60, helped to raise more than $55 million in capital, developed a technology platform, and negotiated multi-million dollar deals with major pharmaceutical and biotech companies. Zycos was sold to MGI Pharma in 2004. From 1992 to 1997, Dr. Philip was president and CEO of Immuno-U.S., a division of Immuno-International which was acquired by Baxter International in 1997. Dr. Philip has also held international executive management positions with Baxter International in the United States, Europe and Japan and with Schering–Plough.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

2

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Investment Highlights Business model capitalizes on unique properties of zebrafish for drug discovery ZNOM intends to develop new pharmaceutical compounds for treating human diseases based on its proprietary zebrafish genetic technology platform, a strong medicinal chemistry program and in-vivo compound screening.

Zebrafish are surprisingly similar to man in both genetics and physiology, sharing 80% to 90% of our genetic makeup. Some zebrafish genes are closer to human genes than are those of mice. In addition, zebrafish have ideal qualities for high throughput drug screening, including: 1) a rapid development time, with all organs formed in five days; 2) high fecundity (females produce hundreds of eggs per week, year-round); and 3) larval organs that are transparent, facilitating analysis of multiple organ systems and tissues. In addition, larval zebrafish are well suited for small molecule drug screens, enabling researchers to evaluate the effect of drug candidates on multiple targets for a given disease condition. There is also a large body of evidence indicating 80% to 90% of FDA-approved human pharmaceuticals are effective in zebrafish.

Strong scientific and research team The Company has assembled a cutting-edge scientific team. The chief scientific officer, Dr. Bruce Beutel, appointed in June, has more than 15 years experience leading groups in various aspects of drug discovery at Abbott laboratories Inc. (1995-2007) and PharmaGenetics Inc. (1993-1995). He has been involved in several disease areas including cancer, CNS, obesity, diabetes, among others and his work has resulted in seven patents, more than 30 publications, and drugs from two different projects advancing into human clinical trials. The former chief scientific officer, Dr. Roger Cone, a recognized leader in obesity research, now chair of the Department of Molecular Physiology and Biophysics at Vanderbilt University, remains as a director and consultantto Znomics. His laboratory has defined key hypothalamic pathways controlling weight regulation and ZNOM licensed a zebrafish obesity model from Dr. Cone’s laboratory when he was with Oregon Health and Science University (OHSU).

In March 2008, the Company recruited Dr. Stephane Berghmans, a researcher with extensive in-vivo compound screening experience using zebrafish, to lead the drug discovery research team. Dr. Ofir Moreno, a highly experienced medicinal chemist who has advanced projects from initial discovery to clinical candidate identification, joined the Company as senior director of chemistry this August. In addition, ZNOM has launched a drug discovery program for the treatment of inflammatory diseases with OHSU and Dr. Thomas Scanlan, the director of its Chemical Biology program and member of Znomics’ scientific advisory board. Dr. Scanlan has a proven record of success in advancing new compounds into clinical studies. ZNOM has also launched a drug discovery program on T-cell disorders in collaboration with pediatric oncologist Nikolaus Trede, M.D., Ph.D., at the University of Utah and its Huntsman Cancer Institute. Dr. Trede also serves as a Znomics scientific advisor.

Three drug discovery programs targeting preclinical lead compounds in 2010/2011 The Company’s drug discovery programs focus on new compounds for treating cancer, inflammation and obesity. ZNOM hopes to have three advanced stage preclinical compounds for these disease areas in 2010/2011 and plans to identify pharmaceutical partners to advance these into clinical trials.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

3

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

In April 2008, the Company announced a new drug discovery program focused on treatments for obesity. ZNOM has obtained an exclusive biological license to a genetic model of obesity using zebrafish developed at Oregon Health & Science University (OHSU) by ZNOM co-founder Dr. Roger Cone.

This was followed in May 2008 by the announcement of a collaborative research program with the University of Utah and its Huntsman Cancer Institute (HCI) to develop new pharmaceutical compounds for the treatment of T-cell leukemia, autoimmune diseases, inflammation and complications related to organ transplantation. In addition to future compounds, Znomics obtained commercial rights to lead compounds previously discovered in the Trede laboratory.

With the July 2008 announcement of a drug discovery program for the treatment of inflammatory diseases through a collaboration with the Oregon Health and Science University and Dr. Thomas Scanlan, ZNOM advances its goal to have three de novo drug discovery programs and three preclinical lead compounds in different disease areas in 2010/2011.

ZeneMark® library supplements drug discovery effort To support its drug discovery research, ZNOM created the ZeneMark® library, an extensive mutant vertebrate library of more than 11,000 disease-related genes representing approximately one-half of the zebrafish genome.

The ZeneMark® Library facilitates discovery of drug targets and disease models for compound screening.

By using the ZeneMark® Library and the Company’s gene-modifying technology, researchers can perform forward genetic screening, which in turn allows them to determine a gene’s function and identify better drug targets.

By selling mutant fish from the ZeneMark® library under terms of its standard MTA agreement, the Company has a unique opportunity to leverage new opportunities that arise from academic researchers using mutant fish from ZNOM to develop new drug models and/or discover new drug targets.

Collaborative agreements with universities and academic researchers The Company has relationships with more than 100 academic institutions worldwide that have purchased ZeneMark® Library mutant fish lines. Its academic partners include the Dana-Farber Cancer Institute, Harvard University, Johns Hopkins University, Massachusetts General Hospital, the Max Planck Institute for Cell Biology and Genetics, the U.S. National Institutes of Health, Northwestern University, Oregon Health and Science University, Salk Institute, Stanford University, University of North Carolina - Chapel Hill, University of California, University of Iowa, University of Munich, University of Oregon, University of Pennsylvania, University of Pittsburgh, University of Texas Health Science Center and many others. All of these relationships include material transfer agreements which provide the Company with exclusive licensing rights to discoveries from their research using ZNOM fish lines.

The Company has received $1.6 million in SBIR grants from the National Institutes of Health and its National Human Genome Research Institute. ZNOM also has had collaborative agreements with Merck for drug target discovery using Znomics proprietary technology.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

4

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Business Model Znomics’ discovery efforts leverage the Company’s proprietary platform consisting of zebrafish genetic technology, a strong medicinal chemistry program and in-vivo compound screening. ZNOM’s primary goal is to develop a pipeline of preclinical drugs through its platform technologies for partnering with pharmaceutical and biotechnology companies. Znomics is currently focused on three therapeutic programs with billion dollar markets and unmet needs: (1) obesity; (2) T-cell mediated disorders (i.e., oncology, autoimmune diseases and complications related to organ transplantation); and (3) inflammation. The goal is to have at least one advanced preclinical compound from each program in 2010/2011. Znomics doesn’t plan on conducting clinical trials but rather will pursue licensing agreements with established pharmaceutical companies in exchange for sizable upfront fees, milestone payments and royalties. While Znomics estimates it will require 18-30 months to develop its first drugs, the Company also anticipates offering research services to pharmaceutical companies, reviewing their chemical libraries for missed opportunities that can be revealed by using Znomics’ technology platform.

These research deals are expected to generate revenues prior to securing drug deals.

Znomics’ business model leverages the unique attributes of the zebrafish (discussed further below) which enables efficient in-vivo screening in quantities not feasible with alternative animal models. Zebrafish are especially well-suited for large scale, live animal screening because of their genetic homology which is 80% to 90% similar to human genes. Approximately 80% to 90% of human pharmaceuticals are known to be active in zebrafish and, in recent years, a great many human diseases have been modeled in the zebrafish. For these reasons, it is likely that many new drugs can be discovered in zebrafish.

Zebrafish characteristics The zebrafish (zebra danio) is a coldwater fish belonging to the minnow family. It is native to India, Pakistan, Bangladesh, Nepal and Myanmar. It commonly inhabits streams, canals, ditches, ponds and slow-moving or stagnant water bodies, including rice fields.

Zebrafish provide a useful model organism for drug discovery research. They can be used to supplement or replace higher vertebrate models such as rats and mice, and provide distinct advantages over other vertebrates in embryonic development research. Although the overall generation time of zebrafish is comparable to that of mice, zebrafish embryos develop more rapidly, progressing from eggs to larvae in less than three days. The embryos are large, robust, and transparent and develop externally to the mother, characteristics which facilitate experimental manipulation and observation. Their nearly constant size during early development facilitates simple staining techniques, and drugs may be administered by adding them directly to the tank.1 By enabling efficient in vivo screening in quantities not feasible in alternative animal models, zebrafish provide major advantages that can help accelerate drug discovery.

http://en.wikipedia.org/wiki/Danio_rerio

1

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

5

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Below are some of the characteristics of zebrafish that make them ideal for disease modeling: • Vertebrate physiology, small size and 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.

• Robotic screening. Zebrafish are well-suited for robotic screening. The three to five-day-old fish are approximately 1-2 mm in length, and can be examined using high-throughput screening assays.

• Simple and efficient drug administration. Drug dosing is simplified by the zebrafish gill system, which efficiently transports small molecules into its bloodstream. Most importantly, the quantity of each compound tested in zebrafish is similar to testing compounds in high-throughput enzyme or cellular assays, which is significantly less than what is required to test in the rodent models commonly used in drug discovery research.

• Direct observation of internal organs. Zebrafish embryos are transparent for approximately the first seven days of their development. This facilitates analysis of multiple organ systems and tissues.

• Ease of high-throughput, in-vivo screening. Multiple drug targets can be tested simultaneously.

• Cost-efficiency. Zebrafish requires relatively little space and have very low maintenance costs.

ZNOM libraries ZNOM’s technology platform leverages its proprietary libraries of identified mutations in specific genes. These include the ZeneMark® Library and the Human Disease Gene Library.

ZeneMark® Library The ZeneMark® Library is a comprehensive repository of retrievable zebrafish lines with identified gene mutations in which each gene is mutated and marked by a retrovirus. The ZeneMark® Library currently contains more than 11,000 mutated genes representing mutations in approximately one-half of the known zebrafish genes.

The library is stored in the form of sperm aliquots. Scientists interested in collaborations with the Company may search for mutations in genes of interest in the ZeneMark® database. This tagged mutant gene library is the first of its kind in any vertebrate.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

6

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Human Disease Gene Library This library contains more than 350 gene mutations known to cause disease in man. The Human Disease Gene Library, a subset of the ZeneMark® Library, contains mutated zebrafish equivalents of human disease genes associated with specific diseases.

Znomics’ Drug Discovery Technologies Disease models and assays Disease models, whether developed in rodents, zebrafish, yeast, or cultured cells, are designed to allow scientists to probe a particular physiological process directly relevant to human disease. ZNOM is developing proprietary zebrafish models and assays for the identification of drugs and drug targets.

Disease models and assays developed by the Company may be used for both lead compound discovery and drug target identification. ZNOM’s proprietary models are used for in-house programs and/or in collaborative research and development programs with pharmaceutical and biotechnology industry partners.

High throughput in-vivo screening The Company is advancing three disease programs by use of high throughput in-vivo screening. To achieve this aim, ZNOM is acquiring in-house compounds and screening capabilities and leveraging its medicinal chemistry capability along with the expertise of its university and industry partners. One particular advantage of zebrafish compound screening is its usefulness at every step of the preclinical discovery process, including finding targets and hits, conducting hit-to-lead work, and lead-optimization. Such live animal work facilitates the discovery of drugs not currently available to the pharmaceutical industry and makes drug discovery more cost-effective.

Pharmacological target validation Drug targets can have different degrees of validation, ranging from those most highly validated as targets of marketed drugs to those merely implicated by genetics or cellular data as being relevant to a disease. High throughput screening has been sufficiently effective, and most major pharmaceutical companies have found that discovering active new hits for a putative target is often the most cost effective stage of drug discovery.

For targets without robust validation, however, these hits are often not compelling enough for further research investment. A major step in deciding whether to pursue a target with further research is to validate the target as being pharmaceutically valid using a chemical in an animal model. Znomics plans on providing this kind of target validation as a service using its zebrafish models for various diseases.

Zebrafish assays for drug discovery Znomics can provide collaborative biological assays in zebrafish to facilitate all stages of drug discovery research from initial hit discovery to lead optimization. While Znomics’ business plan is not the same as a contract research organization, many of the assays used in internal drug discovery programs can also be used in support Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

7

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

T-cell markers, will then be used to screen the university’s large library of compounds and identify lead comof drug discovery projects at pharmaceutical companies since the assays in zebrafish are designed to be relevant to a broad range of drug targets.

Large-scale genetic screens A large-scale genetic screen entails mutating the majority of individual genes in the genome of live animals and identifying animals with pertinent disease symptoms. The mutated genes identified in these large-scale screens serve as potential drug targets for that disease. ZNOM plans to identify new drug targets through its ZeneMark® Library.

Drug screening and target validation Drug screening involves testing thousands of compounds in a disease model or assay to identify those lead compounds which merit further study and refinement. The Company will perform such screens as a part of its drug discovery program.

Although academic and commercial labs are identifying potential drug targets through various genomics methods, ZNOM believes that its zebrafish genetic technology platform provides advantages that can accelerate the discovery of a potential target’s function and confirm its relevance to disease.

Retroviral Insertional Mutagenesis (RIM) ZNOM uses a gene-modifying technology known as Retroviral Insertional Mutagenesis (RIM) to knock-out specific zebrafish genes. Using this process, the Company is able to simultaneously mutate and mark every zebrafish gene, generate new fish lines (harboring more than 25 retroviral insertions per cell) and rapidly recover the marked genes of interest.

Although DNA sequencing has generated vast amounts of data on gene expression, extracting therapeutically useful information from these huge data sets has proven difficult. One approach to determining gene function involves deleting a gene from the genome (gene knock-out), then determining the effect of the deletion in a live animal. ZNOM’s gene-modifying technology enables the Company to quickly and easily induce specific disorders such as obesity and diabetes in large populations of live animals.

Znomics’ Drug Discovery Programs T-cell leukemia, autoimmune diseases and organ transplantation program In May 2008, ZNOM announced a collaborative research program with the University of Utah and its Huntsman Cancer Institute (HCI) to develop preclinical compounds for the treatment of T-cell leukemia, autoimmune diseases, and complications related to organ transplantation.

Under the terms of the research agreement, the Company will fund the program and receive exclusive commercial rights to any discoveries. The research will be led by HCI investigator and pediatric oncologist Dr. Nikolaus Trede, a leading expert on the zebrafish immune system. Dr. Trede and his team, in collaboration with ZNOM researchers, plan to develop proprietary T-cell disease assays in zebrafish. These assays, based on endogenous Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

8

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

pounds warranting further development. Znomics also obtains full rights to lead compounds previously discovered in the Trede laboratory.

Obesity program In April 2008, the Company announced a drug discovery program focusing on treatments for obesity. ZNOM has obtained an exclusive biological license to a genetic model of obesity using zebrafish developed in the OHSU laboratory of ZNOM co-founder Dr. Roger Cone, a leading international researcher in the field of weight regulation, now at Vanderbilt University. The Company’s research team will refine Dr. Cone’s obesity model for use in the screening of small molecule compounds. According to the Company, this program will be the first to probe the complex biology of obesity using the zebrafish for in-vivo screening of compounds that act on novel targets of the disease. ZNOM aims to identify preclinical drug candidates for treating obesity and then partner with a pharmaceutical or biotechnology firm to advance its drug candidates into human clinical studies.

Inflammatory disease program In July 2008, ZNOM announced a collaborative research program with Oregon Health and Science University and Dr. Thomas Scanlan, the director of its Chemical Biology Program in inflammation. Dr. Scanlan is an expert in developing “dissociative glucocorticoid” compounds that retain the therapeutic activity but not the deleterious side effects that steroid drugs have. The intent of the program is to design and develop preclinical compounds for the treatment of diseases such as rheumatoid arthritis, asthma and inflammatory bowel syndrome.

Industry Outlook Overall annual U.S. health expenditures (including investments) exceeded $2.2 trillion at year-end 2007. Going forward, health expenditures are projected to reach $4.3 trillion by 2017, growing at an average annual 6.7% rate.

As a percentage of GDP, healthcare spending is projected to increase from 16% in 2006 to 19.5% in 2017.

National health expenditures, $ billions

Source: Centers for Medicare and Medicaid Services: National Health Care Expenditures Projections: 2007-2017 Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

9

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Healthcare spending growth is fueled by: 1. Increased general health concerns. Expenditures for medical care currently represent nearly 16.3% of all personal consumption expenditures (approximately $7,500 per year, compared to $5,500 per year in 2002).

2. Aging population. In 25 years, the number of Americans aged 65 and older will double to more than 70 million. The number of people aged 85 and above will increase four-fold and those aged 100 or more will increase 10-fold.

3. As a result of population aging, disease incidence is rising. Medical care expenditures will increase dramatically when the leading edge of the Baby Boomer generation moves into Medicare in two to three years.

Biopharmaceutical industry The biopharmaceutical market is growing at a much faster rate than the market for conventional drugs and these compounds often command comparatively higher prices. It is estimated that 80% of the new drugs entering the market over the next decade will be biologicals.2 There remains, however, a large market for small molecule compounds that can address biologically complex diseases.

The global biopharmaceuticals market is valued at $40 billion and has been growing at a 16% compound annual rate.3 There are approximately 3,000 dedicated biotechnology companies worldwide employing 230,000 people, with the United States accounting for 40% of firms and 70% of employment.4 Sales of biotechnology products are projected to reach $100 billion by 2010.

The industry consists of traditional pharmaceutical companies marketing drugs developed by biotechnology firms; dedicated biotechnology firms (usually university spin-offs) researching disease mechanisms at the molecular level; and a specialized tier of companies serving both the pharmaceutical and biotechnology industries with platform technologies that speed up drug discovery or improve drug delivery.

PhRMA member companies sales (billions of $)

Source: www.phrma.org/files/2008/Profile.pdf www.asterion.co.uk/page/1kvbj/Products/The_Commercial_Opportunity.html www.expresspharmaonline.com/20061031/market01.shtml 4 www.pharmahorizons.com/Industry_ReportE.pdf Please carefully read the risks and disclaimer section at the end of this report.

2 3

Znomics, Inc. (OTC BB: ZNOM)

10

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

The pharmaceutical industry is research-intensive; these firms invest five times more in research and development, relative to their sales, than the average manufacturing firm. In 2007, industry research and development spending totaled $58.8 billion. PhRMA members alone invested $44.5 billion. Industry spending on R&D activities has continued to grow over the past decade. Although growth was modest in 2007, spending as a percentage of sales remained high at 18.7% of domestic sales and 16.4% of total sales. 5 PhRMA member companies R&D spending (billions of $)

Source: www.phrma.org/files/MarketingandPromotion.pdf

Developing new medicines is a long and rigorous process, typically requiring 10-to-15 years of research and hundreds of millions of dollars in research spending. According to Burrill & Company, for every 5,000 to 10,000 compounds tested, only five will advance to clinical trials and, of those, only one will eventually secure FDA marketing approval. Today, there are more than 2,700 medicines in clinical trials or undergoing FDA review for 4,600 indications. These include 596 medicines in late-stage development for cancer; 71 for HIV/AIDS; 60 for diabetes; 73 for arthritis, and 57 for Alzheimer’s disease.

R&D process

www.phrma.org/files/2008/Profile.pdf

5

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

11

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Modern drug discovery is built on four core technologies: • genomics (source of novel targets); • medicinal chemistry (source of molecules that interact against those targets); • high-throughput screening (testing one against the other); and • bioinformatics, which is crucial to the analysis of the vast amounts of data generated.6 Zebrafish-based research During the 1980s, zebrafish began replacing mice and fruit flies as model organisms in molecular genetics and developmental biology. Since then, scientific interest in zebrafish models has grown exponentially. A key milestone in zebrafish modeling was the 1996 publication of a volume of research wholly dedicated to zebrafish genomics.

Zebrafish research publications*

Nowadays, zebrafish are used to model human diseases such as cardiovascular disorders or neurodegenerative diseases, in the screening of new therapeutic small molecules, in target validation and in toxicology studies.

Recent developments • In January 2005, ZNOM Scientific Advisor Leonard I. Zon and Randall T. Peterson published a landmark review article proving the value of the zebrafish for all aspects of preclinical drug discovery, including in-vivo compound screening.

www.pharmahorizons.com/Industry_ReportE.pdf

6

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

12

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

• In December 2005, a study of the golden zebrafish strain identified the gene responsible for the unusual pigmentation, a solute carrier that appears to be required for melanin production, and confirmed its function with a gene knockdown.

• In 2006, ZNOM announced the creation and availability of mutant zebrafish in the ZeneMark® library. In 2007, ZNOM reported more than 11,000 mutant fish lines had been created, approximately one-half of the zebrafish genome.

• In January 2007, Chinese researchers at Fudan University raised genetically modified fish that can be used to detect estrogen pollution in lakes and rivers. Their creation will enable environmental officials to identify waterways that must be treated for this substance linked to male infertility.

• In March 2007, ZNOM co-founder and then Chief Scientific Officer Roger Cone and Yuansup Song published a research paper reporting the creation of a genetic model of obesity in a zebrafish teleost.

• In August 2007, researchers at University College in London announced they had grown a type of adult stem cell found in the eyes of fish and mammals that develops into neurons in the retina. These cells could be injected in the eye to treat diseases where retinal neurons are damaged. Diseases of the eye associated with retinal damage include macular degeneration, glaucoma, and diabetes-related blindness.

• In February 2008, researchers at Children’s Hospital in Boston announced the development of a line of zebrafish with transparent bodies. Their transparency facilitates the analysis of disease progression, including the spread of cancer. * Source: www.zfbiolabs.com/english/zebrafish/research_onzebrafish.html

Financial Analysis Revenue ZNOM is a development-stage company and has not yet begun to generate meaningful revenues from preclinical drug discovery or product sales. Current ZNOM revenue sources include government grants, collaborative agreements with third parties and license fees. The Company has incurred losses since its inception and expects to incur losses over the next several years as it continues to ramp up its research and development efforts.

Revenues declined to $73,000 in the first six months of 2008, from $488,000 in the first six months of 2007 primarily due to the loss of $329,000 in prior revenues from National Institute of Health grants. Grant funding from the last grant awarded in 2006 ceased in August 2007.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

13

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Income statement, $ thousands

Source: SEC Filings

Liquidity and capital resources As of June 30, 2008, ZNOM had cash and cash equivalents of $2.3 million, down from $3.6 million at year-end 2007. The Company consumed $1.2 million of net cash in operations during the first six months of 2008. In August, the Company raised $4.9 million through the sale of 3.2 million shares.

ZNOM anticipates it has sufficient cash and cash equivalents to fund ongoing business operations through December 2008.

Balance sheet, $ thousands

Source: SEC Filings Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

14

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Outlook and Valuation ZNOM is pursuing drug discovery and development with a cutting-edge biotechnology platform that leverages the unique attributes of zebrafish. The Company has spent the past five years developing a library of genetic mutations in zebrafish, a vertebrate with genes related to approximately 80% to 90% of the genes found in humans. This is the first mutational library in a vertebrate.

ZNOM is leveraging this technology for its own internal drug discovery as well as for licensing and collaborations with pharmaceutical companies and other research organizations. Its drug discovery program represents a new paradigm for preclinical target and lead compound development by using whole animal screening instead of the one target, cell-based screening prevalent in the industry. The in-vivo, high-throughput screening of zebrafish is expected to accelerate the discovery process and yield targets and compounds that cannot be obtained with single target methods. ZNOM’s approach is especially suitable for diseases with complex biology because all possible targets in the animal are being screened at the same time.

ZNOM also sells mutant fish strains to academic scientists at universities and obtains the option to negotiate for exclusive commercial rights to any discoveries made using its fish. This may add important new technology to the Company’s intellectual property portfolio.

In 2008 and 2009 The Company plans to: •

pursue marketing, research and operations around preclinical lead compound discovery efforts, focusing on its three programs of inflammation, T-cell related diseases and obesity;

• pursue licenses with academic and biotechnology partners to secure new disease models, assays and drug compounds developed in their laboratories to strengthen its drug discovery efforts; • develop collaborative partnerships with pharmaceutical and biotechnology companies; • continue mutant fish sales; and • pursue various NIH grants to develop disease models, improve the ZeneMark® Library technology, and develop therapeutic compounds for diseases. Due to the timing of the grant application and approval process, grant revenues are not anticipated before 2009.

Identification of preclinical compounds is ZNOM’s primary goal. Based on disease models developed from the ZeneMark® Library and/or licensed from academic collaborators, ZNOM has launched drug discovery programs in obesity, inflammation and cancer.

High throughput in-vivo screening will be initiated to identify lead compounds therapeutically active for obesity. In addition, initial lead compounds have been identified and screening is underway for T-cell related diseases, including leukemia, lymphoma and autoimmune diseases. ZNOM, in collaboration with Thomas Scanlan of OHSU, has also identified a lead compound for inflammation and has begun work on its optimization.

The Company’s programs involve a combination of proprietary research, medicinal chemistry and compound screening, as well as developing collaborative research programs with pharmaceutical and biotechnology companies.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

15

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Licensing agreements for preclinical compounds are expected to involve an upfront cash payment, milestone payments as the compound progresses through clinical trials, and royalties on the sales of FDA-approved drugs. At present, ZNOM has no licensing agreements in place but there is a large, growing pharmaceutical market for the sale of intellectual property such as drug targets, lead compounds, disease models and related services. ZNOM expects to derive future revenues from these activities.

Revenues that companies derive from drug licensing agreements can be substantial. Median upfront payments were approximately $12.5 million and milestone payments ranged around $200 million for preclinical compound licensing agreements negotiated between 2006 and 2007. These amounts don’t include royalties on future drug sales, which typically average around 10%. Each of the disease programs ZNOM is addressing represents a multi-billion dollar market opportunity. If ZNOM is successful in advancing any of its lead compounds through to clinical trials and commercial sales, the Company’s revenue stream from royalty payments could easily exceed tens of millions of dollars.

Given the multiple target screening advantages of ZNOM’s technology, we think the Company has a good chance of securing at least two research deals in 2009 with milestone payments extending through 2013. Assuming this is the case, we anticipate research payments totaling around $3.0 million in 2010 and annual milestone payments of approximately $5.0 million between 2011 and 2013.

We also believe it is possible that one or more ZNOM compounds will advance to IND status and clinical trials.

Assuming one compound advances in 2010, we estimate upfront payments totaling $12.5 million that year and milestone payments associated with IND status and Phase I trials totaling $55 million between 2011 and 2013.

Based on this analysis, we estimate research payments to ZNOM totaling approximately $15 million in 2010 and milestone payments totaling $20 million in 2011. We anticipate milestone payments will rise to approximately $40 million in 2013 as a ZNOM lead compound advances to clinical trials.

ZNOM’s peer group of biotechnology companies are currently trading at Price/Sales multiples ranging between 8 times and 9 times revenues. We think ZNOM should be valued at a 50% discount to this peer group due to its early development stage and lack of signed licensing agreements, implying a 4 times Price/Sales multiple as appropriate. We multiply our $15 million 2010 revenue estimate by a 4 times Price/Sales multiple to obtain a $60 million market capitalization target for ZNOM, then divide that amount by 15 million shares outstanding to derive our $4.00 price target. We think it likely that ZNOM will raise additional capital through equity sales and project an increase in the outstanding share count from 11 million to 15 million shares over the next 12 months.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

16

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

We are initiating coverage of ZNOM with a Speculative Buy rating and a $4.00 price target. While we believe the advantages of ZNOM’s multiple target screening technology provide it with a better than average chance of securing lucrative licensing agreements and milestone payments over the next two to five years, we caution investors that there are many potential risks associated with this investment. The most significant risk is that none of ZNOM’s drug discovery programs will produce results and/or licensing agreements. Other risks associated with this investment are discussed in the next section.

Investment Risks History of losses ZNOM has incurred operating losses and negative cash flow from operations since its inception. Accumulated losses exceed $3.7 million and there can be no assurance that the Company will succeed in its drug discovery efforts. In addition, the Company is likely years away from generating meaningful revenues.

Delays in completing preclinical testing ZNOM hopes to have three advanced preclinical compounds in 2010/2011. However, there can be no assurance that the Company can advance its lead drug candidates to preclinical trials in the specified time frame, if at all.

Any substantial development delays would likely have a material adverse impact on the Company’s market value.

Regulatory aspects of drug development The Company’s research and development activity is subject to domestic and international regulatory controls.

In the United States, ZNOM cannot market a new drug until it has secured FDA approval. Companies typically spend several years and millions of dollars conducting clinical trials that are a necessary precursor of new drug submissions and FDA clearance.

Need for additional funding ZNOM recently raised $4.9 million through an equity sale. The Company has adequate funding to pursue its business plan through December 2008 but will need to raise significant additional capital in the future to complete its preclinical research and development projects. There is no assurance that ZNOM will be able to raise capital on acceptable terms.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

17

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Management Mark Philip, Ph.D. President & Chief Executive Officer

In August 2008, the Company appointed Dr. Mark Philip its new president and CEO. Dr. Philip succeeds Richard Sessions, ZNOM’s’ co-founder and interim CEO, who will continue to serve as a consultant and board member. Dr. Philip brings more than 25 years senior executive experience in the biotechnology and pharmaceutical industries to the Company. From 2004 to 2008, Dr. Philip was president of Stryker Biotech, a division of Stryker Inc., where he helped to grow sales more than five-fold globally. From 1997 to 2004, Dr. Philip was president and CEO of Zycos Inc., a start-up biotech focused on DNAbased therapeutics for oncology and infectious diseases. At Zycos, he helped to raise more than $55 million in capital, develop a technology platform and negotiate multi-million dollar deals with major pharmaceutical and biotech companies. Zycos was sold to MGI Pharma in 2004. From 1992 to 1997, Dr. Philip was president and CEO of Immuno-U.S., a division of Immuno-International, which was acquired by Baxter International in 1997. Dr. Philip has also held international executive management positions with Baxter International in the United States, Europe and Japan and with Schering –Plough.

Kerry D. Rea Chief Financial Officer

Kerry Rea is a CPA with more than 20 years experience in finance, primarily with publicly owned companies. Prior to joining Znomics, he was vice president and controller of AccessLine Communications from 2003 to 2006, serving in various consulting roles. From 1997 to 2002, Mr. Rea held positions as vice president of finance and controller for Electric Lightwave. He has also worked as a CPA with two public accounting firms. Mr. Rea holds a Bachelor of Science in business administration from Oregon State University and a Master of Taxation from Portland State University.

Bruce A. Beutel, Ph.D. Chief Scientific Officer

Dr. Beutel is chief scientific officer and joined Znomics in June 2008.

He brings to the Company more than 15 years experience in various aspects of drug discovery at Abbott Laboratories Inc. (1995-2007) and PharmaGenetics Inc. (1993-1995). His most recent position at Abbott Labs was senior director of target and lead discovery, where he led a team of 85 scientists. He has been involved in research with several disease areas including cancer, CNS, obesity, diabetes and infectious disease, among others. Dr. Beutel’s work has resulted in seven patents, more than 30 publications, and drugs from two different projects advancing into human clinical trials. He has a Ph.D. in molecular biology from the University of Wisconsin-Madison and conducted postdoctoral research in the laboratory of Dr. Larry Gold at the University of Colorado, Boulder.

Please carefully read the risks and disclaimer section at the end of this report.

Znomics, Inc. (OTC BB: ZNOM)

18

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Ofir Moreno, Ph.D. Senior Director of Chemistry

Dr. Moreno has 14 years of experience as a medicinal chemist in the pharmaceutical industry and an impressive track record of successful drug discovery advancing from exploratory initial discoveries through to clinical candidate identification. Dr. Moreno previously served as senior director of chemistry at Dendreon, after working in various positions at Corvas International, Amgen and Merck. He received his Ph.D. in organic chemistry from Harvard University where he worked with Professor Yoshito Kishi and a dual Bachelor of Arts in chemistry and biology from Cornell University.

Stephane Berghmans, D.V.M., Ph.D. Director of Drug Discovery

Dr. Stephane Berghmans is an expert and world leader in using zebrafish models for drug discovery. His most recent position was head of safety pharmacology at Summit PLC. Dr. Berghmans received a doctorate in veterinary medicine in 1994 and a doctorate in molecular biology and genetics in 2000 from the University of Liege, Belgium.

From 2000-2004, he was a research fellow at the Department of Pediatric Oncology at the Dana Farber Cancer Institute, Harvard Medical School. He is the author of many pioneering papers on the development of human disease models and drug screens using zebrafish.

Stephen E. Kurtz, Ph.D. Director of Operations

Dr. Kurtz is a co-founder of Znomics and is responsible for evaluating new technologies, overseeing certain laboratory operations and providing liaison with university and corporate scientists that engage in collaborative programs with the Company. He previously served as chief scientific officer for 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, N.J. Dr. Kurtz received his Bachelor of Arts in biology from Brown University, and his doctorate in molecular genetics and cell biology from the University of Chicago.

David Ransom, Ph.D. Director of Genetics and Functional Genomics

Dr. David Ransom has extensive experience as a zebrafish researcher studying the molecular mechanisms of hematopoiesis and cancer, including authoring or co-authoring 17 scientific publications in his field. He holds a doctorate of anatomy and cell biology from the University of Virginia and trained as a postdoctoral researcher with ZNOM’s scientific advisor Dr. Leonard I. Zon, professor of hematology and oncology at Harvard University’s Children’s Hospital. Dr. Ransom has received numerous research grants and awards, including the American Cancer Society Research Scholar Award.

Znomics, Inc. (OTC BB: ZNOM)

19

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Scientific Advisory Board Leonard Zon, M.D. is a professor of hematology and oncology at Harvard University’s Children’s Hospital and a member of the Howard Hughes Medical Institute. Dr. Zon is one of the country’s leading zebrafish researchers and uses zebrafish in model systems for understanding vertebrate blood development and hematopoeitic disease.

Robert Tanguay, Ph.D. is an associate professor at Oregon State University’s Department of Environmental and Molecular Toxicology. The main focus of Dr. Tanguay’s research is understanding the mechanisms underlying developmental toxicity in response to chemical exposure. Dr. Tanguay is a leading developer of zebrafish models for toxicological assays.

Roy G. Smith, Ph.D. is a professor and the director of the Huffington Center on Aging, Baylor College of Medicine in Houston, Texas. Dr. Smith was previously a vice president at Merck Research Laboratories. He is internationally known for his innovative drug discovery programs at Merck and has expertise in all phases of drug discovery, from target discovery and high-throughput screening to design and implementation of clinical trials.

Alex Schier, Ph.D. is a professor at Harvard University’s Department of Molecular and Cellular Biology. He is a leading zebrafish researcher specializing in developmental biology, with emphasis on the neurocircuitry involved with regulation of sleep and sensing of harmful stimuli.

Thomas S. Scanlan, Ph.D. is a professor of physiology & pharmacology and director of the Program in Chemical Biology at Oregon Health & Science University. Dr. Scanlan is a leader in the field of hormone action and molecular endocrinology, and also has expertise in drug discovery and preclinical drug development.

Nikolaus Trede, M.D. Ph.D. is an assistant professor of pediatrics at the University of Utah and the Huntsman Cancer Institute. Dr. Trede is a practicing pediatric oncologist and a leading expert in high-throughput compound screening in zebrafish for drug discovery.

Roger D. Cone, Ph.D., co-founder and former chief scientific officer of Znomics, is chairman of the Molecular Physiology and Biophysics department at Vanderbilt University. He was also a co-founder of Northwest NeuroLogic, and has served as a scientific advisory board member to Neurocrine Biosciences, Lexicon Genetics and Trega Biosciences. Dr. Cone is a current scientific advisor to Mannkind Corp, a publicly-traded biopharmaceutical company. He has authored more than 130 publications in the field of neuro-endocrinology and obesity, and is the recipient of national and international awards for his research in this area.

Znomics, Inc. (OTC BB: ZNOM)

20

Analyst: Victor Sula, Ph.D. Initial Report September 16th, 2008

Disclaimer DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice.

The information contained in our report should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities. We distribute opinions, comments and information free of charge exclusively to individuals who wish to receive them.

Our newsletter and website have been prepared for informational purposes only and are not intended to be used as a complete source of information on any particular company.

An individual should never invest in the securities of any of the companies profiled based solely on information contained in our report. Individuals should assume that all information contained in the report about profiled companies is not trustworthy unless verified by their own independent research.

Any individual who chooses to invest in any securities should do so with caution. Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Always research your own investments and consult with a registered investment advisor or licensed stock broker before investing.

The report is a service of BlueWave Advisors, LLC, a financial public relations firm that has been compensated by the companies profiled. All direct and third party compensation received has been disclosed within each individual profile in accordance with section 17(b) of the Securities Act of 1933. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies. BlueWave Advisors, LLC, and/or its affiliated will hold, buy, and sell securities in the companies profiled. When compensated in shares, all readers should be aware that is our policy to liquidate all shares immediately. We reserve the right to buy or sell the shares of any the companies mentioned in any materials we produce at any time. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies. BeaconEquity.com is a Web site wholly-owned by BlueWave Advisors, LLC. BlueWave Advisors, LLC has been compensated six thousand dollars from Evergreen Marketing, LLC, a shareholder of Znomics Inc. (ZNOM), as a marketing budget to manage a comprehensive investor awareness program including the creation and distribution of this report as well as other investor relations efforts.

Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements.

We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www.finra.org.

All decisions are made solely by the analyst and independent of outside parties or influence.

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

Znomics, Inc. (OTC BB: ZNOM)

21