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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission File Number:

0-30365

Paradigm Genetics, Inc.

(Exact name of registrant as specified in its charter)

108 Alexander Drive, Research Triangle Park, North Carolina 27709

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (919) 425-3000

Former name, former address, and former year, if changed since last report: Not applicable

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $.01 PER SHARE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not 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-K or any amendment to this Form 10-K ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ¨      No x

The aggregate market value of the registrant’s voting and non-voting common stock, held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculations is an affiliate), computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter, was $ 25,923,121.

As of February 27, 2004, there were 32,605,360 shares of common stock, $.01 per share par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in Part III of this Form 10-K is incorporated by reference from the registrant’s proxy statement, to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s Annual Meeting of Stockholders to be held on May 12, 2004.

Table of Contents

PARADIGM GENETICS, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2003

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PART 1

ITEM 1.    BUSINESS

Overview

Paradigm Genetics is a biotechnology company using proprietary systems biology to discover biomarkers¹ to reduce the cost, risk and time of product development, as well as to discover inaccessible targets² for small molecule discovery. While laying the foundation to build our own portfolio of proprietary products, we are growing our business by partnering with life sciences companies,. Additionally, we are leveraging our existing infrastructure to provide value-added services that generate near-term revenue.

In March 2004, we acquired TissueInformatics.Inc, a privately held company, which develops and applies automated pathology software for the quantitative analysis of tissue changes in drug discovery, disease assessment, toxicology, and tissue engineering. We believe this acquisition provides Paradigm Genetics with a unique competitive advantage as the first company to combine gene expression profiling, biochemical profiling and quantitative tissue analysis in a systems biology approach to life sciences discovery. It is through this truly unique combination of distinct sets of biological data that we can identify novel biomarkers and targets that were previously inaccessible due to biological “noise.” All in all, our acquisition of TissueInformatics.Inc completes our transition from a functional genomics company to a systems biology company applying a proprietary technology platform to generate meaningful insights into biological systems, at the gene, cell and system levels.

To date, Paradigm Genetics’ business model has been primarily based on collaborative partnerships. Moving forward, we will seek to increase shareholder value by evolving our business model to include the discovery and development of our own products. By allowing other companies early access to our technology through partnerships in well-defined fields of use, we have generated streams of revenue that have helped to offset the cost of our own research and development activities. We anticipate the first product opportunities for us on the healthcare side of our business will include novel biomarkers and drug targets in diabetes, obesity and liver injury, that we can either take further down the drug development chain ourselves or license and/or co-develop with others. On the agricultural side of our business, we have identified product opportunities outside the scope of our current partnerships, including novel fungicides and compounds that enhance crop traits.

In the following business section, we will:

Systems Biology

Systems biology is an emerging research field that involves the unbiased integration, analysis and interpretation of multiple “omic” data streams. While genomics and proteomics increase scientific understanding of biological systems at a discrete molecular level, systems biology, or “big picture biology,” seeks to understand genes, proteins and other cellular and tissue components in context with each other. In other words, systems

¹ Note: A biomarker is a biological signal, such as a gene, protein or biochemical, which is objectively measured and evaluated as an indicator of normal biologic processes, pathogenic processes, or pharmacologic responses to a therapeutic intervention. Cholesterol is an example of a biomarker used as a predictor of the risk of heart disease. Blood glucose is a biomarker used to track diabetes.

² Note: An inaccessible target is one that would not otherwise be found using individual approaches because of the limitations inherent in a single discovery platform and can only be found by combining multiple data streams.

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biology examines how individual biological elements interact, integrate and function to form a complex organism (human, animal or plant) and how that organism responds, as a system, to disease or other stress. Systems biology requires the cooperation of scientists with differing expertise generating distinct sets of complex data, along with a theoretical framework for integrating and mining these differing data streams. It is a science that is computationally intensive and requires high quality, quantitative data and a substantial computing infrastructure. Systems biology provides greater precision in the understanding of mechanisms of development, disease or toxicity, and subsequently, improved information for making decisions about product candidates.

Paradigm Genetics has recognized the challenges of understanding biology at the system level and has developed its proprietary Gene to Cell to System^™ approach to meet them. Paradigm combines three major technology platforms—gene expression profiling (transcriptomics), biochemical profiling (metabolomics), and phenotypic analysis (phenomics) – with the informatics and analytical infrastructure needed to integrate and understand these data in a coherent way. We use these platforms to capture the responses of organisms to stress, such as disease, at the gene, cell and system levels leading to the discovery of important biomarkers and targets.

Paradigm believes the application of systems biology can lead to better products and more efficient product development cycles for both the healthcare and agrochemical markets. The ability to correlate gene expression with tissue features and metabolomics can generate targets that would not otherwise be found using a single platform, and provides an opportunity to discover biomarkers that act as more easily measurable predictors of product safety and/or efficacy in clinical or field testing.

Target Markets

Paradigm Genetics is in the business of life sciences discovery, both for our partners and for us. The life sciences concept involves the application of biologically based technologies across biologically based industries, such as healthcare, veterinary and agrochemical. A systems biology approach to life sciences discovery is possible because living organisms have many fundamental biological processes in common. Whether we are studying humans, animals or plants, the coding of genes, the transcription of proteins, the basic pathways for metabolism and signaling, all have counterparts and each can be analyzed using similar laboratory technologies. Understanding those processes in detail and generating unique insights into the control of biological function remains the essential starting point for discovering new products. We apply our core technologies across different biological systems with the purpose of finding and validating new biomarkers and targets. Currently our target markets are the healthcare and agricultural industries. Following are descriptions of these industries’ current market needs and how we are addressing them.

Healthcare

Today, the pharmaceutical industry faces increasing challenges and complexities in bringing new drugs to market. According to the Tufts Center for the Study of Drug Development, the cost of developing a new drug has increased from $138 million in 1975 to $802 million in 2000; one out of every 5,000 screened compounds is approved as a new medicine; and only 30% of marketed drugs realize a positive return on investment. Other industry watchers suggest that 70% of new drug targets will be unknown and require validation, and that many drugs work in a maximum of 60% of patients treated. Finally, toxic adverse events from drugs result in more than two million hospitalizations each year and more than 100,000 deaths.

While genomic data may provide important information about what might happen to an organism in response to a disease or other insult, the question of what will happen is much more elusive. An essential component in the analysis of genomic data is the generation of functional information on how genes and gene products impact cells, tissues, organs and their response to associated disease states or therapeutic intervention. Technologies that link genetic and system level information, such as those used in systems biology, have the potential to improve disease understanding, accelerate therapeutic discoveries and advance medical research. Further, there is a growing consensus that the drug development process can be most immediately enriched by technologies that provide (i) better validation of existing targets; (ii) early prediction of potential toxicology and efficacy to the discovery and application of novel biomarkers; (iii) stratification of patients in clinical trials and

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(iv) reduction of drug candidate attrition and earlier elimination of compounds destined to be unsuccessful in the clinic.

At the same time, there is a growing trend toward personalized medicine and the need to identify biomarkers that can predict which patients might respond best to a new therapy. Though the most advanced of the ‘omic’ technologies, gene expression analysis is tissue-specific, and it is not always possible to obtain the appropriate tissues samples for transcript analysis. Proteomics also provides significant analytical challenges, and it is often difficult to make a causal link between proteins identified as potential biomarkers and the mechanisms of disease or drug action. Many pharmaceutical companies today require the identification of suitable biomarkers prior to a drug entering clinical trials.

The Tufts Center for the Study of Drug Development also indicates that drug developers will increasingly rely on joint ventures and partnering opportunities to shorten new product development times and save R&D costs in the near term. Our proprietary systems biology discovery approach uniquely positions us to be the partner of choice to discover novel biomarkers, leading to safer, more effective therapeutics. It is this same systems biology expertise that will enable us to discover and develop our own pipeline of products, including biomarkers and otherwise inaccessible drug targets, in the areas of diabetes, obesity and liver injury.

Agriculture

Agricultural companies continue to search for safer and more effective pesticides to control weeds (herbicides), fungal infections (fungicides) and insect predation (insecticides). Due to their widespread use and exposure to the wider environment, agricultural products are under continuous regulatory scrutiny. More stringent regulatory guidelines mean that future pesticides will need to be used at much lower rates, have specificity to control only the targeted pest, and be increasingly safer to farmers, consumers and the environment.

Several of these same agricultural companies are also searching for the next generation of traits to be introduced into crops. Major target crops for these new traits are corn, wheat, soybean, rice, cotton, and canola, in addition to vegetables and other specialty crops. These new crop traits would improve the overall performance of plants by providing resistance to various diseases or environmental conditions (e.g., drought). In addition, a future generation of traits will improve consumer characteristics of foods such as nutritional content and taste. Agricultural companies are also interested in expanding the utility of using plants to produce products such as oils, fibers, fine chemicals and medicines. Our approach to systems biology, when applied to plant development and responses, can help meet these needs by providing more complete and precise information regarding biological mechanisms. We are also beginning to apply our proprietary systems biology “know how” to the discovery of chemical compounds that enhance crop traits as well as novel fungicide targets, both of which represent product opportunities for Paradigm Genetics.

As a result of consolidation in recent years, there are now six global agrochemical and seed companies: BASF, Bayer CropScience, Dow AgroSciences, DuPont-Pioneer, Monsanto, and Syngenta. Each company has distinct strategies for building product lines of new agrochemicals and new crop varieties. As growth in this industry can be difficult, these companies are always looking for innovative and cost effective research and development programs. We believe many of these companies will outsource certain research and development activities to biotechnology partners to achieve improved efficiency.

Our Technology Foundation

Paradigm Genetics’ technology foundation includes gene expression profiling, biochemical profiling and phenotypic analysis coupled with a powerful informatics infrastructure. We use these technologies to discover biomarkers to reduce cost, risk and time in the product development cycle as well as to discover inaccessible targets for small molecule discovery, both for our partners and for Paradigm Genetics. Our technology foundation includes:

Gene Expression Profiling (Transcriptomics)

Gene expression profiling provides a snapshot of the genes expressed in an organism at a given time. By comparing gene expression profiles of a variant organism to a normal organism, we gather information about the

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function of the modified gene as well as the effect of that gene on the expression of other normal genes. By determining how a modified gene affects normal genes, we gain insight into biochemical pathways of an organism.

Biochemical Profiling (Metabolomics)

We use our analytical biochemistry platform to provide a snapshot of the metabolic state of an organism at a given time. By understanding the changes in levels of biochemicals typically produced by the body (such as amino acids, fats, sugars and vitamins), we gain valuable information about the function of genes and proteins in disease and drug response. Our metabolomics platform uses mass spectroscopy, which separates molecules by electrical charge and size, and chromatography, which separates molecules by size and chemical properties.

Phenotypic Profiling (Phenomics)

Phenotypic profiling is the measurement of physical and chemical characteristics of an organism at one or more times during its life cycle. For our human health research, we use our TissueInformatics^™ automated pathology software for the precise identification and quantification of tissue. This process involves imaging pathology slides robotically to capture the entire tissue image from the slide in a computer file. We then apply our software to analyze the tissue image and locate all of the important physical components of the tissue in relative space. For our agricultural research, we measure approximately 140 different characteristics of our model system Arabidopsis, under standard conditions as well as under various stress conditions. These different measurements, when taken at specified times, produce a phenotype profile for a variant that we can compare to a phenotype profile of a normal organism to help understand the function of the modified gene.

Pathway Informatics

Despite the wealth of genomics and other “omic” data now available (e.g. proteomic and metabolomic), life science researchers are challenged to translate that information into clear measures of safety and efficacy of lead compounds. We believe the key lies in integrating these various data streams in such a way that scientists can simultaneously see all the data, identify relationships between them and draw meaningful conclusions. We believe we are one of the first companies developing such data integration and data coherence tools. Additionally, we have developed an extensive informatics system to intelligently store, retrieve, analyze and mine the data we collect.

Altogether, these technologies make up our proprietary systems biology discovery approach. Our unique ability to correlate gene expression with tissue features and metabolomics enables us to identify targets that would not otherwise be found using a single platform. It is this proprietary approach that currently enables us to provide rich biological information to our partners and will, we believe, enhance the discovery and development of opportunities for our own products.

Our Business Model

We are growing our business by partnering with large life sciences companies and by providing value-added services, while laying the foundation for the discovery and development of our own proprietary products. By allowing our partners early access to our unique systems biology discovery approach, we generate revenues to help offset the cost of our own research and development activities, thereby building long-term growth opportunities for Paradigm Genetics.

Partnerships

Paradigm Genetics’ first commercial activities included the signing of two major partnerships, one with Bayer CropScience and one with The Monsanto Company. These long-term, revenue-generating partnerships

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were built on a foundation of close scientific collaboration, with the potential for downstream royalties for Paradigm. This partnership model has enabled us to “learn as we grow.” While providing the highest quality biological information to our partners, we’ve been able to increase our own expertise and proprietary knowledge base as well as increase Paradigm’s revenue foundation. In the near to mid-term, we will continue to seek major partnerships with healthcare and agrochemical companies.

Healthcare.    Many industry analysts foresee a future in which the successful development and use of new therapeutics will be increasingly dependent on the identification of biomarkers that can stage disease, monitor drug action and select the right patients for treatment. Through our systems biology approach, we identify novel biomarkers that reduce the cost, risk and time it takes for our partners to develop new therapeutics. These biomarkers may also provide causal evidence of pharmacologic activity to and in the drug development and approval process. We are also using this approach to help our partners discover novel drug targets that may otherwise be hidden in “biological noise” as well as to predict toxicity of drug candidates that may otherwise fail due to unanticipated or poorly characterized safety concerns. We currently have three proof-of-concept agreements, one with a pharmaceutical company and two with major biotechnology companies.

Agriculture.    The worldwide, chronic shortage of food and the drive to improve human health through food continue to prompt the need for innovative products. We have built a history of proven performance with market leaders like The Monsanto Company, Bayer CropScience and Pioneer Hi-Bred International and developed market recognition for our deep understanding of agricultural systems. We will seek to further partner with global agricultural leaders to provide new technology and cost-effective solutions to bring new products to market.

Services Business

Our services business directly leverages the technology foundation, expertise and infrastructure we built to provide important biological information to our partners. Our gene expression profiling services business grew out of our five-year, $23.8 million toxicogenomics contract with the National Institute of Environmental Health Sciences. As we gained knowledge and efficiencies through this contract, we identified the opportunity to generate high-margin, near-term revenues for Paradigm Genetics by establishing Paradigm Array Labs. We gained our TissueInformatics^™ automated pathology software for application in drug discovery and toxicology through the acquisition of TissueInformatics.Inc.

Paradigm Array Lab^™ microarray service business.    Through Paradigm Array Labs, we provide gene expression profiling services, microarray process consultation, sample preparation services, and flexible analyses and reporting packages to pharmaceutical, agricultural and other biotechnology companies experiencing an in-house backlog of gene expression experiments. Since its launch in early 2003, Paradigm Array Labs^™ has gained substantial momentum. Last fall, we expanded the program to support the two leading microarray platforms—Agilent Technologies and Affymetrix. This allowed us to gain access to a much broader market, which in turn positioned us to accelerate revenues. We expect Paradigm Array Labs to become a multi-million dollar business in 2004 and beyond.

TissueInformatics^™ automated pathology software.    Our automated pathology software enables the imaging and analysis of complete tissue sections in an automated fashion, providing a mechanism for improving throughput and productivity of early-stage toxicology studies in the drug development process as well as providing better information. We currently have modules that analyze skin and liver, generating important phenotypic data. We will continue to commercialize our TissueInformatics^™ automated pathology software for use by pharmaceutical, biotechnology and tissue engineering companies for application in drug discovery and toxicology.

Pipeline Products

To provide the best opportunity to significantly increase shareholder value, we are investing in targeted research and development activities to build our own product portfolio. This portfolio may include

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biomarkers and/or targets as well as intellectual property that we can either license to others or further develop ourselves.

On the healthcare side of our business, these activities include:

On the agricultural side of our business, these activities include:

Our Partnerships

Bayer CropScience

In September 1998, we entered into a commercial partnership with Bayer for the development of new chemical herbicides. Under the terms of the commercial partnership, we use our technology platforms to identify Arabidopsis genes that may be targets for herbicide discovery. We are providing exclusively to Bayer assays (or tests) based on these targets for use in HTS for herbicides. The commercial partnership had an initial term of three years, ending in September 2001. In June 2001, Bayer extended the term of this agreement for an additional three years, ending in September 2004. In November 2003, Bayer again extended the term of the agreement to September 2006. Through this commercial partnership, we receive committed research funds, additional fees based on the number of assays we deliver, and milestone and royalty payments for any commercial herbicides that might result from the partnership.

The Monsanto Company

In November 1999, we entered into a commercial partnership with Monsanto to provide certain Arabidopsis-based gene function data for the development of crop inputs and outputs and nutrition. Under the terms of this commercial partnership, Monsanto is providing us with thousands of genes from Arabidopsis and other organisms. We are performing a functional analysis of such genes for Monsanto using our technology platforms. Monsanto will either own or have exclusive licenses to certain patents that result from this project. The commercial partnership has an initial term of six years from the commencement of work in February 2000 and ending in January 2006, unless Monsanto terminates it at an earlier date because we do not achieve specific milestones. The commercial partnership brings us committed research funds, additional fees based on the number of genes analyzed and royalty payments for any productized crop traits that might emerge from the partnership.

Advanced Technology Program

In June 2002, we were awarded a five-year, $11.7M grant from National Institute of Standards and Technology (NIST) to develop innovative tools for target discovery through the analysis of complex coherent data sets, with LION biosciences as a joint venture partner. This grant was the largest bioinformatics grant ever awarded in NIST’s Advanced Technologies Program history. The federal funding supports the development of methods and tools for the creation, evaluation and analysis of coherent data sets. This suite of technologies is intended to increase the number and success rate of validated targets for product development by the pharmaceutical and other life sciences industries. LION has notified Paradigm of its intent to withdraw from the

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program. As a result, Paradigm has submitted a proposal to NIST naming a replacement joint venture partner. If NIST does not timely approve our proposal, we could experience delays in revenue recognition.

National Institute of Environmental Health Sciences

In September 2002, Paradigm Genetics was awarded a five-year contract from the NIEHS for $23.8 million to provide microarray processing services and to participate in toxicology research with NIEHS and five university-based labs (Cooperative Research Members, or CRMs). Collectively, this is referred to as the Toxicogenomics Research Consortium (TRC). In April 2003, the NIEHS exercised an option in its existing contract with Paradigm, providing for an additional $8.4 million for toxicogenomics studies. Two million dollars of this modification is currently allotted and earmarked for Paradigm to perform research for the National Toxicology Program (NTP). Data generated from this toxicogenomics research will be included in the NTP’s program to better understand the effects of short and long-term exposures to chemicals. The data will become part of the Chemical Effects in Biological Systems (CEBS) database, a publicly accessible relational database that will contain information on the biological effects of chemicals and other agents and their mechanism of action.

L’Oreal

In November 2003, TissueInformatics.Inc announced that L’Oréal had licensed TissueInformatics software for the automated pathology slide screening of tissue-engineered skin within L’Oréal’s laboratories. L’Oréal has developed a tissue-engineered skin termed “EpiSkin” which has many practical life enhancing applications. To manufacture and utilize EpiSkin effectively in its laboratories, L’Oréal will implement TissueInformatics software to enable the automated pathology slide screening of specific histological structural features of EpiSkin and compare these measurements between test and control tissues. This will allow L’Oreal to ensure the engineered tissue is within acceptable limits of normality and accelerate their laboratory operations. Upon the closing of our acquisition of TissueInformatics.Inc, this contract became a Paradigm Genetics contract. We expect to complete this work in the third quarter 2004.

Pioneer Hi-Bred

In December 2003, we signed a three-year, $9 million contract with Pioneer Hi-Bred, a subsidiary of Dupont, to identify plant genes that influence important crop traits for use in Pioneer’s crop variety development program. For this collaboration, Paradigm will use its high throughput GeneFunction Factory^® platform to analyze genes in Arabidopsis thaliana, a model organism, and identify those genes that will enable Pioneer to accelerate the product breakthroughs and improvements it brings to its customers worldwide.

Emerging Pharmaceutical Partnerships

Our strategy for penetrating the healthcare marketplace involves the signing of small proof-of-concepts agreements with pharmaceutical and biotechnology companies. It is through these agreements that we can demonstrate the differentiating value of our systems biology discovery approach and pave the way to larger, more extensive future partnerships. We currently have three such proof-of-concept agreements in place, one with a major pharmaceutical company and two with biotechnology companies.

Other Collaborative Research Agreements

In addition, Paradigm Genetics has entered into a number of collaborative research agreements to further the growth of its technology platforms and, potentially, the creation of proprietary products. These include:

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Acquisition of TissueInformatics.Inc

In March 2004, Paradigm Genetics closed the acquisition of TissueInformatics.Inc, a privately-held company which specializes in the development and application of automated pathology software for the quantitative analysis of tissue changes in drug discovery, disease assessment, toxicology, and tissue engineering. The acquisition of TissueInformatics.Inc is a key step in the growth strategy of Paradigm Genetics, providing the Company with direct access to highly quantitative information about tissue structure. The Company expects the acquisition to:

We believe this acquisition gives us a unique competitive advantage as the first company to combine gene expression profiling, biochemical profiling and quantitative tissue analysis in a systems biology approach to life sciences discovery.

Specifically, TissueInformatics’ technology provides an important anchor for the understanding of biological systems. This is key to the discovery and validation of new drugs and drug targets that are safer and more effective. Capturing response of stressed biological systems at the gene and cellular level, then linking those responses to changes in tissue provides more medically relevant and clinically important information – information that is designed to shave years and money off the drug discovery and development process. We also anticipate that TissueInformatics’ technology will be important in expanding our plant phenotyping methods.

Competition

We face intense competition in the different market segments we are pursuing. Our potential competitors include specialized biotechnology companies, internal research & development efforts of pharmaceutical and agricultural companies, diagnostic companies, academic and research institutions and government agencies. Many of our competitors have significantly larger financial, technical and personnel resources than we do, which may allow them to have a competitive advantage.

A number of our competitors are developing technologies and products to improve research & development productivity. If these competitors partner or commercialize their technologies or products before we do, they could render our technologies and products obsolete or noncompetitive. In addition, many of our competitors have significantly greater experience than we do in their respective fields. We expect that competition will increase as technical advances are made in genomics, metabolomics and data integration/coherence are made and become more widely known.

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In biomarker and drug target discovery, our competitors include SurroMed, Inc. and Beyond Genomics, Inc., among others. In investigative toxicology, our competitors include CuraGen, Inc. and GeneLogic, Inc., among others. In the areas of crop trait and crop protection discovery, our competitors include Exelixis, Inc., Ceres, Inc., Mendel Biotechnology, Inc., Large Scale Biology Corporation and Diversa Corporation, among others.

Government Regulation

Regulation of Drug Development and Commercialization

Any new drug developed by our commercial partners, as a result of their use of our technology platforms, must undergo an extensive regulatory review process in the United States and other countries. The testing and approval process requires substantial time, effort and financial resources, and we cannot be certain that our commercial partners will receive approvals for any new drug on a timely basis, if at all.

Any products manufactured or distributed pursuant to FDA approvals are subject to continuing regulation by the FDA, including advertising, record-keeping and reporting requirements, compliance with FDA’s current good manufacturing practices, and periodic unannounced inspections.

No agency has approved any product resulting from the use of our technology platforms for commercialization in the United States or elsewhere. In addition, our commercial partners have not submitted any investigational new drug applications for any such product candidate. We cannot be certain if or when our commercial partners will submit an application for regulatory review, or whether our commercial partners will be able to obtain marketing approval for any products on a timely basis, if at all. If our commercial partners fail to obtain required governmental approvals, it will prevent them from marketing drugs or diagnostic products. The occurrence of any of these events may cause our business, financial condition and results of operations to suffer.

Regulation of Development and Commercialization of Agricultural Products

Federal, state, local and foreign government regulations and regulatory agencies will govern our efforts, alone or together with our commercial partners, to develop and commercialize genetically engineered crop products. These regulations and agencies may prevent us and our commercial partners from developing and marketing crop product candidates in a timely manner or under technically or commercially feasible conditions, and may impose expenses, delays and other impediments to our efforts to develop such product candidates.

The USDA prohibits genetically modified plants from being grown and transported except pursuant to an exemption or under special controls. In general, companies apply for an exemption to facilitate product development because the special controls are burdensome. However, we cannot guarantee that the products we develop will qualify for such an exemption.

Regulatory policies for genetically modified crop products vary widely, are currently the subject of intense political controversy, and may change substantially in the near future. Accordingly, labeling, premarket notification or other restrictions in foreign countries where we and our commercial partners may want to develop and/or market genetically modified product candidates may impose additional expenses and delays on such product candidates or may make commercialization in such countries impracticable.

Our future crop product candidates may also be subject to other regulations and regulatory agencies, such as the Occupational Safety and Health Act, the Toxic Substances Control Act, the National Environmental Policy Act, other federal water, air and environmental quality statutes, import/export control legislation and other laws. Any product candidates relating to pesticides will be subject to the jurisdiction of the Environmental Production Agency.

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Environmental Regulation

Our research and development activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of such materials and certain waste products. The risk of accidental contamination or injury from these materials cannot be eliminated. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed our resources.

Intellectual Property

We seek U.S. and foreign patent protection for major components of our technology platforms. We also rely on trade secret protection for certain of our confidential and proprietary information, and we use license agreements both to access external technologies and assets and to convey certain intellectual property rights to others. Our commercial success will be dependent in part on our ability to obtain commercially valuable patent claims and to protect our intellectual property portfolio. As of February 27, 2004, we had 80 U.S. patent applications pending and 27 international patent applications pending, some of which are subject to rights that we have granted to various collaborators and development partners. We have 12 trademark applications pending in the United States, one trademark application pending in the U.K., and one pending European Community trademark application. We have ten registered trademarks in the United States. We own 17 issued U.S. patents and no issued patents in any other country. If each of the 17 issued U.S. patents is maintained for the longest term available under law, the earliest a patent will expire is 2019. On March 11, 2004, we closed the acquisition of TissueInformatics.Inc, which added 13 U.S. patent applications pending, 7 international patent applications pending, 3 issued U.S. patents, and no issued patents in any other country. If each of the 3 issued U.S. patents acquired from TissueInformatics.Inc is maintained for the longest term available under law, the earliest a patent will expire is 2019.

We have applied, and intend to make additional applications, for patent protection for:

In addition, patent law relating to the scope of claims in the technology field in which we operate is still evolving. The extent of future patent protection is uncertain. In particular, we are aware of several groups that are attempting to identify and patent gene fragments and full-length genes, both characterized and uncharacterized. There is substantial uncertainty regarding the possible patent protection for gene fragments or genes without known function or correlation with specific functions. Furthermore, others may independently develop similar or alternative technologies, duplicate any of our technologies, and if patents are licensed or issued to us, design around the patented technologies licensed to or developed by us. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.

We are aware of a number of U.S. patents and patent applications and related foreign patents and patent applications owned by third parties relating to gene sequences and the analysis of gene function. These other technologies may provide third parties with competitive advantages over us and may hurt our business. In addition, some third party patent applications contain broad claims, and it is not possible to determine whether or not applicants will narrow such claims during prosecution or whether patent offices will allow and issue patents on such claims, even if such claims appear to cover prior art or have other defects. An owner or licensee of a patent in the field may threaten or file an infringement action and we may or may not prevail in any such action.

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The cost of defending an infringement action may be substantial, which could significantly increase our expenses and increase our losses. Furthermore, other patent holders may not grant us required licenses on commercially viable terms, if at all. Failure to obtain any required license could prevent us from utilizing or commercializing one or more of our technologies or gene-related products.

Such patents may include claims relating to novel genes and gene fragments and to novel uses for known genes or gene fragments identified through our discovery programs. We may not be able to obtain meaningful patent protection for our discoveries; even if patents are issued, the scope of the coverage or protection they would afford is uncertain. Failure to secure such meaningful patent protection would endanger our competitive position.

Employees

As of February 27, 2004, we had 180 full-time employees, of whom 30 hold Ph.D. degrees. Of our total workforce, 150 are engaged in research and development activities, and 30 are engaged in business development, finance and administration. On March 11, 2004, we closed the acquisition of TissueInformatics.Inc, which added 23 full-time employees, of whom four hold Ph.D. degrees and one holds a M.D. degree. None of our employees is represented by a collective bargaining agreement. We believe that our relations with our employees are good.

RISK FACTORS

We are an early stage company using novel technologies and, as a result, we may never achieve, or be able to maintain, profitability.

You should evaluate us in light of the uncertainties affecting an early stage biotechnology company. Our GeneFunction Factory^® platform, our FunctionFinder^TM system, our biochemical profiling platform, our bioinformatics efforts and our Tissueinformatics software are still evolving. We have not yet proven that determining the function of a gene in commercially significant target organisms or elucidating the biochemical profiles of cells, tissues, or fluids will enable us or our partners to develop commercial products. Furthermore, while we are continuing with our work in the agriculture sector, we are increasing our efforts to address the human health market with our biochemical profiling platform.

In the agriculture sector we have entered into only three commercial partnerships, with Bayer CropScience, Monsanto and Pioneer Hi-Bred International, Inc., a subsidiary of DuPont, to assist in development of certain new products that they are targeting, including herbicides and plants with improved nutritional and growth characteristics. In the human health sector we have only one contract, which is with L’Oréal for the development of software for automated pathology slide screening of tissue-engineered skin. This contract came to us through the acquisition of TissueInformatics.Inc. We have entered into a government contract and have received a government grant, which are helping us to develop our human health technologies. If we are unable to successfully achieve milestones or our commercial partners fail to develop successful products, we will not earn certain revenues contemplated under such partnerships. In addition, we may not be able to enter into additional commercial partnerships. We do not control the resources that our commercial partners devote to our projects and our commercial partners may not perform their obligations. Our commercial partnerships are subject to termination rights by the commercial partners. If any of our commercial partners were to terminate its relationship with us, or fail to meet its contractual obligations, it could have a material adverse effect on our revenues and our ability to undertake research, to fund related and other programs and to develop, manufacture and market any products that may have resulted from the commercial partnership. Also, we may pursue opportunities in fields that conflict with our commercial partners or in which our commercial partners could become active competitors.

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We have a history of net losses. We will continue to incur net losses that may depress our stock price.

We have incurred net losses in each year since our inception and expect these losses to continue. We experienced a net loss of approximately $12.2 million for the year ended December 31, 2003. As of December 31, 2003, we had an accumulated deficit of approximately $84.6 million. To date, we have derived substantially all of our revenues from two commercial partnerships, a government contract and government grants. We expect to derive revenue in the near future principally from government contracts and commercial contracts and partnerships. However, we expect our revenues from our commercial partnership with Bayer CropScience and Monsanto will decrease in 2004 offset by expected revenue increases from the NIEHS contract and our new commercial partnership with Pioneer Hi-Bred. We expect to spend a significant amount of capital to fund research and development and enhance our core technologies. As a result, we expect that our operating expenses will continue to increase in the near term and, consequently, we will need to generate significant additional revenues from existing commercial contracts and partnerships, grants and new revenue sources to become profitable. We cannot accurately predict when, if ever, we will become profitable.

Our business will require substantial additional capital, which we may not be able to obtain on commercially reasonable terms, if at all.

Our future capital requirements and level of expenses will depend upon numerous factors, including the costs associated with:

We currently anticipate that our cash, cash equivalents and short-term investments will be sufficient to support our operations into 2005. To the extent that our existing resources are insufficient to fund our activities, we may need to raise funds through public or private financings of debt or equity securities. No assurance can be given that such additional financings will be available or, if available, can be obtained on terms acceptable to us. If adequate funds are not available, we may have to reduce expenditures for research and development, administration, business development or marketing, which could have a material adverse effect on our business. To the extent that additional capital is raised through the sale of equity or convertible securities, the issuance of such securities could result in dilution to our shareholders.

Our debt covenants could impact our cash position.

As a result of indebtedness to Silicon Valley Bank, we are obligated to maintain a quick ratio of at least 1.5. The quick ratio is the ratio of the sum of cash, cash equivalents, short- and long- term investments and one-half of accounts receivable to the sum of all current liabilities and all amounts owed to Silicon Valley Bank minus our deferred revenue. If we were to default on this financial covenant, we may be required to pay off the loan with Silicon Valley Bank. As of December 31, 2003, our quick ratio was 1.56 and the amount outstanding under the term loan, which amortizes monthly, with Silicon Valley Bank was $4.5 million.

As a result of the equipment financing with General Electric Capital Corporation, we have a negative covenant pledge agreement which will require us to restrict a portion of our cash if at any point in time our unrestricted cash balance falls below the greater of $15.0 million or nine months’ cash needs. If this covenant were trigged at December 31, 2003, we would have been required to restrict approximately $686,000, approximately fifty percent of the amount outstanding under this equipment financing arrangement. The term loan with General Electric Capital Corporation amortizes monthly.

Pursuant to our current operating plan, it is likely we will fail to meet these financial covenants in 2004. We are currently in discussions with Silicon Valley Bank to modify the terms of the agreement or covenants in order

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to avoid a default. In addition we expect to raise funds through public or private financings of our equity securities, which would, subject to the amount raised, also allow us to avoid a default. No assurance can be given that such additional financings will be available or, if available, can be obtained on terms acceptable to us. Additionally, if we were to raise enough funds we may be able continue to meet our financial covenant with General Electric Capital Corporation.

If we lose our key personnel or are unable to attract and retain additional personnel, our operations could be disrupted and our revenues could decrease.

Our success depends on the continued services and on the performance of our senior management and scientific staff. The loss of the services of any of our senior management or scientific staff could seriously impair our ability to operate and achieve our objectives, which could reduce our revenues. Recruiting and retaining qualified scientific personnel to perform future research and development work will be critical to our success.

In order to achieve our business objectives, we must identify, attract, train and motivate additional personnel with expertise in specific industries and areas applicable to the products developed through our technologies. We compete intensely for these personnel and we may be unable to achieve our personnel goals. Our failure to achieve any of these goals could seriously limit our ability to improve our operations and financial results.

If we do not compete effectively, our losses could increase.

Our technology platform for the industrialization of gene function determination faces competition from functional genomics technologies, which are computer hardware and software technologies that researchers use to help them identify the role that specific genes play within organisms, created by others, including Exelixis, Inc., Ceres, Inc., Mendel Biotechnology Inc., and Large Scale Biology Corporation. Our biochemical profiling platform also faces competition from other companies attempting to analyze biochemicals in human beings. We expect competition to intensify in functional genomics and metabolomics research. Genomic technologies have undergone and are expected to continue to undergo rapid and significant change. Our future success will depend in large part on maintaining a competitive position in these fields. Metabolomics is a rapidly growing new technology. We or others may make rapid technological developments, which may result in products or technologies becoming obsolete before we recover the expenses we incur in connection with our development. We or our commercial partners may offer products which could be made obsolete by less expensive or more effective technologies. We may not be able to enhance our technology in ways necessary to compete successfully with newly emerging technologies.

Any products that we may develop alone or in collaboration with others will compete in highly competitive markets. In the specific markets in which we apply or intend to apply our technology platform, we face competition from pharmaceutical, plant genomics, and agri-chemical companies. Many of our existing and potential competitors have substantially greater financial resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than we do. Many of these competitors have achieved substantial market penetration in the human health, agriculture and nutrition markets.

If we are not able to adequately acquire and protect patents and licenses, we may not be able to operate our business and remain competitive.

Our business and competitive position will depend in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the United States and other countries. As of February 27, 2004, we had 80 U.S. patent applications pending and 27 international patent applications pending, some of which are subject to rights that we have granted to various collaborators and development partners. We have 12 trademark applications pending in the United States, one trademark application pending in the U.K., and one pending European Community trademark application. We have ten registered trademarks in the United States. We own 17 issued U.S. patents and no issued patents in any other

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country. If each of the 17 issued U.S. patents is maintained for the longest term available under law, the earliest a patent will expire is 2019. Upon closing the TissueInformatics transaction, Paradigm acquired 13 U.S. patent applications pending, 7 international patent applications pending, 3 issued U.S. patents, and no issued patents in any other country. If each of the 3 issued U.S. patents acquired from TissueInformatics is maintained for the longest term available under law, the earliest a patent will expire is 2019. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries.

The patent positions of life science companies are generally uncertain and involve complex legal and factual questions. Our business could be hurt by any of the following:

Third parties have filed, and in the future are likely to file, patent applications covering genes and gene function that we have developed or may develop or technology upon which our technology platform depends. If patent offices issue patents on these patent applications and we wish to use the claimed genes, gene functions or technology, we would need to obtain licenses from third parties. However, we might not be able to obtain any such license on commercially favorable terms, if at all, and if we do not obtain these licenses, we might be prevented from using certain technologies or taking certain products to market.

The patent positions of biopharmaceutical and biotechnology companies, including our patent position, are generally uncertain and involve complex legal and factual questions. Patent law relating to the scope of claims in the field in which we operate is still evolving. We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will apply for patents covering both our technologies and products, as we deem appropriate. However, other companies may challenge these applications and governments may not issue patents we request. Any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, our patents may be challenged, invalidated or fail to provide us with any competitive advantages.

We rely upon trade secret protection for our confidential and proprietary information. We have taken security measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. Even though we seek to protect our proprietary information by entering into confidentiality agreements with employees, commercial partners and consultants, people may still disclose our proprietary information, and we might not be able to meaningfully protect our trade secrets.

If third parties make or file claims of intellectual property infringement against us or otherwise seek to establish their intellectual property rights, we may have to spend time and money in response and cease some of our operations.

In the future third parties could claim that we are employing their proprietary technology without authorization or that we are infringing their patents. We could incur substantial costs and diversion of management and technical personnel in defending ourselves against any of these claims. Furthermore, parties making claims against us may be able to obtain injunctive or other equitable relief which could effectively block our ability to further develop, commercialize and sell products. In the event of a successful claim of

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infringement, courts may order us to pay damages and obtain one or more licenses from third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. An unsuccessful defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing available products.

If adverse public reaction limits the acceptance of genetically modified products, demand for any products that we or our collaborators may develop in agriculture and nutrition may decrease.

The commercial success of our product candidates in agriculture and nutrition will depend in part on public acceptance of the use of genetically modified products, including drugs, food, plants and plant products. Claims that genetically modified products are unsafe for consumption or pose a danger to the environment may influence public attitudes. Any genetically modified product that our collaborators or we may develop may not gain public acceptance. Due to public reaction in both the United States and Europe, some food processors and restaurants have already decided not to sell food that has been genetically altered or that contains genetically altered ingredients. If this policy continues or becomes more common, there could be a decrease in demand for products that we or our commercial partners may develop.

If we were successfully sued for product liability, we could face substantial liabilities that exceed our resources.

We may be held liable if any product we develop, or any product which is made using our technologies, causes injury or is found unsuitable during product testing, manufacturing, marketing, sale or use. For example, a genetically modified food could, after it is sold, be found to cause illness in individuals who eat the food. Also, like other pharmaceutical products, those produced through genetically modified plants could be found to cause illness. These risks are inherent in the development of chemical, agricultural and pharmaceutical products. We currently do not have product liability insurance. If we choose to obtain product liability insurance but cannot obtain sufficient insurance coverage at an acceptable cost or otherwise protect against potential product liability claims, the commercialization of products that we or our commercial partners develop may be prevented or inhibited. If we are sued for any injury caused by our products, our liability could exceed our total assets.

Any product that we or our commercial partners develop using the gene function information we provide may be subject to a lengthy and uncertain government regulatory process that may not result in the necessary approvals, may delay the commercialization of these products or may be costly, any of which could reduce our revenues.

Any new product that we or our commercial partners develop will likely undergo an extensive regulatory review process in the United States by the FDA and the USDA and by regulators in other countries before it can be marketed or sold. For example, the FDA must approve any drug or biologic product before it can be marketed in the U.S. This review process can take many years and require substantial expense. In the future, we and our commercial partners may also be required to submit pre-market information to the FDA about food developed through biotechnology. Adverse publicity could lead to greater regulation and trade restrictions on imports and exports of genetically modified products. Changes in the policies of U.S. and foreign regulatory bodies could increase the time required to obtain regulatory approval for each new product.

Our efforts to date have been primarily limited to identifying targets. If regulators approve any products that we or our commercial partners develop, the approval may impose limitations on the uses for which a product may be marketed. Regulators may require the submission of post-market launch information about a product after approving it, and may impose restrictions, including banning the continued sale of the product, if they discover problems with the product or its manufacturer.

Our stock price is extremely volatile.

The stock market has experienced significant price and volume fluctuations, and the market prices of technology companies, particularly life science companies, have been highly volatile. Our common stock began

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public trading in May 2000. The trading price of our common stock has been extremely volatile, and we believe it will remain highly volatile and may fluctuate substantially.

Our operating results continue to fluctuate, which could cause the price of our common stock to fall.

Our operating results historically have fluctuated on a quarterly basis and are likely to continue to do so in the future. These fluctuations could cause our stock price to fluctuate significantly or decline. Some of the factors, which could cause our operating results to fluctuate, include:

A large portion of our expenses, including expenses for facilities, equipment and personnel are relatively fixed. Accordingly, if revenues decline or do not grow as anticipated due to expiration of commercial partnerships or government contract or research grants, failure to obtain new contracts or other factors, we may not be able to correspondingly reduce our operating expenses. Failure to achieve anticipated levels of revenues could therefore significantly harm our operating results for a particular fiscal period.

Our operating results in some quarters may not meet the expectations of stock market analysts and investors. In that case, our stock price would likely decline.

If our stockholders sell substantial amounts of our common stock, the market price of our common stock may fall.

The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. As of February 27, 2004, there were 32,605,360 shares of common stock outstanding. All of the (i) 11,847,727 shares sold in our initial public offering and our October 2001 direct offering, (ii) 422,459 shares issued to Celera and subsequently registered on Form S-3, (iii) outstanding shares issued pursuant to stock option exercises or purchases under our Employee Stock Purchase Plan that were registered on one of our registration statements on Form S-8, and (iv) shares that have been sold pursuant to Rule 144 or Rule 701 are freely transferable without restriction or further registration under the Securities Act, except for shares purchased by our “affiliates,” as defined in Rule 144 of the Securities Act. The remaining shares of common stock outstanding are “restricted securities” as defined in Rule 144. Holders of these shares may sell them in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

We may face challenges in integrating TissueInformatics.Inc, which could have negative financial consequences to our shareholders and us.

Our acquisition of TissueInformatics will involve the integration of operations and personnel of TissueInformatics, including, among other things, the integration of TissueInformatics technologies in quantitative tissue analysis with our biomarker and target discovery programs. In addition, we expect to maintain operations in Pennsylvania for some period of time. As a result, we will face challenges in managing an increased number of employees over a geographic distance. The process of this integration could cause an

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interruption of the activities of our businesses. The inability to successfully integrate the operations and personnel of TissueInformatics could have an adverse effect on us, and, as a result, the market price of our common stock could decline.

Anti-takeover provisions of Delaware law and our charter could make a third-party acquisition of us difficult.

The anti-takeover provisions of Delaware law could make it more difficult for a third party to acquire control of us, even if the change in control would be beneficial to stockholders. We will be subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 will prohibit us from engaging in certain business combinations, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent someone from acquiring or merging with us. In addition, our restated certificate of incorporation and amended and restated by-laws contain certain provisions that may make a third party acquisition of us difficult, including:

Some of our existing stockholders can exert control over us and may not make decisions that are in the best interests of all stockholders.

Due to their combined stock holdings, certain institutional stockholders who beneficially own more than five percent of our common stock, if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements, which we would not otherwise consider.

Future issuances of preferred stock may dilute the rights of our common stockholders.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, privileges and other terms of these shares. The board of directors may exercise this authority without the approval of the stockholders. The rights of the holders of any preferred stock that we may issue in the future may adversely affect the rights of holders of our common stock.

If performance milestones, as detailed under our merger agreement with TissueInformatics.Inc, are achieved we would be required to issue additional shares which would dilute the rights of our common stockholders.

In March 2004, we issued a total of approximately 3,400,000 shares of our common stock in connection with our acquisition of TissueInformatics.Inc. We may become obligated to issue up to an additional 2,700,000 shares of our common stock on an “earn-out” basis for no additional consideration upon the successful achievement of performance milestones on or before December 31, 2004. In connection with the acquisition, we also assumed outstanding options and warrants to purchase up to 385,000 additional shares of our common stock. If we are required to issue additional shares of common stock as a result of the “earn out” or upon the exercise or conversion of assumed options and warrants, our stockholders’ percentage ownership will be diluted.

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Although we currently meet all NASDAQ National Market System listing requirements, we could in the future fail to meet such requirements and be delisted from the Nasdaq System.

If we are unable to maintain a $1.00 bid price for our common stock, or maintain $10,000,000 in stockholders’ equity, our common stock would be subject to delisting from the Nasdaq National Market, in which case we would plan to apply for continued listing on the Nasdaq SmallCap Market. While we currently meet the criteria that would enable us to transfer to the Nasdaq SmallCap Market, there is no assurance we will be accepted or that we will continue to meet the criteria at the time we apply for SmallCap inclusion. If we could not transfer to the Nasdaq SmallCap Market and were forced to be listed on the NASD’s OTC Bulletin Board, trading in our common stock would likely decrease substantially, or cease altogether, the market price of our common stock may decline further, and stockholders may lose some or all of their investment. Securities analysts’ and news media’s coverage, if any, of us would also be reduced or disappear altogether. Furthermore, delisting of our common stock from the Nasdaq National Market and subsequent delisting from the Nasdaq SmallCap Market or failure to meet the requirements for transferring to the SmallCap Market could inhibit, if not preclude, our ability to raise additional working capital on acceptable terms, if at all, or to utilize our stock as full or partial consideration for the acquisition of any lines of business from third parties.

Additionally, if we continue with our history of net losses and are not successful in raising additional funds, through the sale of our equity securities, our stockholders’ equity could fall below $10 million.

(b) Recent Events

On March 11, 2004, we closed the acquisition of TissueInformatics.Inc., a privately-held company, which specializes in the development and application of automated pathology software for the quantitative analysis of tissue changes in drug discovery, disease assessment, toxicology, and tissue engineering. The acquisition is an all-stock transaction in which approximately 3.4 million shares of common stock were issued, valued at approximately $4.6 million as of the closing date, and approximately 2.7 million additional shares of common stock will be issued subject to certain performance milestones as specified in the merger agreement.

ITEM 2.    PROPERTIES.

We currently lease an aggregate of approximately 106,600 square feet of single-story and multi-story office and laboratory facilities in Research Triangle Park and Durham, North Carolina. The first building lease, for approximately 20,000 square feet on S. Miami Boulevard in Durham, North Carolina expires August 31, 2005. The second building lease, for approximately 86,000 square feet on Alexander Drive in Research Triangle Park expires on November 18, 2010. We have the option to renew all leases. We also have an option to require a real estate investment trust to develop and finance an additional two-story laboratory and office facility covering approximately 50,000 square feet on our current site on Alexander Drive in Research Triangle Park, North Carolina.

As a result of the acquisition of TissueInformatics.Inc., we now lease approximately 7,200 square feet of office and laboratory facilities in Pittsburgh, Pennsylvania. The building lease expires in June 2004. We are in discussions with the landlord to renew this lease.

ITEM 3.    LEGAL PROCEEDINGS.

We are not a party to any material legal proceedings.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted during the fourth quarter of the year ended December 31, 2003.

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PART II

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

Our common stock, par value $.01 (“common stock”) per share, is traded on the Nasdaq National Market (“Nasdaq”) under the symbol “PDGM.” The following table sets forth for the periods indicated the range of high and low sales prices for the common stock as reported by Nasdaq.

Stockholders

As of February 27, 2004, there were approximately 217 holders of record of our common stock and, according to our estimates, approximately 5,200 beneficial owners.

Dividends

We have never declared or paid dividends on our capital stock and do not anticipate paying any dividends in the foreseeable future. As a result of our indebtedness with Silicon Valley Bank they would have to consent to the payment of any dividends.

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ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth our consolidated financial data for each of the five years in the period ended December 31, 2003. The statement of operations data for the years ended December 31, 2003, 2002 and 2001, and the balance sheet data as of December 31, 2003 and 2002 have been derived from our audited financial statements beginning on page F-1 of this report. The statement of operations data for the years ended December 31, 2000 and 1999 and the balance sheet data as of December 31, 2001, 2000 and 1999 have been derived from audited financial statements that are not included in this report. The historical results are not necessarily indicative of the operating results to be expected in the future. The selected financial data shown below should be read in conjunction with our financial statements and the notes to those financial statements beginning on page F-1 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 24 of this report.

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2003

Selected Quarterly Financial Data

(unaudited)

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that are based upon current expectations. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors,” “Forward-Looking Statements” and elsewhere in this report.

You should read the following discussion and analysis in conjunction with “Selected Financial Data” and the financial statements and related notes included elsewhere in this report.

Overview

Paradigm Genetics is a biotechnology company using proprietary systems biology to discover biomarkers to reduce cost, risk and time in the product development cycle as well as to discover inaccessible targets for small molecule discovery, both for our partners and for Paradigm Genetics. We are growing our business by partnering with life sciences companies, while building our own portfolio of products. Additionally, we are leveraging our existing infrastructure to provide services that generate near-term revenue.

In March 2004, we acquired TissueInformatics.Inc, a privately held company, which develops and applies automated pathology software for the quantitative analysis of tissue changes in drug discovery, disease assessment, toxicology, and tissue engineering. We believe this acquisition provides Paradigm Genetics with a unique competitive advantage as the first company to combine gene expression profiling, biochemical profiling and quantitative tissue analysis in a systems biology approach to life sciences discovery. It is through this truly unique combination of different biological data that we can identify novel biomarkers and targets that were previously inaccessible due to biological “noise.”

Our business model targets near term and mid term revenues and cash flow from our current commercial partnerships, government contracts and grants, new commercial partnerships and our service businesses—Paradigm Array Labs^™ (“PAL”) and TissueInformatics^™ automated pathology software. In the long term, we are targeting revenues and cash flow through the development of our proprietary product portfolio. Our current efforts are focused on developing diagnostics for liver disease and injury, biomarkers and drugs for diabetes and obesity, novel agricultural compounds as well as the development and application of automated pathology software.

Commercial Partnership Revenue

Currently, we have several revenue generating partnerships and contracts. The table below presents these revenue sources:

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We currently have commercial partnerships with Bayer Crop Sciences (“Bayer”) in the area of crop production and with The Monsanto Company (“Monsanto”) and Pioneer Hi-Bred International, Inc. (“Pioneer”), a subsidiary of DuPont, in the area of crop trait discovery. Our partnership with Bayer was signed in September 1998 and was extended in November 2003. Under the terms of the agreement, the companies will collaborate on herbicide discovery through September 2006. The partnership with Monsanto was signed in November 1999 and began contributing revenues in the second quarter of fiscal year 2000. During September 2001, we announced that Monsanto had amended the partnership agreement by eliminating its option to terminate the agreement without cause in exchange for broader commercialization rights. This amendment commits Monsanto to a total partnership term of six years with committed funding through January 2006. During November 2002, we announced that the research plan under the commercial partnership with Monsanto had been revised. The revision only affected the fourth quarter of 2002 by slowing the timing of our revenue recognition. This revision will not alter the total amount of revenue we will recognize over the term of this commercial partnership. The partnership with Pioneer was signed in December 2003 and began contributing to our revenues in the first quarter of fiscal year 2004.

We also have a $23.8 million five-year contract with the National Institute of Environmental Health Sciences (“NIEHS”) that was signed in September 2002 and began contributing to our revenue in the fourth quarter of 2002. In April 2003, the Company announced that NIEHS exercised an $8.4 million option under this contract bringing the total contact value to $32.2 million. Under the terms of the contract we will use our technologies to determine how toxicants work and cause damage at the cellular level.

Our acquisition of TissueInformatics.Inc brings revenue-generating contracts, of which the most significant is the contract with L’Oréal for the development and license of TissueInformatics Software for the automated pathology slide screening of tissue-engineered skin. This contract was signed in November 2003 and will begin contributing to revenue in March of 2004.

In addition, we have two government grants. Our Advanced Technology Program (“ATP”) grant from National Institute of Standards and Technology (NIST) was awarded in June 2002 for $11.7 million over five years to develop innovative tools for target discovery through the analysis of complex coherent data sets. This grant, the largest bioinformatics grant ever awarded in NIST’s Advanced Technologies Program history, supports the development of methods and tools for the creation, evaluation and analysis of coherent data sets. The grant will be shared between the joint venture partners, currently Paradigm and LION Bioscience A.G, based on the research work plan. We are expecting LION Bioscience A.G to step down as a joint venture partner and be replaced with an undisclosed party. The other grant with the National Science Foundation (NSF) for the development of a high throughput gene discovery system in Arabidopsis using geminivirus ended in June 2003. During the year ended December 31, 2002 we also generated revenues from another grant from NSF that ended in December 2002.

During the year ended December 31, 2002, we also generated $1.0 million in revenues from our commercial partnership with VDDI Pharmaceuticals that ended in December 2002. This revenue is included under the caption other revenue in the table above.

2003 Performance

During 2003, one of our major initiatives was to substantially reduce our cash burn rate. We ended 2003 with $16.3 million in cash, cash equivalents, short-term investments and long-term investments compared to $21.2 million at December 31, 2002. This equates to a net use of cash and investments of $4.9 million in 2003 compared to $21.8 million in 2002, a reduction of 77%. Our cash position will continue to be a major focus in 2004. We may seek to further strengthen our cash position through additional financings involving either debt or the sale of our stock or both. For further discussion of our cash position please see “Liquidity and Capital Resources” below.

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During 2003, we set out to increase productivity gains, improve cost controls and gain traction by signing commercial deals, which would represent the acceptance and validation of our technology. We achieved each of these goals, closing out a year of strong performance commercially, financially and strategically. In 2003, we signed numerous commercial partnerships, including:

We also launched Paradigm Array Labs^™, which capitalizes on our in-house experience and knowledge base in microarray processing. Our success with regard to productivity gains and cost controls enabled us to redirect some of the savings towards the acceleration of our research and development programs in agriculture and healthcare.

Financially, we signed a new debt agreement with Silicon Valley Bank. This agreement provided a $5.0 million, four-year term loan and a $2.5 million line of credit. We used approximately $3.0 million of the proceeds from the term loan to pay off our equipment financing loan with Transamerica Technology Finance, which was to mature in June 2004. We also actively worked to maintain our listing on the NASDAQ National Market.

Strategically, we identified the acquisition of TissueInformatics.Inc as a key step to creating powerful and unique systems biology capabilities for life sciences discovery. Further we identified near term, mid term and long term revenue opportunities. In the near-term, we believe our Paradigm Array Labs services business and automated pathology software offering will generate positive cash flow and revenue. In both the near and mid-term, the new commercial partnerships and contracts that we signed in 2003 provide good visibility on both cash flow and revenue. In the long-term, we believe that our programs for the development of diagnostics for liver disease and injury; biomarkers and drugs for diabetes and obesity; novel agricultural compounds and development and application of automated pathology software will lead to long-term positive cash flow and revenue and ultimately, greater shareholder value. The acquisition of TissueInformatics.Inc also added approximately $2.6 million in cash to our balance sheet.

Liquidity and Capital Resources

We have historically financed our operations through the sale of common and preferred stock, debt and capital lease financing, payments received from commercial partnerships and government grants. From our inception through December 31, 2003, we have raised an aggregate of approximately $95.5 million in equity issues and approximately $25.6 million in proceeds from secured debt financing.

At December 31, 2003, we had cash, cash equivalents and short-term investments totaling approximately $16.3 million. We currently see several factors which could negatively impact our cash position:

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If we were required to pay off the loan with Silicon Valley Bank and restrict cash under the loan covenants with General Electric Corporation, we believe our remaining cash would be sufficient to support our operations into 2005. Please see the section entitled “Future Cash Commitments” and “Outlook for 2004” below, for further details.

In order to best understand the Company’s cash flow, management believes that the cash flow measure presented below, which includes Short-Term and Long-Term Investments, is an appropriate measure for evaluating the Company’s liquidity, because this reflects all liquid resources available for strategic opportunities including, among others, to invest in the business and continue operating activities. However this measure should be considered in addition to, and not as a substitute for, or superior to, cash flows, prepared in accordance with generally accepted accounting principles in the U.S.

* Cash, cash equivalents, short-term and long-term investments exclude restricted cash.

** See reconciliation to generally accepted accounting principles (“GAAP”) below.

Cash used in operating activities:

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We expect our cash from operating activities will improve slightly in 2004 when compared to 2003, as we are expecting new revenues in 2004 to contribute to our cash flow from operations offset, in part, by higher research and development costs from our expanding research programs, see “Outlook for 2004” below. No assurance can be given that we will earn the new revenues anticipated in 2004.

Cash used in investing activities primarily consisted of investments in laboratory and data processing equipment for our GeneFunction Factory^™, our biochemical profiling, and phenotypic analysis platforms and also in leasehold improvements. The need for capital equipment has declined over the last two years. We expect our cash used in investing activities will increase in 2004 compared to 2003 as we continue to make investments in the purchase of equipment to support our operations.

Cash provided by (used in) financing activities:

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The table below presents our future cash commitments associated with long-term debt, capital and operating leases.

Overall, we believe that we have sufficient cash to fund our operations, our capital needs and our debt obligations into 2005. Nevertheless, we expect to raise additional funds to support our expanding research and development programs through public or private financings of our equity securities, additional debt financing or both. No assurance can be given that such additional financings will be available or, if available, can be obtained on terms acceptable to us.

** Reconciliation to GAAP

Under GAAP, cash flows from investing activities above would improve by net maturities of investment securities and unrealized gains and losses on investments; also under GAAP, cash and cash equivalents at the beginning and end of the period would be less, as they would exclude short and long-term investments. The following table present these differences:

Results of Operations

Years Ended December 31, 2003 and 2002.

Revenues

The table below presents our revenue sources for 2003 compared to 2002.

*Increase greater than 200%

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Notes:

Research and Development and Selling, General and Administrative Expenses

The table below presents our operating expenses for 2003 compared to 2002.

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Notes:

Divestiture

We are reporting a small loss from discontinued operations in 2003. In November 2002, we decided to discontinue the operations of our plant genotyping business, ParaGen and in February 2003 we sold ParaGen, to DNA Landmarks. In 2002, we reported the operating losses from ParaGen and the related write-off of goodwill and associated assets to fair value less costs to sell, as a loss from discontinued operations of $3.2 million. We are expecting a minimal income contribution from discontinued operations as we recognize royalties from the sale during 2004. We purchased ParaGen in 2001 from Celera for 422,459 shares of our common stock, which were subsequently registered for resale on an S-3 registration statement.

Interest Income (Expense), Net

Interest income (expense), net represents interest earned on our cash, cash equivalents and short-term and long-term investments, offset by interest expense on long-term debt and capital leases. Interest income (expense) net, increased to an expense of approximately $492,000 for the year ended December 31, 2003 compared to $185,000 for the year ended December 31, 2002. This increase was attributable to a reduction in interest earned on our cash balances offset, in part, by a decrease in our interest expense. We expect that net interest expense will continue to increase as we use our cash balances to fund our operations and service our debt.