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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

Icoria, Inc.

(Exact name of registrant as specified in its charter)

108 T.W. 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: Paradigm Genetics, Inc.

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 $29,330,514.

As of March 14, 2005, there were 38,925,962 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 11, 2005.

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ICORIA, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2004

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PART 1

Introduction

We are a biotechnology company dedicated to finding new ways of detecting and treating human disease. We use our ability to analyze biological function at the level of gene expression, biochemical pathways and tissue structure to discover and validate novel biomarkers, drugs and drug targets. Our business model provides opportunities to work with pharmaceutical, biotechnology, government, and academic laboratories on a fee for service or collaborative basis, while we develop our own proprietary sets of products for internal development, or eventual out-licensing. Our internal programs focus on metabolic disorders (diabetes, obesity, etc.) and the liver as a site of disease progression and drug action.

Over the past several years, the company has gradually transformed itself from a functional genomics company focused exclusively on agricultural biotechnology to a biomarker-enabled drug discovery company targeting human diagnostics and therapeutics. This transformation is built upon proprietary technologies and expertise developed over the past three years in serving the life sciences market. Biomarker-enabled drug discovery is a new paradigm in drug development that links the discovery of new targets and drugs to biomarkers and diagnostics that can be used to monitor drug action, stage disease and predict patient response. Biomarkers are biological signals, such as genes, proteins or biochemicals, which can be objectively measured and evaluated as indicators of normal biologic processes, pathogenic processes, or pharmacologic responses to a therapeutic intervention. For example, cholesterol is an example of a biomarker used as a predictor of heart disease, and blood glucose is a biomarker used to detect diabetes and insulin resistance. Our goal is to discover novel biomarkers that can be integrated into the drug discovery and development process to reduce the cost, risk and time of product development by improving the measurement of drug response and patient susceptibility, and allowing the right drug to be given to the right patient for the right disease. Biomarkers can also be used to find unique drug targets that would not otherwise have been discovered using more traditional methods. We believe our approach to biomarker and target discovery, which combines strong computational, analytical and data mining skills with the ability to generate large, multi-dimensional data sets on proprietary platforms, gives us an important competitive advantage.

We currently leverage the above technology platforms, infrastructure and value generation strategy to generate near-term revenue while laying the foundation for our own portfolio of proprietary products, which we may elect to advance ourselves or co-develop with a partner. We continue to work in collaboration with large agricultural companies under existing contracts to deliver top quality services and products; however, we intend to use the revenue generated exclusively towards growing our healthcare business and will not enter into new agricultural contracts.

In March 2004, we acquired TissueInformatics.Inc, a privately held company, which develops and applies machine vision software for the quantitative analysis of tissue feature changes in drug discovery, disease assessment, toxicology, and tissue engineering. The use of computer vision to detect and quantify changes in tissue structure provides a highly sensitive method for evaluating the effects of disease and drug action at the tissue level. We believe this acquisition provides Icoria with a unique data stream for biomarker and target discovery and a strong competitive advantage as the first company to combine gene expression profiling, biochemical profiling and quantitative tissue analysis in a systems biology approach to drug discovery and development. 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 the complexity of the biology. On August 17, 2004, we, Paradigm Genetics, Inc., changed our corporate identity to Icoria, Inc., to reflect our evolution into an advanced systems biology company.

On March 23, 2005, we sold selected agricultural assets related to the field of transgenic traits for agriculture to Monsanto Company. This transaction was intended to obtain the best possible return on these assets and to refine our business strategy. By divesting ourselves of these assets, we will improve our cost structure and cash burn rate and strengthen our ability to focus on healthcare discovery and development applications. We believe that this transaction will be instrumental in completing our transition to a healthcare company by providing us with needed capital, lower overhead and a more strategic, concentrated use of resources to address what we consider to be a significant healthcare market opportunity.

The Monsanto transaction is essentially a sale of our GeneFunction Factory^™ discovery platform, which we have used to analyze genes in Arabidopsis, for Monsanto. The transaction is structured as an asset purchase and is for $4,750,000 with an additional installment payment of $1,180,000 due in January 2006. A payment of $820,000 may also be due in January 2006 if we meet certain transition milestones. As part of the sale, Monsanto agreed to assume the remaining five years on a 32,000 square foot facility lease and hire approximately sixty of our employees beginning in May 2005. Due to the sale of these assets, our existing six-year commercial partnership with Monsanto was amended to terminate in May 2005, approximately nine months before its previously scheduled end date, and the total contract value was reduced by $1.4 million to $53.6 million. All of the summaries regarding this transaction are

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conditioned by the Asset Purchase Agreement dated March 23, 2005 which was filed with the Current Report on Form 8-K on March 29, 2005.

We have continuously evolved our business focus to target emerging high value markets and the most favorable opportunities for our efforts. This is evidenced by the present sharpening of our focus to the healthcare market and, specifically metabolic disorders such as diabetes, obesity and liver-related diseases. We believe that these conditions and their underlying causes are ideally suited for analysis with our technologies. We believe that these areas hold great potential and that our rapidly developing healthcare business will become our new growth driver. This transition is not without risk or cost, but we are of the opinion that our traditional revenue streams from a few large agricultural-based research contracts are no longer available in this rapidly consolidating industry. Therefore, rather than marginalizing the operation with significant risks, we decided to begin our exit from the agriculture – based research business through the Monsanto transaction.

To date, Icoria’s business model has been primarily based on services and collaborative partnerships in the agriculture and healthcare industries. Moving forward, we seek to increase and sustain shareholder value by further refining our business model to serve healthcare companies while increasingly working on the discovery and development of our own healthcare products. By allowing other companies early access to our technology through partnerships in well-defined fields of use, we have traditionally generated streams of revenue that have helped to offset the cost of our own research and development activities. We anticipate maintaining this past practice of using revenue streams to offset the cost of our own research and development activities, while simultaneously advancing the state of the art of our science and technology. We hope to be able to advance our own products and discoveries further down the drug development chain ourselves or license and/or co-develop these products and discoveries with others. We believe that this combination of our resources provides us a greater likelihood of increasing long-term shareholder value, and will limit the costs associated with performing research and selling services. We intend to complete the agricultural research that has been contracted in our existing agreements and to deliver top-quality services and products to these agricultural partners. In time; however, we may reach some other resolution regarding these contracts and technology to further enhance our present value and sharpen our healthcare focus.

In the following business section, we:

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Healthcare Markets

The pharmaceutical industry continues to face increasing challenges and complexities in bringing new drugs to market. Despite the ongoing “–omics” revolution and the hope it has generated for discovering new ways of preventing, treating and curing disease, the path to successful drug development remains uncertain, with cost and risk both increasing, rather than decreasing in the post-genomics era. In discovery, pharmaceutical companies must deal with increasingly large and complex data streams. In clinical development and post-marketing, patient safety remains a major concern, and drugs still fail or are withdrawn from market for reasons of toxicity or limited efficacy that were not seen or anticipated in earlier trials. The current cost of bringing a new therapeutic to market has been estimated to be as high as $0.8 to $1.7 billion. A new medicine entering Phase I clinical trials is estimated to have only an eight percent chance of gaining regulatory approval and reaching the market. As a result, there is concern that larger companies might seek less risky, higher return projects, leaving preclinical and clinical breakthrough innovation to smaller companies. This past year, the National Institutes of Health and the FDA both issued position papers that recommended a series of research initiatives designed to add efficiencies to the drug research and development process. Both these agencies have embraced biomarkers and better predictive tools as important components of the toolkit needed to improve the quantity and quality of new therapeutics coming through the pharmaceutical pipeline to the market.

We anticipate several areas in which our research and development strategy impact the critical path of drug discovery and development:

Computational Biology: The advent of high-throughput biology has created demand for computational tools that enable discovery in living systems. Conservative estimates place the global bioinformatics and computational biology market size in 2006 at around US $1.6 billion at an annual growth of around 40%, with the pharmaceutical market being the largest consumer. The market for computational biology software and expertise is large but fragmented, with many tools available to address customer or problem-specific needs. We believe Icoria has a strong position in the following areas of computational biology:

Biomarker Discovery: The past several years have seen rapid growth in the commercial application of biotechnology to biomarker discovery. The primary driver for biomarker research is the conviction that using biomarkers will favorably impact the economics of drug research and development by improving productivity. Market research has projected that within five years, pharmaceutical companies will be able to reduce their R&D expenditures by nearly 25% through the aggressive use of biomarkers at different stages of the drug development pipeline. The market for biomarker related products and services sector is projected to grow from total revenues of $120 million in 2003 to just under $3 billion in 2008. In the biomarker services area, metabolomics is considered the most rapidly growing segment, with a compound average annual growth rate of 62%. The analysis of gene expression (transcript profiling) is currently the single largest segment within the biomarker products and services market, commanding a 43% share in 2003 with a projected compound average annual growth rate of 10%. We believe Icoria has a strong position in the following areas of biomarker discovery:

Microarray Services: Paradigm Array Labs^™, which provides GLP-compliant RNA preparation, transcript profiling and data analysis and microarray services using Affymetrix Genechip^® Gene Expression Analysis Arrays, Agilent Oligo Microarrays and proprietary MirChip^™ technology Icoria developed with Rosetta Genomics, as well as Laser Capture Microdissection and the ability to process paraffin-embedded tissues. Paradigm Array Labs is primarily a service organization, providing array processing on a fee-for-service basis, as well as supporting Icoria’s internal development programs.

Metabolic disorders and liver disease: On average, it takes approximately ten years before patients are diagnosed with Type 2 diabetes. During this period, they develop conditions such as fatty liver, insulin resistance and dyslipidemia that are now recognized as the Metabolic Syndrome. This syndrome is estimated to be present in up to 27% of the U.S. population and is believed to double the risk of cardiovascular disease. There are no simple tests for insulin resistance. We believe Icoria’s technologies are well suited to developing a method for screening patients and identifying these metabolic abnormalities at earlier stages as well as for identifying novel therapeutic targets.

Our Technology Foundation

Icoria’s technology foundation includes gene expression profiling, biochemical profiling and phenotypic analysis coupled with a powerful informatics infrastructure. We use these technologies to discover biomarkers as well as to discover inaccessible targets for small molecule discovery, both for our partners and for Icoria. Our technology foundation includes:

Gene Expression Profiling

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 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.

Metabolomics

Biochemical profiling provides a way of measuring the net change in a system at the biochemical level. Not every change in gene expression translates to changes at the protein level, and not every change in protein is translated to alterations in biochemical networks and pathways. Metabolomics therefore provides a more functional readout of biochemical changes which, when combined with gene expression results, enable us to construct a more comprehensive picture of the mechanisms that are altered within biological

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to separate the thousands of components present in a biological sample according to both their physicochemical characteristics and their mass. The complex data from these analyses is deconvoluted using proprietary software developed by Icoria.

Quantitative Tissue Analysis

We use our proprietary quantitative tissue analysis software for the precise identification and quantification of changes in tissue structure. This process involves digitally imaging pathology slides to capture the entire tissue image in a computer file. We then apply our software to analyze the tissue image in terms of color, shape and textures, so that we can locate and quantify all of the important physical components of the tissue in relative space. Unlike standard histopathological scores, quantitative tissue analysis (QTA) provides a continuous digital measure of the phenotype, which not only enhances our ability to correlate changes with mechanistic changes at the gene and biochemical levels, but can also be integrated with these data and used in a mechanistic sense.

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.

Icoria’s pathway informatics strengths are in three key areas. First, Icoria possesses a broad knowledge of human/mammalian metabolites, enzyme-catalyzed reactions, and pathways (called Metabolome Dictionary) which we believe is greater than what is available as a commercial product or in the public domain. Second, Icoria utilizes novel algorithms to discover networks from metabolomic data, transcriptional data and reference knowledge. Third, Icoria has developed the ability to integrate metabolomics, transcriptional and tissue feature data with biological pathways. We have not designed or organized our technologies for use as a commercial software package. Instead, they are utilized in our proprietary internal discovery and partnered research efforts.

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 continue to refine our business model to match perceived markets for our services. The Asset Purchase Agreement with Monsanto signed on March 23, 2005 marks the turning point for a new direction for our business. We anticipate growing our new business by partnering with pharmaceutical and biotechnology companies and by providing value-added services in areas of clearly defined market need for some production-ready elements of our technology. However, we will also pursue the discovery and development of our own proprietary products in tightly focused areas of medical and scientific opportunity. We are changing the industry and products on which we are focusing our resources and efforts. The change from a life sciences company to that of a pure healthcare focus is fundamentally altering who we are. We anticipate that our shift of focus will result in our becoming a fully evolved biomarker enabled drug discovery and development company targeting drugs, targets and diagnostics for diabetes, obesity and liver injury. We intend to continue the model whereby we allow our partners early and limited access to our unique multi-platform discovery approach to generate revenues that will help to offset the cost of our own research and development activities. We also intend to seek partners for the out-licensing or co-development of some of the proprietary diagnostics, targets and drug candidates in our portfolio. We believe that this partnering philosophy builds long-term growth opportunities for Icoria. We will use some of our tested methods while we move towards building our business exclusively within the healthcare realm. This shift from investing in current revenue sources to what we believe has better long-term growth potential comes as a result of our belief that there are not a sufficient number of business-sustaining contracts available in the agriculture research market. Although the transition is difficult and has risk, it comes as a result of a diminishing agriculture market opportunity for functional genomics research dollars and our belief that our resources are better allocated to an area of larger potential. We believe that while becoming exclusively a healthcare biotechnology company represents a major evolution, it is a necessary one to capture and generate sustainable shareholder value given market trends in our previous businesses.

Partnerships

Icoria’s earlier commercial activities included the signing of two major partnerships, one with Bayer CropScience and one with Monsanto Company. These long-term, revenue-generating partnerships were built on a foundation of close scientific collaboration, with the potential for downstream royalties to Icoria. 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

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base as well as increase Icoria’s revenue foundation. We believe there is potential for major partnerships with healthcare companies. By contrast, we believe that large agricultural contracts similar to the Bayer and Monsanto agreements have become rare and the cost of obtaining such contracts, if they exist at all, is economically prohibitive.

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 hope to 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 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 hope to expand our healthcare efforts and grow our business internally with the idea of having our own technology and products. We currently have two proof-of-concept agreements, one with a pharmaceutical company and one with a major biotechnology company. Icoria is continuing to work on an $11.7 million contract with the National Institute of Standards and Technology (NIST) Advanced Technology Program (ATP) and has two Small Business Innovation Research contracts from the National Institutes of Health.

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 Monsanto Company, Bayer CropScience and Pioneer Hi-Bred International and developed market recognition for our deep understanding of agricultural systems. We will complete our remaining projects with agricultural leaders to provide new technology and cost-effective solutions designed to enable them to bring new products to market, but we will not enter into new contracts in the agriculture sector.

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 and near-term revenues for Icoria by establishing Paradigm Array Labs^™. We gained our TissueInformatics^™ quantitative tissue analysis software for application in toxicology and drug discovery through the acquisition of TissueInformatics.Inc.

Paradigm Array Labs^™ 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 agricultural, pharmaceutical 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 sustained multi-million dollar business.

TissueInformatics^™ quantitative tissue analysis software. Our computer vision tissue analysis 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 use our TissueInformatics^™ software in our internal discovery efforts.

Pipeline Products

To provide the best opportunity to significantly increase shareholder value in the longer term, we are investing in targeted research and development activities in the healthcare field to build our own product portfolio. This portfolio will hopefully include 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 current and future:

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On the agricultural side of our business, we have:

Our Partnerships

Emerging Pharmaceutical Partnerships

Our strategy for penetrating the healthcare marketplace involves the conduct of internal proof-of-concept studies followed by small pilot projects with pharmaceutical and biotechnology companies. It is through these agreements that we have demonstrated the differentiating value of our systems biology discovery approach and paved the way to larger, more extensive future partnerships. We currently have two pilot project agreements in place, one with a major pharmaceutical company and one with a leading biotechnology company. Our goal is to grow initial fee-for-service pilot projects into research partnerships characterized by increased retention of intellectual property rights as well as developmental milestones and, ultimately, product royalty streams.

In addition, Icoria has already 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:

Advanced Technology Program

In June 2002, we were awarded a five-year, $11.7 million grant from National Institute of Standards and Technology (NIST) to develop innovative tools for drug target discovery through the analysis of complex coherent data sets, with LION biosciences, Inc. initially and then in 2004, with Agilent Technologies as a joint venture partner. This grant, the largest bioinformatics grant ever awarded by NIST’s Advanced Technologies Program history at that time, 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.

National Institute of Environmental Health Sciences

In September 2002, Icoria 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 Icoria, providing for an additional $8.4 million for toxicogenomics studies. Two million dollars of this modification is currently allotted and earmarked for Icoria 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.

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Pioneer Hi-Bred

In December 2003, we signed a three-year $9 million contract with Pioneer Hi-Bred International, Inc. (“Pioneer”), a subsidiary of E. I. duPont de Nemours and Company, to identify plant genes that influence important crop traits for use in Pioneer’s crop variety development program. We have realized $2.5 million in revenue from the contract to date. For this collaboration, Icoria will use its high throughput GeneFunction Factory^® platform (licensed back to Icoria under the asset sale agreement with Monsanto) 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. We intend to satisfy the contract, realize its full value, and allocate the revenues generated towards our new goals.

Partnerships Ending or Completed in 2005

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 have provided 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. On November 19, 2004, we received a notice of termination from Bayer regarding the September 1998 agreement, as amended. The notice of termination is pursuant to the terms of the Agreement and formally establishes an abbreviated timeline for the completion of the parties’ relationship. The termination is effective from December 31, 2004. We anticipate that the majority of the work remaining under the Agreement will be substantially completed by the end of March 2005. Under the terms of the Agreement, the Company will earn additional fees as assays are delivered. The termination letter also acknowledges Bayer’s obligation to pay a termination fee in January 2005. We have received this fee of $575,000. The notice of termination expresses Bayer’s satisfaction with Icoria’s services during the length of the parties’ relationship and states that corporate restructuring and enhanced internal capabilities at Bayer are the reasons for the termination of the Agreement.

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. On March 23, 2005, we sold to Monsanto the agricultural assets used to perform under this contract. Due to the sale of these assets, our commercial partnership with Monsanto was amended to terminate in May 2005, approximately nine months before its previously scheduled end date, and the total contract value was reduced by $1.4 million to $53.6 million.

Acquisition of TissueInformatics.Inc

In March 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 of TissueInformatics.Inc was instrumental in our evolving business strategy and provided us with direct access to highly quantitative information about tissue structure. The acquisition did not yield all of the value anticipated and $1.9 million of intangible assets were written off at December 31, 2004; however, we believe the acquisition provides an important anchor for the understanding of biological systems, and we believe that the sum of our knowledge in this field, due to our informatics synergies, is substantially greater than the sum of the component parts. This total understanding is important to our efforts in the discovery and validation of new drugs and drug targets that are safer and more effective. Capturing the responses 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 reduce the time and cost of the drug discovery and development process.

Competition

We faced intense competition in the different market segments we were pursuing and we continue to face such competition to the extent we are pursuing efforts in the growing healthcare industry. We believe that one of the advantages to focusing our efforts and bringing all of our resources to bear in one industry is that it will allow us to compete more effectively. Our potential competitors include

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specialized biotechnology companies, internal research & development efforts of pharmaceutical companies, diagnostic companies, academic and private 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 and 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 in genomics, metabolomics and data integration/coherence are made and become more widely known.

In biomarker and drug target discovery, our competitors include SurroMed, Inc., Metabolon, Inc. and BG Medicine, Inc., among others. In quantitative tissue analysis, our competitors include LifeSpan Biosciences. In microarray services, our competitors include Gene Logic, Inc., Expression Analysis, Ambion, Inc., among others. While we will not expand our agriculture business beyond our existing contracts, our current 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

If a new drug is developed by our commercial partners, as a result of their use of our technology platforms, the drug would be required to 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 would 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 have governed and continue to govern our efforts, alone or together with our commercial partners, regarding our efforts with respect to genetically engineered crop products. These regulations and agencies may prevent our commercial partners from developing and marketing crop product candidates, may impose expenses, delays and other impediments to 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 if we were to develop products that they would 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.

Future crop product candidates that we or our commercial partners may have at some point 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. Candidates relating to pesticides, if developed, 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 the 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. After the Monsanto transaction was closed, as of March 24, 2005, we had 73 U.S. patent applications pending and 44 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. We have 16 registered trademarks in the United States. We own 22 issued U.S. patents and no issued patents in any other country.

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 biomarkers and related methods. There is substantial uncertainty regarding the possible patent protection for biomarkers. 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 biomarkers and related methods. 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. 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 related products.

Such patents may include claims relating to novel biomarkers and related methods identified or developed 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 March 25, 2005, we had 188 full-time employees, of whom 32 hold Ph.D. degrees. Of our total workforce, 156 are engaged in research and development activities, and 32 are engaged in business development, finance and administration. As part of the asset sale to Monsanto, approximately 60 of these employees will be hired by Monsanto effective in May 2005.

In accordance with our internalization of TissueInformatics.Inc, we are maintaining as small a work force as we deem viable to preserve the benefits we have realized from the March 2004 transaction. We have reduced our presence in Pennsylvania to nine employees.

The impact of the Monsanto asset sale has not been fully integrated within our workforce. However, we are trying to limit our expenditures to the most essential healthcare-related employees while continuing to service our existing customers. We believe that the material reduction in our workforce pursuant to the Monsanto transaction will have substantial benefits to our ongoing cost structure, while allowing us to fulfill our business goals. None of our employees is represented by a collective bargaining agreement.

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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, including our biochemical profiling platform, our bioinformatics efforts, our recent write down of the intangible assets related to our TissueInformatics^® software and the sale of our GeneFunction Factory^® in connection with the Asset Purchase Agreement with Monsanto Company dated March 23, 2005. 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, we are increasing our efforts to address the human health market with our biochemical profiling platform, an area of business in which we have limited experience.

We have a limited number of material and substantial partnerships, relationships or contracts.

We have a limited number of significant revenue generating contracts and commercial partnerships. In the agriculture sector we have entered into only three significant commercial partnerships, with Bayer CropScience, Monsanto and Pioneer to assist in development of certain new products that they are targeting, including herbicides and plants with improved nutritional and growth characteristics. Of these contracts, only Pioneer remains as the Bayer and Monsanto contracts wind down, which is occuring presently. This limited number of significant agriculture contracts subjects us to the volatility inherent in providing services to only one company in the agriculture industry. These contracts have provided a significant portion of our operating revenue. The Pioneer contract is terminable at December 31, 2005 upon the payment of a $500,000 fee.

We have entered into a government contract and have received a government grant. 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. Partnerships or contracts in which we previously engaged may no longer be available. 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 commercial partners terminate their relationship with us, or fail to meet their 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. Our strategy of using revenue generated from our commercial partnerships, or using the proceeds generated from the sale of our efforts in connection with our commercial partnerships, for investment capital to develop and grow our healthcare business may be flawed, it may not yield results sufficiently quickly enough, or at all, and may leave us without the means to generate revenue in the future. Our long-term business plan evolution centralizes our risks more, and makes us less diversified as a company.

We have a history of significant net losses. We expect to continue to incur net losses for the foreseeable future and may never reach profitability.

We have incurred net losses in each year since our inception and expect these losses to continue. We experienced a net loss of approximately $14.4 million for the year ended December 31, 2004. As of December 31, 2004, we had an accumulated deficit of approximately $99.0 million. To date, we have derived substantially all of our revenues from three commercial partnerships, a government contract and government grants. We expect our cash received in 2005 from our commercial partnership with Bayer CropScience and Monsanto will be less than $0.8 million and less than $3.7 million, respectively, as a result of the early termination of the Bayer and Monsanto contracts. We do not have replacements for these contracts. We do not believe replacements exist and we are no longer pursuing such contracts in agriculture. We expect to spend a significant amount of capital to fund research and development and enhance our core technologies in healthcare. We will need to generate significant additional revenues from existing commercial contracts and partnerships, grants, and new revenue sources to fund research and development in our new core technologies. We have sold certain assets to Monsanto in order to realize current benefits from these assets instead of completing the Monsanto contract under its terms. This strategy of selling these assets to Monsanto may not yield sufficient resources to accomplish our objectives. We cannot accurately predict when, if ever, we will become profitable.

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We are shifting our business model away from agriculture-based research and areas of historical revenue.

Our shift towards the healthcare industry and the therapeutic fields of obesity, liver disease and diabetes is fundamentally a shift away from our known and historical areas of revenue generation. Our belief that the potential market for healthcare products and services is better for us in the long run, rather than our current strategy of using our agriculture-based contracts, may be wrong and based on data and assumptions that may be flawed. We may not have the financial ability or human capital to effectuate this shift, and the costs of the transition may be prohibitive. Our belief that we can obtain revenues from material and substantial healthcare partnerships, agreements, discoveries or contracts might be wrong. If we are unable to accomplish the evolution to a healthcare focused company, we might not have sufficient resources to refocus again. This shift in focus makes it very difficult to evaluate the success of our business to date and to assess our future viability.

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 and cash equivalents will be sufficient to support our operations into the second quarter of 2006. 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 will 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.

In April 2004, we modified the financial covenant in our debt agreement with Silicon Valley Bank (“SVB”). We are now obligated to maintain a minimum ratio of cash and investments to SVB debt of 1.75. This ratio is defined in our amended agreement with SVB as the ratio of unrestricted cash and investments to the amount of outstanding debt to SVB (including all amounts outstanding or letters of credit issued under the line of credit.) If we were to default on this financial covenant, we may be required to pay off the loan with SVB. As of December 31, 2004, our cash to SVB debt ratio was 2.81, and the aggregate amount outstanding under the SVB term loan was approximately $3.4 million.

In October 2004, we raised gross proceeds of $5 million from Laurus Master Fund, Ltd. through a convertible note collateralized by substantially all of our fixed assets. In connection with the Monsanto Asset Purchase Agreement dated March 23, 2005, Laurus agreed to allow their liens on the assets transferred to be released. In exchange for this release, we agreed to additional interest on this note of approximately $60,000 and a future prepayment of up to approximately $430,000 in principal with a 20% penalty if Laurus is unable to convert this amount of principal by October 1, 2005.

We may be required to raise funds through public or private financings of our equity securities to attempt to avoid a default on our debt. No assurance can be given that such additional financings will be available or, if available, can be obtained on terms acceptable to us. The Laurus financing restricts our ability to engage in certain types of financings.

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. As previously disclosed in our Form 8-K dated November 9, 2004, Philip Alfano stepped down from his role as Vice President of Finance, Chief Financial Officer and Treasurer, effective December 31, 2004. Mr. Alfano has not remained in any capacity with us. The loss of the services of any of our senior management or our scientific staff could seriously impair our ability to operate and achieve our objectives, which could reduce our revenues. During approximately the same time period as the Monsanto Asset Purchase Agreement dated March 23, 2005, as reported in the Current Report on Form 8-K on March 29, 2005, Peter Johnson, M.D., our Chief Business Officer

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and Chief Medical Officer also resigned. This loss of expertise and institutional knowledge could have a material impact on us and on our ability to execute on our latest business plan. Our cost-cutting and business plan refocusing efforts could have an impact on employee morale and could have an effect on recruiting. 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.

We did not realize the near-term value we anticipated from TissueInformatics.Inc; it may have ongoing negative financial consequences to our stockholders and us.

Our acquisition of TissueInformatics.Inc (TissueInformatics) involved 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. We also anticipated generating substantial sales of quantitative tissue analysis software. We have been unable to realize timely commercial benefits from the acquisition of TissueInformatics and have determined that the commercialization of this technology will require substantial additional investment. We have determined that we will not proceed with this commercialization investment at this time and have written off all intangible assets related to this technology. In addition, we terminated 9 of the 18 remaining former TissueInformatics employees in March 2005. As a company with two sites, we face challenges in managing these employees over a geographic distance. The inability to successfully integrate the operations and personnel of TissueInformatics.Inc could have an adverse effect on us, increasing our expenses and costs and, as a result, the market price of our common stock could decline and our ability to attract financing could decrease.

We do not currently meet the Nasdaq SmallCap Market System listing requirements, and if we continue to fail to meet such requirements, we would likely be delisted from the Nasdaq System.

Our common stock is quoted on the Nasdaq SmallCap Market. In order to continue to be included in the Nasdaq SmallCap Market, we must meet Nasdaq’s maintenance criteria, including a minimum bid price of $1.00 per share as well as a minimum stockholders’ equity balance of $10 million. Since June 2004, the daily minimum bid price for our common stock was quoted at below $1.00 per share. On December 17, 2004, the Company’s stock listing was transferred from the Nasdaq National Market to the Nasdaq SmallCap Market pursuant to minimum bid price non-compliance. We will be delisted from the Nasdaq SmallCap in June of 2005 if we continue to fail to meet the Nasdaq requirements. The Over the Counter Bulletin Board Market is less well known and potentially has fewer market participants providing liquidity. This could increase our stock price volatility and increase our difficulty in obtaining capital.

Currently, we have until June 17, 2005 to meet Nasdaq’s minimum bid criteria for ten consecutive days, although in certain circumstances, Nasdaq may require additional days. Failure to meet the maintenance criteria of the Nasdaq SmallCap Market may result in the delisting of our common stock from the Nasdaq System. Our ability to remain listed on the Nasdaq SmallCap Market or National Market is dependent on the market price of our common stock and the timing of any decision to move from one market to another. In the event of delisting, the trading market for our common stock could be diminished. If our common stock were delisted, in order to have our common stock relisted on the Nasdaq National Market or the SmallCap Market, we would be required to meet the criteria for initial listing, which are more stringent than the maintenance criteria. Accordingly, we cannot assure you that if we were delisted, we would be able to have our common stock relisted on the Nasdaq System, and most likely our common stock would be quoted on the Over the Counter Bulletin Board. In addition, if our common stock were delisted from the Nasdaq System, it might become more difficult for us to raise additional capital, due to increased costs and potential diminished liquidity in the market for our common stock to accomplish our business objectives through the sale of our common stock or securities convertible into our common stock.

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

We face intense competition in our biomarker and drug target discovery business from other biotechnology companies and large pharmaceutical companies. Our competition often also includes internal departments of these larger companies. A number of these companies are engaged in efforts to reduce the cost, risk and time of drug discovery and development cycles and small molecule discovery. These competitors have been active in the human health field for a longer period and have greater financial resources, research and development staffs, facilities, manufacturing and marketing experience, distribution channels and human resources than we do. If these competitors partner or commercialize their technologies or products before we do, they could render our technologies and products obsolete or noncompetitive. We expect that competition will increase as technical advances in genomics, metabolomics and data integration/coherence are made and become more widely known. In biomarker and drug target discovery, other companies that offer similar technologies include SurroMed, Inc. of Menlo Park, California and Beyond Genomics, Inc. of Waltham,

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Massachusetts, among others. In investigative toxicology, our competitors include CuraGen, Inc. of New Haven, Connecticut and GeneLogic, Inc. of Gaithersburg, Maryland, among others.

Our Paradigm Array Labs^™ microarray service business faces competition from other companies that offer similar technologies including gene expression profiling services and analysis, such as Gene Logic, Inc. of Gaithersburg, Maryland and Expression Analysis, Inc. of Durham, North Carolina. These competitors may have greater name recognition, larger more established customer bases and greater technical, marketing and other resources than we do to provide more competitive service offerings. As a result, they may be able to respond more quickly to new technologies and changes in customer requirements, devote greater resources to the development, promotion, sale and support of their services, and reduce prices if necessary to increase market share.

We also continue to face intense competition in our agricultural line of business from plant genomics and agri-chemical companies. At times, we also compete with internal departments of our customers. In the areas of crop trait and crop protection discovery, other companies that offer similar technologies include Exelixis, Inc., Ceres, Inc., Mendel Biotechnology, Inc., Large Scale Biology Corporation and Diversa Corporation, among others.

Our centralization of focus to the healthcare industry heightens the impact on us of competitive forces in that industry. The less diversified we are as a company, the greater the chosen industry will impact us. Our emerging focus in the healthcare industry increases the impact of its competitive pressures.

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 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.

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 or compete effectively.

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 March 24, 2005, after the Monsanto transaction was closed, we had 73 U.S. patent applications pending and 44 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. We have 16 registered trademarks in the United States. We own 22 issued U.S. patents and no issued patents in any other country. If each of the 22 issued U.S. patents 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 biomarkers and related methods 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 biomarkers 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

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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.

Third parties may claim that we are employing their proprietary technology without authorization or that we are infringing on 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 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. 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 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 we or our collaborators 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 may 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. 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 may 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 seriously reduce our revenues or exceed our financial ability to meet such obligations.

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 United States. 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

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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 business exposes us to risks of environmental liabilities.

Our research and development activities involve the controlled use of hazardous materials, chemicals and toxic compounds which could expose us to risks of accidental contamination, events of non-compliance with environmental laws, regulatory enforcement and claims related to personal injury and property damage. If an accident occurred or if we were to discover contamination caused by prior operations, we could be liable for cleanup obligations, damages or fines, and any liability could exceed our resources.

The environmental laws of many jurisdictions impose actual and potential obligations on us to remediate contaminated sites. These environmental remediation obligations could exceed our resources. Stricter environmental, safety and health laws and enforcement policies also could result in substantial costs and liabilities to us, and could subject our handling, manufacture, use, reuse or disposal of substances or pollutants to more rigorous scrutiny than is currently the case. Consequently, ongoing compliance with these laws could result in significant capital expenditures, as well as other costs and liabilities, which could materially adversely affect us.

If our results of operations continue to fluctuate and if quarterly results are poor or lower than the expectations of securities analysts, then the price of our common stock could 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.

There is substantial overhang in the market for our stock. This means we have a number of stockholders who own our common stock or securities convertible into our common stock who are eligible to convert and/or sell their shares into the public trading market due to recent registration statements or the elapse of sufficient time. These individuals have not yet sold their shares into the publicly trading market. If all of our warrant holders converted their shares and sold them into the market or our employees, convertible note holders and the former TissueInformatics.Inc shareholders sold their shares into the market, the price of our common stock would likely go down.

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

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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.

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 was an all-stock transaction in which approximately 3.4 million shares of common stock were issued, valued at approximately $4.6 million. Approximately 2.7 million additional shares of common stock could have been issued subject to certain performance milestones as specified in the merger agreement. In connection with our earnings release on March 24, 2005, we disclosed that the performance milestones were not reached and that all intangible assets resulting from the acquisition had been written off as of December 31, 2004.

On October 19, 2004, Icoria entered into a series of agreements with Laurus Master Fund, Ltd., (“Laurus”) whereby Icoria received $5,000,000 gross proceeds through the sale of a three-year convertible term note. In accordance with the terms of the note, the note is payable in cash or convertible into Icoria common stock at a fixed conversion price of $0.53 per share subject to certain conditions relating to increases in the price of Icoria’s common stock above $0.59 per share and the actual trading volume of Icoria’s common stock. Laurus may also elect to have interest paid in stock at a fixed conversion price of $0.53 per share. The note is collateralized by essentially all of Icoria’s otherwise unencumbered fixed assets. In connection with the financing, Icoria paid approximately $200,000 of costs and expenses of Laurus and has issued warrants for the purchase of 1,650,943 shares of common stock at a weighted average price of $0.79. One half of the warrants expire two years after issuance and the other half of the warrants expire five years after issuance. In addition, Icoria also paid a placement agent approximately $400,000 and issued a five-year warrant to purchase an aggregate of 843,396 of shares of common stock exercisable at $0.53 per share. The placement agent also previously received consideration consisting of a warrant for 100,000 shares of common stock exercisable at $0.72 per share in connection with entering into the placement agency agreement dated July 14, 2004. These warrants also expire five years after issuance.

On March 23, 2005, Icoria sold selected agricultural assets related to the field of transgenic traits for agriculture to Monsanto Company. Under the terms of the agreement, Monsanto paid $4,750,000 with an additional installment payment of $1,180,000 due in January 2006. A payment of $820,000 may also be due in January 2006 if Icoria meets certain transition milestones. As part of the sale, Monsanto agreed to assume the remaining five years on a 32,000 square foot facility lease and hire approximately sixty of Icoria’s employees beginning in May 2005. Since essentially all of the fixed assets transferred to Monsanto served as collateral for the Laurus note, we agreed to provide Laurus with $100,000 in additional interest and to prepay an additional $430,000 in principal in the event that Laurus is unable to convert this amount of the note by October 1, 2005. Due to the sale of these assets, Icoria’s existing six-year commercial partnership with Monsanto was amended to terminate in May 2005, approximately nine months before its previously scheduled end date, and the total contract value was reduced by $1,400,000.

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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 20,400 square feet on South Miami Boulevard in Durham, North Carolina expires August 31, 2005. The second lease is for two buildings on T. W. Alexander Drive in Research Triangle Park, North Carolina, one of approximately 54,000 square feet and one of approximately 32,000 square feet, 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 Monsanto transaction, Monsanto agreed to assume the remaining five year commitment on the 32,000 square foot building on Alexander Drive.

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 on February 28, 2006.

We are not a party to any material legal proceedings.

No matters were submitted during the fourth quarter of the year ended December 31, 2004.

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PART II

Market Information

Our common stock, par value $.01 (“common stock”) per share, is traded on the Nasdaq SmallCap Market (“Nasdaq”) under the symbol “ICOR.” Our common stock was traded on the Nasdaq National Market until December 17, 2004. On August 17, 2004, the Company changed its corporate identity from Paradigm Genetics, Inc. to Icoria, Inc., changing the stock symbol from “PDGM” to “ICOR”. 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 March 14, 2005, there were approximately 287 holders of record of our common stock and, according to our estimates, approximately 5,312 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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The following table sets forth our consolidated financial data for each of the five years in the period ended December 31, 2004. The statement of operations data for the years ended December 31, 2004, 2003 and 2002, and the balance sheet data as of December 31, 2004 and 2003 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, 2001 and 2000 and the balance sheet data as of December 31, 2002, 2001 and 2000 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 23 of this report.

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Selected Quarterly Financial Data

(unaudited)

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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.

Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help the reader understand Icoria, Inc., our operations and our present business environment. This section is provided as a supplement to—and should be read in conjunction with our consolidated financial statements and the accompanying notes. This overview summarizes the discussion and analysis, which includes the following sections:

Our Business

General

Icoria is a biotechnology company that uses gene expression, metabolomics and tissue feature profiling to identify biomarkers to accelerate drug discovery. In addition to its internal drug discovery program, the company provides services to clients in the pharmaceutical, biotech, agriculture, academic and public health research sectors. We are developing our business by partnering with pharmaceutical, biotech and agricultural companies and entities, while building our own portfolio of products. Additionally, we are leveraging our existing infrastructure to provide services that generate near-term revenue. We are in the process of fundamental change to sharpen our focus on healthcare. Our shift towards becoming a healthcare-focused company is a central priority along with continuing to service our existing customers.

In March 2005, we sold selected agricultural assets related to the field of transgenic traits for agriculture to Monsanto Company (“Monsanto”). Under the terms of the agreement, Monsanto paid $4,750,000 with an additional installment payment of $1,180,000 due in January 2006. A payment of $820,000 may also be due in January 2006 if we meet certain transition milestones. As part of the sale, Monsanto agreed to assume the remaining five years on a 32,000 square foot facility lease and hire approximately sixty of our employees beginning in May 2005. Due to the sale of these assets, our existing six-year commercial partnership with Monsanto was amended to terminate in May 2005, approximately nine months before its previously scheduled end date, and the total contract value was reduced by $1,400,000.

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 Icoria 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 combination and analysis of different biological data streams that we can identify novel biomarkers and targets that were previously inaccessible due to biological “noise.” While we initially thought we would also be able to sell TissueInformatics technology as a stand-alone software product, we were unable to realize these plans in a timely manner.

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 gene expression analysis service business - Paradigm Array Labs^™ (“PAL”). In the long term, we are targeting revenues and cash flow through the development of our proprietary product portfolio. Our current proprietary product development efforts are focused on diagnostics for liver disease and injury, biomarkers and drugs for diabetes and obesity.

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Commercial Revenue

We have been servicing several revenue generating partnerships and contracts while we also have been developing our PAL services business. Notably, two of our revenue generating contracts end in 2005 as a result of termination and sale. The table below presents these revenue sources which historically have been derived from customers in both the healthcare and agriculture industries:

We 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, we announced that NIEHS exercised an $8.4 million option under this contract bringing the total contract 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.

In addition, we currently have a government grant and two Small Business Innovative Research (“SBIR”) Contracts. 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 Icoria and Agilent Technologies, based on the research work plan. Our SBIR grants involve the study of biomarkers for liver injury and alcohol-related diseases

During 2003, we began our PAL services business. We have seen significant demand for PAL services which caused PAL revenues to increase by nearly $1.0 million during 2004. PAL services have a shorter sales cycle than the rest of our business and tend to have smaller contracts.

The Company has commercial partnerships that are presently winding down with Bayer CropScience, a subsidiary of Bayer AG, (“Bayer”) in the area of crop protection and Monsanto as well as our ongoing contract with Pioneer Hi-Bred International, Inc. (“Pioneer”), a subsidiary of E.I. du Pont de Nemours and Company, in the area of crop trait discovery. On November 19, 2004, we received a notice of termination from Bayer regarding the September 1998 agreement, as amended. We anticipate that the majority of the work remaining under the agreement will be substantially completed by the end of March 2005. Under the terms of the agreement, we will earn additional fees as the final assays are delivered. We received a termination fee in January 2005 of $575,000. The partnership with Monsanto was signed in November 1999 and began contributing revenues in the second quarter of 2000. As amended, the agreement committed Monsanto to a total partnership term of six years with committed

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funding through January 2006. Due to the sale of the related assets to Monsanto, our commercial partnership with Monsanto was amended to terminate in May 2005, approximately nine months before its previously scheduled end date, and the total contract value was reduced by $1,400,000.

The on-going three-year partnership with Pioneer was signed in December 2003 and began contributing to the Company’s revenues in the first quarter of fiscal year 2004. The Pioneer agreement may be terminated at December 31, 2005 upon the payment of a $500,000 termination fee, which exposes us to some risk of early termination. While we intend to exit the agriculture industry, we remain committed to completing our current contractual obligations.

2004 Performance

We ended 2004 with $9.6 million in cash, cash equivalents or short-term investments compared to $16.3 million at December 31, 2003. This equates to a use of cash and investments, net of financing proceeds, of $6.7 million in 2004 compared to $4.9 million in 2003, an increase of 37%. Our cash position will continue to be a major focus in 2005. We anticipate that the Monsanto transaction, coupled with a general refinement of our business plan, will materially reduce our costs and will provide us with sufficient capital to help us execute on our refocused business plan. However, we likely will seek to further strengthen our cash position through additional financings involving either debt or the sale of our common or preferred stock or both. We will consider all capital raising transactions available to us to enhance our cash positions. For further discussion of our cash position please see “Liquidity and Capital Resources” below.

During 2004, we set out to increase productivity gains, improve cost controls and gain market traction by signing new commercial deals, which would represent the acceptance and validation of our technology. We confronted many challenges this year including: the Bayer termination, a difficult trading market, the loss of our Chief Financial Officer and our inability to realize near term commercial value from our TissueInformatics technology. Strategically, we had identified the acquisition of TissueInformatics.Inc as a key step to creating powerful and unique technologies for healthcare research and discovery. We continue to believe in this strategy. However, due to the inability to generate significant revenues in the near term, we wrote off $1.9 million of intangible assets associated with the acquisition. We believe that despite these challenges we continued to build significant value, but our limited cash position has forced us to make difficult choices. The proceeds from the Monsanto transaction should enable us to make the transition to focus more on the healthcare industry while still delivering on our remaining agriculture contracts.

Some of the items of long-term value we have built and implemented during 2004 are:

We believe that our programs for the development of diagnostics for liver disease and injury, biomarkers and drugs for diabetes and obesity and development and application of automated pathology software will lead to long-term revenues, positive cash flow and ultimately, greater shareholder value.

Financially, we signed a new debt agreement with Laurus Master Fund, Ltd. (“Laurus”). This agreement provided $5.0 million in gross proceeds through the sale of a three-year convertible term note. The note is payable in cash or convertible into our common stock at a fixed conversion price of $0.53 per share subject to certain conditions relating to increases in the price of the our common stock above $0.59 per share and the actual trading volume of our common stock. Laurus may also elect to have interest paid in stock at a fixed conversion price of $0.53 per share. The note is collateralized by essentially all of our otherwise unencumbered fixed assets. In connection with the financing, the Company paid approximately $200,000 of costs and expenses of Laurus and has issued warrants for the purchase of 1,650,943 shares of common stock at a weighted average price of $0.79. One half of the warrants expire two years after issuance and the other half of the warrants expire five years after issuance. In addition, we also paid a placement agent approximately $400,000 and issued a five-year warrant to purchase an aggregate of 843,396 of shares of Common Stock exercisable at $0.53 per share. The placement agent also previously received consideration consisting of a warrant for 100,000 shares of common stock exercisable at $0.72 per share in connection with entering into the placement agency agreement dated July 14, 2004. These warrants also expire five years after issuance. In December 2004, Laurus converted $150,000 of principal on the convertible term note into 283,019 shares of our common stock. In addition, Laurus elected to convert accrued interest into 61,437 shares of our common stock. In January and February 2005, Laurus elected to convert approximately $1,120,000 of their note into 2,112,000 shares of our common stock.

In connection with the Monsanto Asset Purchase Agreement dated March 23, 2005, we agreed to provide Laurus with approximately $60,000 in additional interest and to prepay an additional $430,000 in principal in the event that Laurus is unable to convert this amount of the note by October 1, 2005.

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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, 2004, we have raised an aggregate of approximately $95.5 million in equity issues and approximately $30.1 million in proceeds from secured debt financing.

At December 31, 2004, we had cash, cash equivalents and short-term investments totaling approximately $9.6 million. We currently see several factors which could negatively impact our cash position:

If we were required to pay off the loan with Silicon Valley Bank, we believe our remaining cash would be sufficient to support our operations at least into the second quarter of 2006. Please see the section entitled “Future Cash Commitments” and “Outlook for 2005” below, for further details.

During October 2004, we paid, without penalty, the remaining balance of the debt to General Electric Capital Corporation.

On October 19, 2004, we entered into a series of agreements with Laurus whereby Icoria received $5,000,000 gross proceeds through the sale of a three-year convertible term note as set forth above in “2004 Performance”.

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 our 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 GAAP in the United States.

Cash used in operating activities:

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In 2005, we expect our net cash used in operating activities will decrease when compared to 2004. We are expecting reductions in our cost structure resulting from the Monsanto transaction and our focus on our healthcare opportunities. Please see “Outlook for 2005” below. No assurance can be given that we will earn the new revenues anticipated in 2005 or achieve any significant planned cost reductions.

Cash provided by (used in) investing activities:

We expect our cash provided by investing activities will increase in 2005 compared to 2004 due to the proceeds from the Monsanto transaction, partially offset by additional investments in our PAL services unit and technology platforms.

Cash provided by (used in) financing activities:

If we are not successful in raising funds through additional debt, the sale of equities or any other capital or proceeds generating transaction, we expect to use cash in financing activities in 2005 when compared to cash provided by financing activities in 2004. See future cash commitment table below for further details.

Reconciliation to GAAP Cash Flow

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 presents these differences:

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Cash Commitments

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

Based on the above discussion including the funds provided by the Monsanto transaction, we believe that we have sufficient cash to fund our operations into the second quarter of 2006. Due to the Monsanto transaction, approximately $3.8 million of future minimum operating lease payments will be assumed by Monsanto beginning in May 2005. We expect to raise additional funds to support our expanding research and development programs, through public or private issuances 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.

Results of Operations

Years Ended December 31, 2004 and 2003

Revenues

The table below presents our revenue sources for 2004 compared to 2003.