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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended: December 31, 2002.

OR

for the transition period from                      to                     

Commission File Number:

0-30365

Paradigm Genetics, Inc.

(Exact name of registrant as specified in its charter)

108 Alexander Drive, Research Triangle Park, North Carolina 27709

(Address of principal executive offices and zip code)

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

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

SECURITIES REGISTERED 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.  x

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 $26,310,479.

As of February 28, 2003, there were 32,041,655 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 9, 2003.

Table of Contents

PARADIGM GENETICS, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2002

Table of Contents

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PART 1

ITEM 1.    BUSINESS

Overview

We are a biotechnology company seeking to improve research and development productivity in the agricultural and healthcare industries. We focus our suite of technologies on the full product development cycle, from target discovery to the enhancement of safety and efficacy profiles of lead candidates.

We use a systems biology approach to understand gene function in the context of biological pathways and to develop assays and biomarkers for molecular diagnostic solutions for life sciences companies. By conducting our research with a Gene to Cell to System^™ approach, we ensure that we have an accurate and complete understanding of biological systems. Hence, we, our partners and our customers can make the best decisions for future and existing life sciences products and therapies.

Specifically, we are focusing on five market opportunities: crop traits, crop protection, green biotechnology, predictive toxicology, and biomarker discovery. We are building our business by partnering with commercial, government and academic entities to help them achieve greater efficiencies in their research and development activities. Additionally, we are developing our own product concepts around biomarkers and green biotechnology.

Market Need

Agriculture

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

Many of these same agricultural companies are also searching for the next generation of traits to be engineered into crops. Major target crops for these new traits are corn, wheat, soybean, rice, cotton, and canola, in addition to vegetables and other specialty crops. These new crop traits would improve the overall performance of plants by providing resistance to various diseases or environmental conditions (e.g., drought). In addition, a future generation of traits will improve consumer characteristics of foods such as nutritional content and taste. Agricultural companies are also interested in expanding the utility of products extracted from plants such as oils, fibers, fine chemicals and medicines.

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

Healthcare

According to the Tufts Center for the Study of Drug Development, the cost of developing a new drug and bringing it to market, including failures, now exceeds $800 million in the United States, and the length of time from candidate discovery to approval has increased from an average of eight years in the 1960s to more than

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14 years today. Toxic side-effects from drugs result in more than two million hospitalizations each year and there are more than 100,000 deaths annually from unintended drug complications, making this the fifth leading cause of death in the United States. Currently, on average, more than 10,000 lead compounds must be tested in pre-clinical development for each marketed drug that is developed in order to overcome attrition due to inadequate safety or efficacy.

Additionally, significant improvements in the process for FDA approval of new molecular entities (NMEs), preludes to new drugs, have not occurred. In 2002, only 15 NMEs were approved by the FDA as compared to 24 in 2001. There is a growing consensus that the drug development process can be most immediately enriched by technologies that provide (i) better validation of existing targets; (ii) early prediction of potential toxicology and efficacy issues; and (iii) stratification of patients in clinical trials. In addition, technologies that can correlate DNA microarray (gene expression) data with cell and system level functions will have immediate application in drug discovery (target identification) and clinical research.

Increasingly, pharmaceutical companies are turning to smaller biotechnology companies to gain access to new experimental medicines and technology.

Our Offering and Strategy

We believe we are uniquely positioned to address the agricultural market’s need to discover new crop traits more efficiently and to develop safer and more effective crop protection chemicals. Using our GeneFunction Factory^™ integrated technology platform, we believe we have discovered and validated genes for improving crop traits faster, more efficiently and with higher scientific rigor than any company today. We have also used our GeneFunction Factory^™ platform to identify hundreds of new targets for herbicides. Additionally, we have developed significant expertise in target discovery and lead chemical programs in fungicides, the production of high throughput screening assays for herbicides and the modification and enhancement of fine chemical production from plants.

For the human healthcare industry, we believe our Gene to Cell to System^™ approach will provide important and proprietary insights into drug safety and efficacy for our partners and ourselves and will increase R&D productivity in the pharmaceutical industry. We believe our proprietary human metabolomics platform, when coupled with gene expression and disease association data, will have the potential to lower the cost of drug discovery, decrease the time to market for new drugs, lower the incidence of toxic side effects and complement other genomics tools to help researchers better understand the link between cellular or biochemical function and pharmaceutical drugs and disease response.

To meet market needs and build shareholder value, we are focused on the following business objectives:

Maintain and grow our leadership position in agricultural biotechnology.    Agriculture continues to be the largest sector of the U.S. economy. The worldwide, chronic shortage of food and the drive to improve human health through food continue to prompt the need for innovative products. We have built a history of proven performance with market leaders like The Monsanto Company and Bayer CropSciences and developed market recognition for our deep understanding of agricultural systems. We will seek to further partner with global agricultural leaders to provide new technology and cost-effective solutions to bring new products to market.

Develop proprietary production concepts in green biotechnology.    Green biotechnology describes the use of genetically modified crops for the production of specialty chemicals, such as menthol, and pharmaceutical intermediates. We believe our proprietary technologies are uniquely positioned to capture this emerging market opportunity. Using our agricultural platforms to develop production systems for green biotechnology is one of our long-term market strategies.

Build a healthcare presence through integrative predictive toxicology.    The failure of drug candidates due to unanticipated or poorly characterized safety concerns is a major reason that pharmaceutical companies are

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unable to maintain a rich pipeline of new products. Predictions of toxicity are now becoming possible because of the availability of techniques to rapidly characterize early responses of cells and tissues to toxic molecules. Paradigm has already built credibility in this new field of toxicogenomics through its contract with National Institute of Environment Health Sciences (NIEHS), and plans to further differentiate its offering to the pharmaceutical industry by using an integrated systems biology approach to discover more efficient and accurate ways to predict toxic reactions earlier in the drug development process.

Expand our healthcare presence through biomarker discovery and disease staging.    Many industry analysts foresee a future for human health in which highly targeted medicines are used to treat specific disease subtypes or stages. These new medicines will treat root causes of disease rather than just alleviate symptoms. Particular biological entities that can be used as biomarkers to define types or stages of a particular disease will be needed with these new medicines. Biomarkers will constitute combinations of metabolites, proteins or gene expression patterns. We will use our Gene to Cell to System^™ focus to discover proprietary biomarkers that can be used from discovery through to the clinic to develop the next generation of targeted medicines.

Develop a Microarray Service business.    Gene expression profiling is a widely used genomics technology. But many agricultural, pharmaceutical and other biotechnology companies do not want to pre-invest in the technology or develop the expertise in-house. In September 2002, we were awarded a five-year contract from the NIEHS for $23.8 million to provide microarray services for the National Toxicology Program. We plan to build on this success as well as our years of experience with gene expression profiling and our informatics strengths, along with our ongoing relationship with Agilent Technologies, to develop near-term revenues through a microarray service business.

Our Technology Foundation

Since our founding in 1997, we have built significant technology platforms for our agricultural endeavors. We are now leveraging this investment into our human health research. We believe that our proprietary integrated technology platforms, coupled with our data coherence tools, are singularly unique and applicable across the life sciences.

For agriculture, we apply our GeneFunction Factory^™ integrated technology platform to the rapid analysis of the function of thousands of plant genes, to enable us and our commercial partners to accelerate the development of novel products. For human health, we will apply our gene expression profiling and metabolomics technologies to improve the study of drug targets, lead compounds and predictive medicines, thereby accelerating drug discovery and development for our partners and ourselves.

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.

Biochemical Profiling (or Metabolomics)

We use our metabolomics platform to provide a snapshot of the chemicals, including vitamins, minerals and other biochemicals, in cells, tissues, and organisms, at a given time. By understanding what changes take place in biochemicals, we gain valuable information about the function of genes and proteins in disease and drug response. Our metabolomics platform uses mass spectroscopy, which separates molecules by electrical charge and size, and chromatography, which separates molecules by size and chemical properties.

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Phenotype Profiling

Phenotype profiling is the measurement of physical and chemical characteristics of an organism at one or more times during its life cycle. For our agricultural research, we measure approximately 140 different characteristics of our model system Arabidopsis, under standard conditions as well as under various stress conditions. These different measurements, when taken at specified times, produce a phenotype profile for a variant that we can compare to a phenotype profile of a normal organism to help understand the function of the modified gene.

Data Integration/Coherence

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.

Our Commercial Partnerships

Bayer CropScience (Bayer)

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 GeneFunction Factory^™ platform to identify Arabidopsis genes that may be targets for herbicide discovery. We are providing exclusively to Bayer assays (or tests) based on these targets for use in high throughput screening 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. Bayer also has the option to extend the agreement for two additional years, through September 2006. The commercial partnership entitles us to committed research funds, additional fees based on the number of assays we deliver, and milestone and royalty payments for any herbicides that might result from the partnership. Under the terms of the deal, Bayer will pay us a total of approximately $24.3 million in committed funding and as much as an additional $21.4 million in performance fees and milestone payments. We have achieved all of our milestones in our commercial partnership with Bayer, including the delivery of several assays for high throughput chemical screening.

The Monsanto Company (Monsanto)

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 GeneFunction Factory^™ platform. 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 entitles us to 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. Under the terms of the deal, Monsanto will pay us approximately $41.5 million in committed funding and as much as an additional $13.5 million in performance fees and milestone payments.

National Institute of Environmental Health Sciences

In September 2002, Paradigm Genetics was awarded a five-year contract from the NIEHS for $23.8 million to provide microarray processing services and to participate in toxicology research with NIEHS and five

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university-based labs (Cooperative Research Members, or CRMs). Collectively, this is referred to as the Toxicogenomics Research Consortium (TRC). As of December 31, 2002, we have received $63,000 under this contract. This amount is less than we anticipated receiving by this date, and is due to the delay in approval of the 2003 United Sates Federal budget.

Advanced Technology Program

In June 2002, we were awarded a five-year, $11.7M grant from National Institute of Standards and Technology (NIST) to develop innovative tools for target discovery through the analysis of complex coherent data sets. This grant, which was the largest bioinformatics grant ever awarded in NIST’s Advanced Technologies Program and the largest grant awarded by NIST in 2002, involves a collaborative research agreement with LION Bioscience to develop robust software tools, called the Target Assessment Technologies Suite (TATS), to improve data integration, transform data from different sources into a single coherent data set, and then to analyze these data to identify gene function or mechanism of action rapidly, reliably, and efficiently. Paradigm and LION Bioscience will participate equally in the grant. As of December 31, 2002, Paradigm had received $210,000 under this grant.

VDDI Pharmaceuticals (VDDI)

Our commercial partnership with VDDI was signed in February 2002, for the development of antibiotics for the treatment of gram-positive bacterial infections. Pursuant to the agreement, we used our proprietary metabolomics technology platform to prioritize lead compounds targeting the essential bacterial enzyme nicotinamide adenine dinucleotide synthetase for further preclinical development. This commercial partnership, for which we will receive $1 million, ended in December 2002.

Competition

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

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

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

Government Regulation

Regulation of Development and Commercialization of Agricultural Products

Federal, state, local and foreign government regulations and regulatory agencies will govern our efforts, alone or together with our commercial partners, to develop and commercialize genetically enhanced crop

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products. These regulations and agencies may prevent us and our commercial partners from developing and marketing crop product candidates in a timely manner or under technically or commercially feasible conditions, and may impose expenses, delays and other impediments to our efforts to develop such product candidates.

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

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

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

Regulation of Drug Development and Commercialization

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

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

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

Environmental Regulation

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

Intellectual Property

We seek U.S. and foreign patent protection for major components of our technology platforms. We also rely on trade secret protection for certain of our confidential and proprietary information, and we use license

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agreements both to access external technologies and assets and to convey certain intellectual property rights to others. Our commercial success will be dependent in part on our ability to obtain commercially valuable patent claims and to protect our intellectual property portfolio. As of February 28, 2003, we had 82 U.S. patent applications pending and 37 international patent applications pending, which are subject to rights that we have granted to various collaborators and development partners. We have 13 trademark applications pending in the United States. We have seven registered trademarks. We own nine 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 gene fragments and full-length genes, both characterized and uncharacterized. There is substantial uncertainty regarding the possible patent protection for gene fragments or genes without known function or correlation with specific functions. Furthermore, others may independently develop similar or alternative technologies, duplicate any of our technologies, and if patents are licensed or issued to us, design around the patented technologies licensed to or developed by us. In addition, we could incur substantial costs in litigation if we are required to defend ourselves in patent suits brought by third parties or if we initiate such suits.

We are aware of a number of U.S. patents and patent applications and related foreign patents and patent applications owned by third parties relating to gene sequences and the analysis of gene function. These other technologies may provide third parties with competitive advantages over us and may hurt our business. In addition, some third party patent applications contain broad claims, and it is not possible to determine whether or not applicants will narrow such claims during prosecution or whether patent offices will allow and issue patents on such claims, even if such claims appear to cover prior art or have other defects. An owner or licensee of a patent in the field may threaten or file an infringement action and we may or may not prevail in any such action. The cost of defending an infringement action may be substantial, which could significantly increase our expenses and increase our losses. Furthermore, other patent holders may not grant us required licenses on commercially viable terms, if at all. Failure to obtain any required license could prevent us from utilizing or commercializing one or more of our technologies or gene-related products.

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

Employees

As of February 28, 2003, we had 194 full-time employees, of whom 26 hold Ph.D. degrees. Of our total workforce, 160 are engaged in research and development activities, and 34 are engaged in business development, finance and administration. None of our employees is represented by a collective bargaining agreement. We believe that our relations with our employees are good.

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RISK FACTORS

Our common stock may be delisted from Nasdaq.

On October 25, 2002, we received a notice from the Nasdaq National Market that our common stock had failed to maintain the required minimum closing bid price of $1.00 for a period of 30 consecutive trading days. As a result, Nasdaq provided us 90 calendar days, or until January 23, 2003, to regain compliance with this requirement or be subject to delisting from the Nasdaq National Market. In order to regain compliance, the closing bid price of our common stock needed to remain above $1.00 for 10 consecutive trading days. We were unable to regain compliance with this requirement during this time period. On March 6, 2003 we appeared before a Nasdaq listing qualifications board in order to appeal to Nasdaq for relief from this requirement. Nasdaq has not yet ruled on our appeal. If our appeal is unsuccessful, our common stock will be delisted from trading by the Nasdaq National Market, in which case we plan to apply for listing on the Nasdaq SmallCap Market. While we currently meet the criteria that would enable us to transfer to the Nasdaq SmallCap Market, there is no assurance we will be accepted or that we will continue to meet the criteria at the time we apply for SmallCap inclusion. If we could not transfer to the Nasdaq SmallCap Market and were forced to be listed on the NASD’s OTC Bulletin Board, trading in our common stock would likely decrease substantially, or cease altogether, the market price of our common stock may decline further, potentially to zero, and stockholders may lose some or all of their investment. Securities analysts’ and news media’s coverage, if any, of us will be reduced. Furthermore, delisting of our common stock from the Nasdaq National Market and subsequent delisting from the Nasdaq SmallCap Market or failure to meet the requirements for transferring to the SmallCap Market could inhibit, if not preclude, our ability to raise additional working capital on acceptable terms, if at all, or to utilize our stock as full or partial consideration for the acquisition of any lines of business from third parties.

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

You should evaluate us in light of the uncertainties affecting an early stage biotechnology company. Our GeneFunction Factory^™, our FunctionFindersystem^™, our metabolic profiling platform, and our databases are still evolving. We have not yet proven that determining the function of a gene in commercially significant target organisms or elucidating the biochemical profiles of cells, tissues, or fluids will enable us to develop commercial products. Furthermore, while we are continuing with our work in the agriculture sector, we are increasing our efforts to address the human health market with our metabolic profiling platform. To date, we have no significant commercial partnerships in this area.

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

We have incurred net losses in each year since our inception and expect these losses to continue. We experienced a net loss of approximately $23.5 million for the twelve months ended December 31, 2002. As of December 31, 2002, we had an accumulated deficit of approximately $72.4 million. To date, we have derived all of our revenues from a government contract, two commercial partnerships and government grants. We expect to derive revenue in the foreseeable future principally from government contracts and commercial partnerships. However, we expect our revenues from our commercial partnership with Bayer will decrease in 2003. We expect to spend a significant amount of capital to fund research and development and enhance our core technologies, particularly our metabolic profiling platform. As a result, we expect that our operating expenses will increase significantly in the near term and, consequently, we will need to generate significant additional revenues to become profitable. We cannot accurately predict when, if ever, we will become profitable.

We may never become profitable if we and our commercial partners are unable to develop or commercialize our technologies into products.

We have no experience in manufacturing and marketing products, and we currently do not have the resources or capability to manufacture products on a commercial scale. In order for us to commercialize our products on our own, we would need to develop, or obtain through outsourcing arrangements or through

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acquisitions, the capability to manufacture, market and sell products. Since we do not currently possess the resources necessary to develop and commercialize potential products ourselves, we must enter into commercial partnerships to develop and commercialize products.

We have entered into only two commercial partnerships, with Bayer and Monsanto, to fund the development of certain new products, including herbicides and plants with improved nutritional and growth characteristics. We have entered into no significant commercial partnerships in the area of human health. If we are unable to successfully achieve milestones or our commercial partners fail to develop successful products, we will not earn certain revenues contemplated under such partnerships. In addition, we may not be able to enter into additional commercial partnerships. We do not control the resources that our commercial partners devote to our projects and our commercial partners may not perform their obligations. Our commercial partnerships are subject to termination rights by the commercial partners. If any of our commercial partners were to terminate its relationship with us, or fail to meet its contractual obligations, it could have a material adverse effect on our revenues and our ability to undertake research, to fund related and other programs and to develop, manufacture and market any products that may have resulted from the commercial partnership. Also, we may pursue opportunities in fields that conflict with our commercial partners or in which our commercial partners could become active competitors. In either case, we may not be able to commercialize our products.

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

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

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

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

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

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

Our technology platform for the industrialization of gene function determination faces competition from functional genomics technologies, which are computer hardware and software technologies that researchers use to help them identify the role that specific genes play within organisms, created by others, including Exelixis, Inc., Ceres, Inc., Mendel Biotechnology Inc., and Large Scale Biology Corporation. Our metabolic profiling platform also faces competition from other companies attempting to analyze biochemicals in human beings. We expect competition to intensify in functional genomics and metabolomics research. Genomic technologies have undergone and are expected to continue to undergo rapid and significant change. Our future success will depend

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in large part on maintaining a competitive position in these fields. Metabolomics is a rapidly growing new technology. We or others may make rapid technological developments, which may result in products or technologies becoming obsolete before we recover the expenses we incur in connection with our development. We or our commercial partners may offer products which could be made obsolete by less expensive or more effective technologies. We may not be able to enhance our technology in ways necessary to compete successfully with newly emerging technologies.

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

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

Our business and competitive position will depend in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the United States and other countries. As of February 28, 2003, we had 82 U.S. patent applications pending and 37 international patent applications pending, which are subject to rights that we have granted to various collaborators and development partners. We own 9 issued U.S. patents and no issued patents in any other country. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant problems in protecting their proprietary rights in these foreign countries.

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

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

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

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

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

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

Our efforts to date have been primarily limited to identifying targets. If regulators approve any products that we or our commercial partners develop, the approval may impose limitations on the uses for which a product may be marketed. Regulators may require the submission of post-market launch information about a product

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after approving it, and may impose restrictions, including banning the continued sale of the product, if they discover problems with the product or its manufacturer.

Our stock price is extremely volatile.

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

The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock. As of December 31, 2002, there were 32,039,593 shares of common stock outstanding. All of the (i) 11,847,727 shares sold in our initial public offering and our October 2001 direct offering, (ii) 422,459 shares issued to Celera and subsequently registered on Form S-3, (iii) outstanding shares issued pursuant to stock option exercises or purchases under our Employee Stock Purchase Plan that were registered on one of our registration statements on Form S-8, and (iv) shares that have been sold pursuant to Rule 144 or Rule 701 are freely transferable without restriction or further registration under the Securities Act, except for shares purchased by our “affiliates,” as defined in Rule 144 of the Securities Act. The remaining shares of common stock outstanding are “restricted securities” as defined in Rule 144. Holders of these shares may sell them in the future without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act.

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

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

• a classified board of directors, with three classes of directors each serving a staggered three-year term;

• the ability of the board of directors to issue preferred stock; and

• the inability of our stockholders to call a special meeting or act by written consent.

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, our officers, directors and 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.

ITEM 2.    PROPERTIES.

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

ITEM 3.    LEGAL PROCEEDINGS.

We are not a party to any material legal proceedings.

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

No matters were submitted during the fourth quarter of the year ended December 31, 2002.

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PART II

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

Market Information

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