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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

OR

Commission File Number:

0-30365

Paradigm Genetics, Inc.

(Exact name of registrant as specified in its charter)

108 Alexander Drive, Research Triangle Park, North Carolina 27709

(Address of principal executive offices and zip code)

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

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

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

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

COMMON STOCK, PAR VALUE $.01 PER SHARE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x      No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨

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

Yes ¨      No x

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

Table of Contents

PARADIGM GENETICS, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2003

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PART 1

ITEM 1.    BUSINESS

Overview

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

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

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

In the following business section, we will:

Systems Biology

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

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

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

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

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

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

Target Markets

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

Healthcare

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

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

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

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

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

Agriculture

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

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

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

Our Technology Foundation

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

Gene Expression Profiling (Transcriptomics)

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

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

Biochemical Profiling (Metabolomics)

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

Phenotypic Profiling (Phenomics)

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

Pathway Informatics

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

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

Our Business Model

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

Partnerships

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

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

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

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

Services Business

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

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

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

Pipeline Products

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

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

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

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

Our Partnerships

Bayer CropScience

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

The Monsanto Company

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

Advanced Technology Program

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

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

National Institute of Environmental Health Sciences

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

L’Oreal

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

Pioneer Hi-Bred

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

Emerging Pharmaceutical Partnerships

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

Other Collaborative Research Agreements

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

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Acquisition of TissueInformatics.Inc

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

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

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

Competition

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

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

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

Government Regulation

Regulation of Drug Development and Commercialization

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

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

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

Regulation of Development and Commercialization of Agricultural Products

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

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

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

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

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Environmental Regulation

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

Intellectual Property

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

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

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

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

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

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

Employees

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

RISK FACTORS

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

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

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

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

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

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

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

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

Our debt covenants could impact our cash position.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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