PARADIGM GENETICS INC, 424B4, 2000-05-09

PARADIGM GENETICS INC
424B4, 2000-05-09
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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Filed pursuant to rule 424(b)(4)
Registration No. 333-30758

PROSPECTUS
6,000,000 Shares
[LOGO OF PARADIGM]

Common Stock

This is an initial public offering of common stock by Paradigm Genetics,
Inc. We are selling 6,000,000 shares of common stock.

Four of our principal stockholders have agreed to purchase an aggregate of
1,000,000 of the shares that we are offering.

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Our common stock is listed on the Nasdaq National Market under the symbol
PDGM.

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<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price.................................... $7.00 $42,000,000
Underwriting discounts................................... $0.49 $ 2,450,000
Proceeds to Paradigm Genetics............................ $6.51 $39,550,000
</TABLE>

Our proceeds before expenses include proceeds of $7.00 per share from the
sale of a total of 1,000,000 shares of our common stock to four of our
principal stockholders for an aggregate price of $7,000,000. The underwriters
are not underwriting the sale of those shares and we are not paying any
underwriting discount with respect to those shares.

The underwriters may also purchase up to 900,000 additional shares of common
stock from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.

Chase Securities Inc. expects to deliver the shares to purchasers on or
about May 10, 2000.

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Investing in our common stock involves risks.
See "Risk Factors" beginning on page 5.

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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.

Chase H&Q

J.P. Morgan & Co.

Pacific Growth Equities, Inc.

Stephens Inc.
May 5, 2000
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[Inside front cover and Gatefold]

[Graphic: Includes graphic depiction summarizing the
steps in our GENEFUNCTION FACTORY. The graphic is titled:
"Our GENEFUNCTION FACTORY/TM/. Text underneath the graphic
states: "Our GENEFUNCTION FACTORY/TM/ is an assembly-line
process that enables us rapidly to discover genes, alter
genes in plants and other organisms, evaluate the results
of the alterations and determine the function of genes.
We capture information throughout the process in
FUNCTIONFINDER/TM/, our computerized system for storing and
analyzing biological information.

Second graphic includes pictures of components of our
FUNCTIONFINDER/TM/ bioinformatics system. The graphic is
entitled "FUNCTIONFINDER/TM/."]
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary................................................. 1
Risk Factors....................................................... 5
Special Note Regarding Forward-Looking Statements.................. 13
Use of Proceeds.................................................... 14
Dividend Policy.................................................... 14
Capitalization..................................................... 15
Dilution........................................................... 16
Selected Financial Data............................................ 17
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 18
Business........................................................... 22
Management......................................................... 38
Certain Transactions............................................... 48
Principal Stockholders............................................. 50
Description of Capital Stock....................................... 53
Shares Eligible for Future Sale.................................... 56
Underwriting....................................................... 58
Legal Matters...................................................... 61
Experts............................................................ 61
Where You Can Find More Information................................ 61
Index to Financial Statements...................................... F-1
</TABLE>

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PROSPECTUS SUMMARY

This summary highlights the most important features of this offering and
the information contained elsewhere in this prospectus. You should read the
entire prospectus carefully, especially the risks of investing in our common
stock discussed under "Risk Factors" beginning on page 5.

Paradigm Genetics, Inc.

Overview

We are industrializing the process of determining gene function by
creating an assembly-line process to generate information that we believe will
enable us to develop novel products in four major sectors of the global
economy: crop production, nutrition, human health and industrial products. We
have developed our GeneFunction Factory to simultaneously study the functions
of many genes in our selected plants and fungi. We designed our GeneFunction
Factory to be an integrated, rapid, industrial-scale laboratory through which
we can discover and modify genes, understand the consequences of the
modifications and reliably determine the function of those genes. We store and
annotate gene function information in our FunctionFinder bioinformatics system,
which is a computer system that helps us and our partners analyze the large
volumes of complex data generated from our study of genes. We currently have
strategic alliances with Bayer AG in the area of crop production and with The
Monsanto Company in the areas of crop production and nutrition. We describe
these alliances in greater detail below.

The Opportunity

In the early 1990s, a worldwide effort began to decipher and make publicly
available the precise sequence of the entire genetic content, or genomes, of
various organisms, including humans, pathogens and agricultural crops. Industry
experts anticipate that researchers will complete the sequencing of the entire
human genome, as well as the genome of the small mustard plant, Arabidopsis, by
the end of the year 2000. However, knowing a gene's sequence does not provide
enough information to determine gene function. In addition, the traditional
process of determining gene function has been slow, labor intensive and
formulaic. Furthermore, new technologies, such as those that measure gene
expression, in the absence of other supporting data, provide insufficient
information to conclude a gene's function.

Our GeneFunction Factory

We believe the most reliable way to determine a gene's precise function is
to study the effects of altered forms of the gene on an organism. The biology
and genetics of certain organisms, which we call model organisms, make them
effective tools for investigating the function of genes of other organisms with
commercial value, which we refer to as target organisms. By applying our
GeneFunction Factory to selected plants and fungi, we and our strategic
partners intend to use the resulting information to develop novel products. By
using our GeneFunction Factory we are able to discover a gene, alter the gene,
measure the consequences of the alteration, determine the function of the gene
and place the resulting large amount of information into our FunctionFinder
bioinformatics system. Our assembly-line approach automates the measurement of
thousands of physical and chemical characteristics of a selected organism at
different times of the organism's life cycle. Our GeneFunction Factory
presently is capable of determining the function of approximately 50 genes per
week, and we believe that it will be able to determine the function of up to
200 genes per week by the end of 2000.

Initially, we are using our GeneFunction Factory to determine the function
of genes in Arabidopsis, rice and six filamentous fungi, which are multi-cell
fungi. Arabidopsis is a useful model organism because it is related to
soybeans, cotton, vegetables and oil seed crops. Rice is an important target
and model organism

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because it is one of the world's most important grains, and it is closely
related to corn, wheat, barley, sugarcane, oats and rye. Fungi are useful
target and model organisms for developing potential products in crop
production, nutrition, human health and industrial products. We work with our
model organisms to infer the function of genes in target organisms, when
working directly with the target is not practicable. We have chosen our
particular models because they are relevant to target organisms with commercial
value, are efficient research tools and are amenable to the collection of large
numbers of measurements. We intend to study the function of essentially every
gene in these organisms, and utilize this information to develop novel
products.

Our Strategy

Our goal is to be the leading supplier of gene function information in our
model and target organisms. The key elements of our strategy are to:

. determine the function of genes in our target and model organisms;

. continue to develop our GeneFunction Factory and FunctionFinder
bioinformatics system;

. develop products both with strategic partners and independently;

. focus our development efforts on large market opportunities; and

. pursue intellectual property protection for our GeneFunction Factory and
gene function information.

We will continue to make significant expenditures in excess of our
revenues to pursue our strategy. Through December 31, 1999, we had incurred a
net loss of approximately $10.6 million, and this loss will continue to
increase for the foreseeable future. We may need additional funding to pursue
our strategy and because we are an early stage company and our technology is
unproven, we may not be able to achieve our goals or achieve or maintain
profitability.

Our Strategic Alliances

To date, we have established strategic alliances with Bayer and Monsanto.
The Bayer alliance is focused on the development of new herbicides while the
Monsanto alliance is focused on the development of crop production and
nutrition products. Under these alliances, we have total committed funding of
approximately $56 million and have performance fees, milestone payments and
payments in connection with extension options that could generate as much as an
additional $133 million. We will also earn product development milestones and
sales royalties if products are commercialized from these alliances.

In September 1998, we entered into a three-year collaboration with Bayer
for the development of new chemical herbicides. We will use our GeneFunction
Factory to identify Arabidopsis genes that may be targets for herbicide
discovery and will provide Bayer with assays to screen chemicals for potential
herbicides and access to customized Arabidopsis-based releases of our
FunctionFinder bioinformatics system.

In November 1999, we entered into a six-year strategic alliance with
Monsanto to develop crop production and nutrition products. Monsanto is to
provide us with thousands of gene sequences from Arabidopsis and other
organisms. Using our GeneFunction Factory, we will provide functional analysis
of these genes to Monsanto.

We were incorporated in North Carolina on September 9, 1997. We
reincorporated as a Delaware corporation on April 7, 2000. Our facilities and
executive offices are located at 104 Alexander Drive, Research Triangle Park,
North Carolina 27709, and our telephone number at that address is (919) 425-
3000. Our worldwide web address is www.paragen.com. The information on our web
site is not incorporated by reference into this prospectus.

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The Offering

<TABLE>
<S> <C>
Common Stock offered by Paradigm Genetics........... 6,000,000 shares
Common Stock to be outstanding after this offering.. 24,962,372 shares
Use of proceeds..................................... Research and development, plant and
equipment and general corporate
purposes, including possible
acquisition of or investment in
complementary businesses, products
or technologies. For a more detailed
discussion of our anticipated use of
proceeds from this offering, see
"Use of Proceeds."
Nasdaq National Market symbol....................... PDGM
</TABLE>

The above information is based on the number of shares outstanding as of
May 2, 2000 and excludes:

. 1,500,903 shares of common stock issuable upon the exercise of stock
options at a weighted average exercise price of $1.87 per share; and

. 763,779 shares of common stock underlying warrants at a weighted
average exercise price of $1.77 per share.

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Unless otherwise indicated, all information contained in this prospectus:

. reflects our reincorporation from a North Carolina corporation to a
Delaware corporation on April 7, 2000;

. assumes that the underwriters do not exercise their over-allotment
option; and

. reflects the mandatory conversion of all of our outstanding shares of
Series A and Series B Preferred Stock into a total of 10,353,198 shares
of common stock upon completion of this offering.

The number of shares of common stock to be outstanding after this offering
reflects the mandatory conversion of 3,000,000 shares of our Series C
Preferred Stock, which were sold in January 2000.

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Summary Financial Data

The following statement of operations data for the period from inception
(September 9, 1997) through December 31, 1997 and for the years ended December
31, 1998 and 1999 have been derived from our financial statements and the notes
to those financial statements that are included elsewhere in this prospectus.
The summary balance sheet data as of December 31, 1999 are presented (1) on an
actual basis, (2) on a pro forma basis to reflect the mandatory conversion of
all of our outstanding preferred stock at December 31, 1999 into a total of
10,353,198 shares of common stock upon completion of this offering; and (3) on
a pro forma as adjusted basis to reflect the receipt of estimated proceeds from
our sale of 6,000,000 shares of common stock in this offering at the initial
public offering price of $7.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us.

For a more detailed explanation of the financial data, see "Selected
Financial Data" on page 17, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 18 and our financial
statements and the notes to those financial statements beginning on page F-1 of
this prospectus.

<TABLE>
<CAPTION>
Period From
Inception
(September 9, Years Ended December
1997) to 31,
December 31, -----------------------
1997 1998 1999
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(in thousands, except per share
data)
<S> <C> <C> <C>
Statements of Operations Data:
Collaborative research agreements and
grant revenues....................... $ -- $ 871 $ 2,197
Total operating expenses.............. 220 5,171 12,442
Net loss.............................. (220) (4,290) (10,620)
Net loss per share--basic and
diluted.............................. $ (0.19) $ (1.14) $ (2.51)
Weighted average common shares
outstanding--basic and diluted....... 1,160,958 3,750,036 4,236,409
Pro forma net loss per share--basic
and diluted.......................... $ (0.76)
Pro forma weighted average common
shares outstanding--basic and
diluted.............................. 14,046,759
</TABLE>

<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments............................... $ 3,956 $ 3,956 $ 42,506
Working capital............................ (3,635) (3,635) 34,915
Total assets............................... 14,225 14,225 52,775
Long-term debt, less current portion....... 8,047 8,047 8,047
Equity subject to potential redemption..... -- -- 3,500
Preferred stock............................ 11,919 -- --
Accumulated deficit........................ (15,163) (15,163) (15,163)
Total stockholders' equity (deficit) ...... (2,827) (2,827) 32,222
</TABLE>

The pro forma and pro forma as adjusted balance sheet data do not reflect
our receipt of proceeds of approximately $15.0 million, or $5.00 per share,
from the sale of 3,000,000 shares of our Series C Preferred Stock in January
2000. If this amount had been included, our pro forma as adjusted total assets
would have been approximately $67.8 million and our pro forma as adjusted total
stockholders' equity would have been approximately $47.2 million.

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RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially harm our business, operating results and
financial condition and could result in a complete loss of your investment.

Risks Related to our Business

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 $10.6
million for the year ended December 31, 1999. As of December 31, 1999, we had
an accumulated deficit of approximately $15.2 million. To date, we have derived
all of our revenues from only two strategic alliances and a government grant.
We expect to derive revenue in the foreseeable future principally from
strategic alliances. We expect to spend a significant amount of capital to fund
research and development and enhance our core technologies, including our
GeneFunction Factory. 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
predict when, if ever, we will become profitable.

We may never become profitable if we and our strategic 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
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 strategic alliances to develop
and commercialize products.

We have entered into only two strategic alliances, with Bayer and
Monsanto, to fund the development of certain new products, including herbicides
and plants with improved nutritional and growth characteristics. We have
derived substantially all of our revenues to date from these two collaborative
research and development agreements. If we are unable to successfully achieve
milestones or our strategic partners fail to develop successful products, we
will not earn the revenues contemplated under such collaborative agreements. In
addition, we may not be able to enter into additional strategic alliances. We
do not control the resources that our strategic partners devote to our projects
and our strategic partners may not perform their obligations. Also, we may
pursue opportunities in fields that conflict with our strategic partners or in
which our strategic partners could become active competitors. In either case,
we may not be able to commercialize our products.

We may need additional financing, which may not be available, and any
financings may dilute the percentage ownership of our existing stockholders,
cause us to relinquish rights to our technologies or cause us to grant licenses
on unfavorable terms.

Our existing capital resources may not be sufficient to fund our future
operating plans and we may therefore need to raise significant additional
capital. We have expended significant resources in developing our GeneFunction
Factory and expect our capital expenditures and operating expenses to increase
over the next several years as we continue developing the GeneFunction Factory
and increase our research and development activities. The amount of additional
capital which we expect we will need to raise will depend on many factors,
including:

. the number, breadth and progress of our research programs;

. the achievement of the milestones under certain of our existing
strategic alliances;

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. our ability to establish additional and maintain current and
additional strategic alliances;

. our strategic partners' success in commercializing products developed
under our strategic alliances;

. our success in commercializing products to which we have retained the
rights under our strategic alliances;

. the costs incurred in enforcing and defending our patent claims and
other intellectual property rights; and

. the costs and timing of obtaining regulatory approvals for any of our
products.

We may need to raise additional capital through public or private equity
offerings, debt financings or additional strategic alliances and licensing
arrangements. We may not be able to find additional financing when we need it
or on terms favorable to our stockholders or us. If we raise additional capital
by issuing equity securities, such an issuance will reduce the percentage
ownership of existing stockholders. Furthermore, we may need to issue
securities that have rights, preferences and privileges senior to our common
stock. If we raise additional funds through strategic alliances and licensing
arrangements, we may be required to relinquish rights to certain of our
technologies or product candidates, or to grant licenses on unfavorable terms.

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, in particular John Ryals, Ph.D.,
our Chief Executive Officer and President. The loss of the services of Dr.
Ryals or any of our other senior management or scientific staff could seriously
impair our ability to operate and achieve our objectives, which could reduce
our revenues. We have $2 million of key man life insurance on Dr. Ryals. This
amount may not be sufficient to compensate us for the loss of his services. In
addition, 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 or sale. 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
strategic 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.

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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., CuraGen Corporation, Rosetta Inpharmatics,
Inc. and Large Scale Biology Corporation (formerly known as Biosource
Technologies, Inc.). We expect competition to intensify in genomics research as
scientists achieve technology advances that become widely known. 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 the genomics field, and particularly in the
functional genomics field. 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 strategic partners may offer products which could be made obsolete by
less expensive or more effective crop enhancement, nutrition enhancement, drug
discovery and industrial product development technologies, including
technologies that may be unrelated to genomics. 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
plant genomics, pharmaceutical, agrochemical and biotechnology 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
crop production, nutrition, human health and industrial products markets.

Our exclusive use of plant and fungal model organisms may limit our
ability to compete in the human health market and the industrial products
markets. We believe that our ability to compete in the human health market may
depend on the degree to which information we develop on plant and fungal gene
and pathway functions may relate to human physiology. Competing companies who
use model organisms with greater similarities to human genes, such as mice, as
well as companies that do direct studies of human populations, may have a
substantial advantage in developing products for humans.

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 May 2, 2000, we had 33 U.S. patent applications and 1
international patent application pending covering our technology. We hold no
issued patents and we may never receive patents on our applications in the
United States or other countries. 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.

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 a license
from the third party. 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.

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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 claiming the
technology 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, strategic 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 shut down 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.

Risks Related to our Industry

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 is still in the early
stages of development. We have not yet proven that determining the function of
a gene in commercially significant target organisms will enable us to develop
commercial products.

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

The commercial success of our product candidates will depend in part on
public acceptance of the use of genetically modified products, including drugs,
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 products 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 manufacturers and restaurants have already
decided not to sell food that has been genetically altered. If this continues
or increases, this could cause a decrease in demand for products that we or our
collaborators may develop.

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Any products that we or our strategic 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 strategic partners develop will likely
undergo 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, in the United States, the FDA must approve any drug or
biologic product before it can be marketed in the U.S. This regulatory review
process can take many years and require substantial expense. 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 strategic partners develop, the
approval may impose limitations on the uses for which a product may be
marketed. Regulators may continue to review a product after approving it for
marketing to the public. Regulators may impose restrictions and sanctions,
including banning the continued sale of the product, if they discover problems
with the product or its manufacturer.

Risks Related to this Offering

We may face a financial liability arising out of a possible violation of the
Securities Act of 1933 in connection with e-mails sent to all of our employees
regarding participation in our directed share program.

As part of our initial public offering, we and the underwriters have made
available up to 500,000 shares of our common stock at the initial public
offering price for directors, employees, business associates and related
persons associated with us. On February 28 and March 13, 2000, we sent e-mail
messages with respect to the proposed directed share program to all of our
employees setting forth procedural aspects for participating in the directed
share program and informing them about the administration of the program and
that their friends and families might have an opportunity to participate in the
proposed program. No person who received either e-mail should rely on it in any
manner in making a decision whether to purchase shares of our common stock in
this offering. We did not deliver a preliminary prospectus prior to
distribution of the e-mails, and each e-mail may constitute a non-conforming
prospectus under the Securities Act of 1933. As a result, we may have a
contingent liability under the Securities Act of 1933. Any liability would
depend upon the number of shares of our common stock purchased by the
recipients of the e-mails. The recipients of the e-mails who purchase shares of
our common stock in this offering may have a right for a period of one year
from the date of the purchase to obtain recovery of the consideration paid in
connection with their purchase of shares of our common stock or, if they had
already sold the stock, sue us for damages resulting from their purchase of
shares of our common stock. If any liability is asserted with respect to either
e-mail, we will vigorously contest the matter. However, if all of the
purchasers in the directed share program who received the e-mails are awarded
damages after an entire or substantial loss of their investment, the damages
could total up to approximately $2.1 million plus interest based on the initial
public offering price of $7.00 per share and based on the Company's intention
to allocate up to 300,000 of the potential 500,000 shares to such persons.
Although the Company does not intend to allocate more than 300,000 shares to
employees who received the e-mails, or their friends and families, if a
violation of the Securities Act were deemed to apply to the entire allocation
of 500,000 shares in the directed share program, our damages could total up to
approximately $3.5 million plus interest based on the initial public offering
price of $7.00 per share. If this occurs, our financial condition would be
adversely affected.

9
<PAGE>

Our management will have broad discretion as to the use of proceeds from this
offering and may spend the proceeds in ways with which you may not agree.

Our management will have broad discretion over the use of proceeds from
this offering. We currently intend to use the proceeds of this offering for
research and development and general corporate purposes. Our management may
allocate the net proceeds among these purposes as it determines is necessary.
In addition, market factors may require our management to allocate all or
portions of the net proceeds for other purposes. Management may not use the
proceeds in a manner in which you approve. Accordingly, you will be relying on
the judgment of our management with regard to the use of proceeds from this
offering.

Our stock price may be extremely volatile and you may not be able to resell
your shares at or above the initial public offering price.

Prior to this offering, there has been no public market for shares of our
common stock. An active trading market may not develop following completion of
this offering, or if developed, may not be maintained. We and representatives
of the underwriters have negotiated the initial public offering price for the
shares. This price may not be indicative of prices that will prevail later in
the market. 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. You may not be able to resell
your shares at or above the initial public offering price.

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:

. expiration of research contracts with strategic partners, which may
not be renewed or replaced;

. the success rate of our discovery efforts leading to milestones and
royalties;

. the timing and willingness of strategic partners to commercialize our
products which would result in royalties; and

. general and industry specific economic conditions, which may affect
our strategic partners' research and development expenditures.

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 research contracts or
government research grants, failure to obtain new contracts or other factors,
we may not be able to correspondingly reduce our operating expenses. In
addition, we plan to significantly increase operating expenses in 2000. 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 after this
offering, 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 after the closing
of this offering, 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. There will be 24,962,372 shares of common stock
outstanding immediately after this offering, or 25,862,372 shares if the
underwriters exercise their over-allotment option in full. All of the

10
<PAGE>

shares sold in this offering will be freely transferable without restriction or
further registration under the Securities Act, except for any shares purchased
by our "affiliates," as defined in Rule 144 of the Securities Act, and except
for any shares that are subject to 180-day lock-up agreements providing that
the stockholders will not offer, sell, pledge or otherwise dispose of their
shares for a period of 180 days after this date of this prospectus without the
prior written consent of Chase Securities Inc. The remaining shares of common
stock outstanding will be "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. See "Shares Eligible for Future Sale."

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

We reincorporated as a Delaware corporation on April 7, 2000. 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, upon
completion of this offering, our restated certificate of incorporation and
amended and restated by-laws will 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 staggeredthree-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.

After this offering, our officers, directors and stockholders who
beneficially own more than five percent of our common stock will together
control 18,273,448, or approximately 64.6%, of our outstanding common stock. As
a result, these stockholders, 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 will have 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.

11
<PAGE>

You will experience immediate dilution in the book value per share of the
common stock you purchase.

The initial public offering price is substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $5.08 in net tangible
book value per share of common stock, based on the initial public offering
price of $7.00 per share. Investors will incur additional dilution based on the
exercise of outstanding stock options and warrants.

12
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some statements contained in this prospectus are forward-looking
statements concerning our operations, economic performance and financial
condition. Forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, are included, for example, in
the discussions about:

. our strategy;

. sufficiency of our cash resources;

. revenues from existing and new strategic alliances;

. product development;

. our research and development and other expenses; and

. our operational and legal risks.

These statements involve risks and uncertainties. Actual results may
differ materially from those expressed or implied in those statements. Factors
that could cause these differences include, but are not limited to, those
discussed under "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

------------------

"Paradigm Genetics", the Paradigm Genetics logo and FunctionFinder are
trademarks of Paradigm Genetics, Inc. The Company has filed a trademark
application for GeneFunction Factory. Other trademarks and trade names
appearing in this prospectus are the property of their holders.

13
<PAGE>

USE OF PROCEEDS

The net proceeds that we will receive from our sale of shares of common
stock in this offering, at the initial public offering price of $7.00 per
share, are estimated to be approximately $38.6 million after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us. If the underwriters exercise their over-allotment option in full, we
estimate the net proceeds from this offering will be approximately $44.4
million. We intend to use the net proceeds of this offering for the following
purposes:

. approximately 45% for research and development;

. approximately 35% for acquisitions of plant and equipment;

. approximately 10% for the development of our physical infrastructure;
and

. approximately 10% for general corporate purposes, including the
possible acquisition of or investment in complementary businesses,
products or technologies.

At the present time, we have no understandings, commitments or agreements with
respect to any material acquisition. Pending the use of the net proceeds of
this offering for the purposes described above, we intend to invest these
proceeds in short-term, interest-bearing, investment-grade securities.

The foregoing information is based on current expectations, and we may
allocate the net proceeds among these purposes as we deem necessary or
appropriate. The amounts and timing of our actual expenditures will depend upon
numerous factors, including the time actually required to reach profitability,
the status of our product development efforts, the success of our strategic
alliances, the amount of proceeds actually raised in this offering, the amount
of cash generated by our operations and competition. In addition, these and
other market factors, some of which are not yet known, may require us to
allocate portions of the net proceeds for purposes other than those described
above. See "Risk Factors--Risks Related to This Offering--Our management will
have broad discretion as to the use of proceeds from this offering and may
spend the proceeds in ways with which you may not agree" on page 10.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support the development of our
business and do not anticipate paying cash dividends for the foreseeable
future.

Our loan security agreement with Transamerica Business Credit Corporation
prohibits the payment of any cash dividends to any of our stockholders,
warrantholders or optionholders until we have paid in full all amounts under
the terms of the agreement. See note 7 of our financial statements.

14
<PAGE>

CAPITALIZATION

The following table sets forth our actual capitalization as of December
31, 1999 (1) on an actual basis; (2) on a pro forma basis to reflect the
mandatory conversion of all of our outstanding preferred stock at December 31,
1999 into a total of 10,353,198 shares of common stock upon the completion of
this offering and to reflect the increase in the number of authorized shares of
our Common Stock from 30,000,000 to 50,000,000 and the authorization of an
additional 5,000,000 shares of Preferred Stock, all of which is undesignated,
effected by our reincorporation as a Delaware corporation on April 7, 2000; and
(3) on a pro forma as adjusted basis to reflect the receipt of the estimated
proceeds from our sale of 6,000,000 shares of common stock in this offering at
the initial public offering price of $7.00 per share, after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by us. This information should be read in conjunction with our financial
statements and the notes to those financial statements beginning on page F-1 of
this prospectus.

<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except
share data)
<S> <C> <C> <C>
Long-term debt, less current portion......... $ 8,047 $ 8,047 $ 8,047
Equity subject to potential redemption....... -- -- 3,500
Stockholders' equity (deficit):
Series A Preferred Stock, $0.01 par value;
8,000,000 shares designated, 7,562,500
shares issued and outstanding, actual; no
shares issued or outstanding, pro forma and
pro forma as adjusted...................... 5,951 -- --
Series B Preferred Stock, $0.01 par value;
2,790,698 shares designated, 2,790,698
shares issued and outstanding, actual; no
shares issued or outstanding, pro forma and
pro forma as adjusted...................... 5,968 -- --
Preferred Stock, $0.01 par value; no shares
authorized, issued or outstanding, actual;
5,000,000 shares authorized, no shares
issued or outstanding, pro forma and pro
forma as adjusted.......................... -- -- --
Common Stock, $0.01 par value; 30,000,000
shares authorized; 5,224,257 shares issued
and outstanding, actual; 50,000,000 shares
authorized, 15,577,455 shares issued and
outstanding, pro forma; and 50,000,000
shares authorized, 21,577,455 shares issued
and outstanding, pro forma as adjusted..... 52 156 216
Additional paid-in capital.................. 3,530 15,345 50,334
Deferred compensation....................... (3,165) (3,165) (3,165)
Accumulated deficit......................... (15,163) (15,163) (15,163)
-------- -------- --------
Total stockholders' equity (deficit)..... (2,827) (2,827) 132,222
-------- -------- --------
Total capitalization................... $ 5,220 $ 5,220 $ 43,769
======== ======== ========
</TABLE>

The pro forma amounts above do not include the effect on total
capitalization of the receipt of approximately $15.0 million of proceeds from
the sale of 3,000,000 shares of our Series C Preferred Stock at a sales price
of $5.00 per share. After giving effect to the sale of the Series C Preferred
Stock, our pro forma total capitalization would be approximately $20.2 million
and our pro forma as adjusted total capitalization would be approximately $58.8
million.

The outstanding share information is based on our shares outstanding as of
December 31, 1999 and excludes:

. 1,500,903 shares of common stock issuable upon the exercise of stock
options outstanding as of May 2, 2000 at a weighted average exercise
price of $1.87 per share; and

. 763,779 shares of common stock issuable upon the exercise of warrants
outstanding as of May 2, 2000 at a weighted average exercise price of
$1.77 per share.

See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and
Results of Operations" and the financial statements and notes thereto included
in this prospectus.

15
<PAGE>

DILUTION

Our pro forma net tangible book value as of December 31, 1999, after
giving effect to the mandatory conversion of all of our outstanding preferred
stock into a total of 10,353,198 shares of common stock was negative $2.8
million or ($0.18) per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding.
After further giving effect to the sale of 3,000,000 shares of our Series C
Preferred Stock for $5.00 per share on January 21, 2000, our pro forma net
tangible book value as of December 31, 1999 was $12.1 million or $0.63 per
share. This represents an increase in pro forma net tangible book value of
$0.81 per share of common stock. After giving effect to the sale by us of
6,000,000 shares of common stock in this offering at the initial public
offering price of $7.00 per share, our pro forma net tangible book value as of
December 31, 1999 would have been approximately $47.0 million, or $1.92 per
share of common stock. This represents an immediate increase in pro forma net
tangible book value of $1.29 per share to our existing stockholders and an
immediate dilution in pro forma net tangible book value of $5.08 per share to
new investors purchasing shares in this offering. The following table
illustrates this dilution on a per share basis:

<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $7.00
Pro forma net tangible book value per share at December 31,
1999.......................................................... $(0.18)
Increase per share attributable to our sale of Series C
Preferred Stock............................................... $ 0.81
------
Pro forma net tangible book value per share at December 31,
1999 after giving effect to our sale of Series C Preferred
Stock......................................................... $ 0.63
Increase per share attributable to new investors............... $ 1.29
Pro forma net tangible book value per share after the offering... $1.92
-----
Dilution per share to new investors.............................. $5.08
=====
</TABLE>

The following table summarizes, as of December 31, 1999, on a pro forma
basis, the number of shares of stock purchased from us, including amounts paid
by purchasers of preferred stock, the total consideration paid to us and the
average price per share paid by existing stockholders, including the Series C
Preferred Stock stockholders and by new investors, based upon the initial
public offering price of $7.00 per share for shares purchased in this
offering, before deducting the estimated underwriting discounts and
commissions and estimated offering expenses. This table illustrates that
although investors purchasing common stock in this offering will have
contributed about 60.8% of the total consideration paid to us for our
outstanding common stock, they will only own about 24.4% of our outstanding
common stock.

<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders as
of December 31, 1999.... 15,577,455 63.4% $12,095,998 17.5% $0.78
Series C Preferred Stock
Stockholders............ 3,000,000 12.2% $14,975,000 21.7% $5.00
New investors............ 6,000,000 24.4% $42,000,000 60.8% $7.00
---------- ------ ----------- ------
Total.................. 24,577,455 100.0% $69,070,998 100.0% $2.81
========== ====== =========== ======
</TABLE>

The above tables assume no exercise of any outstanding stock options or
warrants to purchase common stock. As of May 2, 2000, there were:

. 1,500,903 shares of common stock issuable upon the exercise of stock
options outstanding at a weighted average exercise price of $1.87 per
share; and

. 763,779 shares of common stock issuable upon the exercise of warrants
outstanding at a weighted average exercise price of $1.77 per share.

To the extent these options or warrants are exercised, there will be further
dilution to the new investors.

16
<PAGE>

SELECTED FINANCIAL DATA

The statement of operations data for the period from inception (September
9, 1997) through December 31, 1997, and for 1998 and 1999 and the balance sheet
data as of December 31, 1998 and 1999 have been derived from our audited
financial statements beginning on page F-1 of this prospectus. The balance
sheet data as of December 31, 1997 have been derived from audited financial
statements that are not included in this prospectus. The historical results are
not necessarily indicative of the operating results to be expected in the
future. The selected financial data shown below should be read in conjunction
with our financial statements and the notes to those financial statements
beginning on page F-1 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 18 of this prospectus.

<TABLE>
<CAPTION>
Period from
Inception
(September Years Ended December
1997) to 31,
December 31, ------------------------
1997 1998 1999
------------ ----------- -----------
(in thousands, except per share
amounts)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Collaborative research agreements..... $ -- $ 820 $ 2,052
Grant revenue......................... -- 51 145
---------- ----------- -----------
Total revenues....................... -- 871 2,197
Operating costs and expenses:
Research and development (excludes $0,
$0 and $88, respectively, of stock
based compensation).................. 71 3,641 7,528
Selling, general and administrative
(excludes $0, $6 and $112,
respectively, of stock based
compensation)........................ 149 1,524 4,714
Stock based compensation.............. -- 6 200
---------- ----------- -----------
Total operating costs and expenses... 220 5,171 12,442
---------- ----------- -----------
Loss from operations................... (220) (4,300) (10,245)
---------- ----------- -----------
Interest income (expense), net......... -- 10 (375)
---------- ----------- -----------
Net loss............................... $ (220) $ (4,290) $ (10,620)
========== =========== ===========
Net loss per share--basic and diluted.. $ (0.19) $ (1.14) $ (2.51)
========== =========== ===========
Weighted average common shares
outstanding--basic and diluted........ 1,160,958 3,750,036 4,236,409
========== =========== ===========
Pro forma net loss per share--basic and
diluted............................... $ (0.76)
===========
Pro forma weighted average common
shares outstanding--basic and
diluted............................... 14,046,759
===========
<CAPTION>
December 31,
-------------------------------------
1997 1998 1999
------------ ----------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments........................... $ 18 $ 3,455 $ 3,956
Working capital........................ (224) 1,148 (3,635)
Total assets........................... 63 7,435 14,225
Long-term debt, net of current
portion............................... -- 3,539 8,047
Preferred stock........................ -- 5,951 11,919
Accumulated deficit.................... (253) (4,543) (15,163)
Total stockholders' equity (deficit)... (216) 1,452 (2,827)
</TABLE>

17
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

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

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

Overview

To date, we have generated revenues from a collaborative herbicide
discovery and commercialization agreement with Bayer and a grant from the U.S.
Department of Energy. The agreement with Bayer was signed in September 1998 and
generated substantially all of our revenues for fiscal years 1998 and 1999. In
November 1999, we signed a joint development and commercialization agreement
with Monsanto. This agreement will not contribute to our revenue until the
first quarter of fiscal year 2000.

We have invested heavily in establishing our GeneFunction Factory and in
our bioinformatics infrastructure. Our total number of employees increased from
four employees at December 31, 1997 to 47 employees at December 31, 1998 and to
92 employees at December 31, 1999. Of our total number of employees on December
31, 1999, 74% were engaged in research and development activities. Our research
and development efforts consisted of work performed under our collaborative
research agreements and our federal government grant and work advancing our own
core technologies.

We have incurred significant losses since our inception. As of December
31, 1999, our accumulated deficit was approximately $15.2 million and total
stockholders' deficit was approximately $2.8 million. Operating expenses
increased from approximately $220,000 during the period from inception through
December 31, 1997, to approximately $5.2 million in the year ended December 31,
1998 and to approximately $12.4 million in the year ended December 31, 1999. We
expect to incur additional operating losses over at least the next two years as
we continue to expand our research and development efforts on our core
technologies and establish the infrastructure necessary to support our
business.

Source of Revenue and Revenue Recognition Policy

18
<PAGE>

the collaboration agreement. Revenues from government grants are recognized as
expenses are incurred over the period of each grant. Cash received in excess of
revenues recognized under collaborative agreements and grants is recorded as
deferred revenue. Payments received under our collaborative research agreements
and government grants are generally non-refundable regardless of the outcome of
the future research and development activities to be performed by us under
these arrangements. As of December 31, 1999, we had deferred revenues of
approximately $5.8 million.

Results of Operations

Years Ended December 31, 1998 and 1999.

Revenues. Revenues are comprised of amounts recognized under a
collaborative research agreement and a grant from the U.S. Department of
Energy. Total revenues increased 152% from approximately $871,000 in 1998 to
approximately $2.2 million in 1999. This increase was primarily a result of our
signing a collaborative research agreement in September 1998 with Bayer for the
development of novel screening targets in the field of herbicides.

Revenues earned under collaborative research agreements increased 150%
from approximately $820,000 in 1998 to approximately $2.1 million in 1999. This
increase was the result of an increase in revenues earned under the Bayer
collaborative research agreement in 1999 as compared to 1998 due to the fact
that this agreement was not signed until September 1998. Substantially all of
our revenues during 1998 and 1999 relate to the collaborative research
agreement with Bayer. Assuming our collaborative research agreements are
continued for the full terms under those agreements, Bayer will contribute
future committed revenues of approximately $11.8 million in 2000 through 2001
and Monsanto will contribute future committed revenues of approximately $41.5
million in 2000 through 2005.

Grant revenues increased 187% from approximately $51,000 in 1998 to
approximately $145,000 in 1999. This increase was the result of the grant being
extended in 1999.

Research and Development Expenses. Research and development expenses
consist primarily of personnel costs, facility costs, cost of supplies and
depreciation of laboratory equipment. Research and development expenses
increased 107% from approximately $3.6 million in 1998 to approximately
$7.5 million in 1999. Of this increase, approximately $2.5 million was due to
an increased number of research and development staff, approximately $334,000
was due to higher facilities costs, and approximately $886,000 was due to
depreciation of additional laboratory equipment to support our collaborative
research agreements and development of our core technology. We expect to
continue to devote substantial resources to research and development. We also
expect that research and development expenses will continue to increase and
that net losses will continue as a result.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist primarily of personnel costs, facilities costs,
business development costs and professional expenses, such as legal and
accounting fees. Selling, general and administrative expenses increased 209%
from approximately $1.5 million in 1998 to approximately $4.7 million in 1999.
Of this increase, approximately $1.3 million was due to increased staffing
necessary to manage and support our growth, approximately $209,000 was due to
higher facilities costs, approximately $267,000 was due to an increase in
professional expenses and approximately $397,000 was due to increased
depreciation expenses. We expect that our selling, general and administrative
expenses will continue to increase as we expand our legal, accounting and
business development staff, add infrastructure, incur additional costs related
to being a public company, including directors' and officers' insurance
premiums, investor relations programs and increased professional fees and
continue to make commission payments related to our collaborative research
agreements.

Stock Based Compensation Expense. Stock based compensation expense
represents the amortization of deferred compensation related to stock options
granted to employees with an exercise price below the estimated fair value of
our common stock at the date of grant, as determined by our board of directors.

19
<PAGE>

Deferred compensation is amortized over the vesting period of the related stock
options, which is generally four years. We recognized approximately $6,000 in
non-cash compensation expense related to amortization of deferred compensation
in 1998 as compared to approximately $200,000 in 1999.

Deferred compensation for options granted to employees has been determined
as the difference between the estimated fair value for financial reporting
purposes of our common stock on the date the options were granted and the
exercise price. Deferred compensation for options granted to consultants has
been determined in accordance with Statement of Financial Accounting Standards
No. 123 as the fair value of equity instruments issued. In connection with the
grant of stock options to employees, we recorded deferred compensation of
approximately $3.4 million in 1999.

Net Interest Income (Expense). Net interest income (expense) represents
interest earned on our cash and cash equivalents and short-term investments
offset by interest expense on long-term debt and capital leases. Net interest
income was approximately $11,000 in 1998, as compared to net interest expense
of approximately $375,000 in 1999. This change was attributable to increases in
senior long-term debt and an increase in notes payable secured by capital
equipment purchases, partially offset by an increase in interest income.

The Period from Inception (September 9, 1997) through December 31, 1997, and
the Year Ended December 31, 1998.

Revenues. Total revenues increased from zero during 1997 to approximately
$871,000 in 1998. The revenues in 1998 were attributable primarily to the Bayer
collaborative research agreement.

Research and Development Expenses. Research and development expenses
increased from approximately $71,000 in 1997 to approximately $3.6 million in
1998. Of this increase approximately $1.3 million was due to an increase in the
number of our research and development staff, approximately $901,000 was due to
increases in the cost of supplies, approximately $250,000 was due to
depreciation of laboratory equipment and approximately $226,000 was due to
increases in facilities costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from approximately $149,000 in 1997 to
approximately $1.5 million in 1998. Of this increase, approximately $586,000
was due to an increase in the number of administrative staff necessary to
manage and support the growth of our business, approximately $251,000 was due
to increased business development activities related to the negotiation of our
collaboration agreement with Bayer and $160,000 was due to increased
professional expenses.

Net Interest Income (Expense). Net interest expense was de minimus in
1997, as compared to net interest income of approximately $11,000 in 1998. The
increase in net interest income was attributable to higher average cash
balances during 1998.

Liquidity and Capital Resources

We have historically financed our operations through the sale of preferred
stock, debt and capital lease financing and payments received from
collaborative research agreements and a government grant. From our inception
through December 31, 1999, we have raised approximately $11.9 million in net
cash proceeds from the sale of preferred stock.

We had cash, cash equivalents and short-term investments of approximately
$18,000 at December 31, 1997, compared to approximately $3.5 million at
December 31, 1998 and approximately $4.0 million at December 31, 1999.

We had a working capital deficit of approximately $224,000 at December 31,
1997, working capital of approximately $1.1 million at December 31, 1998 and a
working capital deficit of approximately $3.6 million at December 31, 1999. The
increase in working capital between 1997 and 1998 was primarily due to

20
<PAGE>

borrowings and the issuance of convertible preferred stock in 1998. The
decrease in working capital between 1998 and 1999 was primarily due to
increases in deferred revenue from our strategic partners in 1999 with which we
financed part of our operations, expenditures for property and equipment and
funding of our operating loss partially offset by proceeds from sales of
preferred stock and issuance of notes payable. Assuming our collaborative
research agreements with our strategic partners are continued for their full
terms, Bayer will contribute committed working capital of approximately $8.0
million in 2000 through 2001 and Monsanto will contribute committed working
capital of approximately $39.5 million in 2000 through 2005.

Our operating activities used cash of approximately $233,000 in 1997,
approximately $2.1 million in 1998 and approximately $4.4 million in 1999. Cash
used in operating activities was primarily related to net operating losses.

Cash used by investing activities totaled approximately $4,000 in 1997,
approximately $6.1 million in 1998 and approximately $7.6 million in 1999.
Investing activities consist primarily of additions to property and equipment
and net purchases of short-term investments. We expect to continue to make
significant investments in the purchase of property and equipment to support
our expanding operations. A portion of our cash may be used to acquire or
invest in complementary businesses, products or technologies, or to obtain the
right to use such complementary technologies.

Financing activities provided cash of approximately $254,000 in 1997,
approximately $9.2 million in 1998 and approximately $11.5 million in 1999.
Cash provided by financing activities resulted from the receipt of
approximately $6.0 million in net proceeds from the sale of Series A Preferred
Stock in 1998, including $350,000 in proceeds from bridge loans which were
converted to Series A Preferred Stock and approximately $6.0 million in net
proceeds from the sale of Series B Preferred Stock in 1999. In addition, we had
net borrowings of approximately $250,000 in 1997, approximately $3.6 million in
1998 and approximately $5.5 million in 1999, from borrowings under our notes
payable for equipment financing of approximately $3.8 million and our senior
note payable of approximately $2.0 million.

In January 2000, we completed the sale of our Series C Preferred Stock for
gross proceeds of approximately $15.0 million and received approximately $9.0
million in payments under collaboration agreements.

Our forecast of the period of time through which our financial resources
will be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary as a result of
a number of factors. We believe that our existing cash and investment
securities and anticipated cash flow from existing collaborations together with
the net proceeds of this offering will be sufficient to support our current
operating plan for at least the next two years. We have based this estimate on
assumptions that may prove to be wrong. Our future capital requirements will
depend on many factors, including:

. the number, breadth and progress of our research programs;

. the achievement of the milestones under certain of our existing
strategic alliances;

. our ability to establish additional and maintain current and
additional strategic alliances;

. our strategic partners' success in commercializing products developed
under our strategic alliances;

. our success in commercializing products to which we have retained the
rights under our strategic alliances;

. the costs incurred in enforcing and defending our patent claims and
other intellectual property rights; and

. the costs and timing of obtaining regulatory approvals for any of our
products.

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<PAGE>

BUSINESS

Overview

We are industrializing the process of determining gene function to
generate information that will enable us to develop novel products in four
major sectors of the global economy: crop production, nutrition, human health
and industrial products. We have developed our GeneFunction Factory to
simultaneously study the functions of many genes in our selected plants and
fungi. We designed our GeneFunction Factory to be an integrated, rapid,
industrial scale laboratory through which we can discover and modify genes,
understand the consequences of the modifications and reliably determine the
function of those genes. Our assembly-line approach automates the measurement
of thousands of physical and chemical characteristics of a selected organism at
different times in the organism's life cycle using the following techniques:

. gene expression profiling, a process of determining the level of
activity of genes in an organism at a specific time;

. metabolic profiling, a process of determining the identity and
quantities of chemicals in an organism at a specific time; and

. phenotypic profiling, a process of measuring the physical and chemical
characteristics of an organism at a specific time.

The resulting large amounts of information are then fed into our FunctionFinder
bioinformatics system. Our GeneFunction Factory presently is capable of
determining the function of approximately 50 genes per week, and we believe
that it will be capable of determining the function of up to 200 genes per week
by the end of 2000.

Background

Genes

The genes of an organism, whether animal, plant or microbe, determine its
physical and chemical characteristics. The entire genetic content of an
organism is called its genome. Genes consist of organized units of molecules
called deoxyribonucleic acid, or DNA, which in turn consist of four different
chemical bases, called nucleotides. Each nucleotide pairs with its
complementary nucleotide in the double helix structure of DNA, forming what
scientists call a base pair. The precise sequence of the nucleotides in a gene
determines the physical and chemical activity that the gene produces in an
organism. Each cell of an organism contains at least one complete copy of the
organism's genes, but each cell type expresses only those genes that are
necessary for the cell to perform its role. When a gene is expressed, it acts
alone or in combination with other expressed genes to synthesize structural
proteins and enzymes. The activity of these proteins causes the cell to perform
biological functions, which may influence the physical and chemical
characteristics of the organism. A modification in a gene sequence may lead to
the over- or under-production of a protein, modifying the normal biological
function of the cell, and potentially affecting the physical and chemical
characteristics of the entire organism.

The Industrialization of Gene Sequencing

In the early 1990s, a worldwide effort began to decipher the precise
sequence of the genomes of various organisms, including humans, pathogens and
agricultural crops. The search to identify genes and their encoded proteins
that are associated with both health and disease has fueled this effort.
Advances in

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DNA sequencing technology and instrumentation have allowed researchers to begin
to sequence genes on an industrial scale by creating "sequencing factories,"
instead of sequencing genes one at a time. During the last two decades, the
speed at which scientists can sequence the building blocks of genes, or base
pairs, has increased from hundreds per week to millions per week, while the
cost of sequencing a base pair has decreased proportionately. Large sequencing
centers at universities, research institutes and private companies produce tens
of thousands of gene sequences each week. To date, scientists have cataloged
the complete genomes of over forty species of bacteria, Baker's Yeast and a
nematode, which is a small worm-like organism. In an effort called the Human
Genome Project, scientists funded by the government, as well as several
foundations, have been systematically sequencing human DNA since the late
1980s. Industry experts anticipate that researchers will complete the
sequencing of the entire human genome, as well as the genome of the plant
Arabidopsis, by the end of the year 2000. Additionally, the government and
private industry are funding researchers attempting to complete the sequencing
of the entire genomes of several species of crops, such as rice, corn, tomato
and soybean, as well as bacteria, protists and fungi. Researchers expect that
the entire DNA sequences of these organisms will be determined in the near
future.

The gene sequence information that has been discovered to date provides a
vast and diverse starting point for gene function research. However, in the
absence of other information, a gene's sequence does not provide any clues to a
gene's function. Without understanding function, researchers will have a
limited ability to translate this gene sequence data into information necessary
to develop new commercial products.

Determining Gene Function

Historically, gene function determination has been a slow, labor intensive
and formulaic process, pursuant to which an investigator typically would take
the following steps:

. identify a gene;

. determine its sequence;

. gather information on how the gene was expressed in an organism's
tissues;

. determine the activity of the protein corresponding to the gene;

. isolate or create modifications in the gene; and

. investigate the impact of modifications on the organism.

Individual research laboratories in different locations have conducted most of
this type of genetic research using variations on the same techniques to study
different genes, one gene at a time. Researchers have only recently developed
methods to study the function of many genes at one time and in one place, using
one or more of the following techniques, each of which is explained in the
corresponding paragraphs below:

. gene annotation and homology determination;

. gene expression profiling; and

. model organism functional genomics.

Gene Annotation and Homology Determination

Researchers can use search and alignment algorithms to determine the
degree to which a newly discovered gene sequence is similar, or homologous, to
previously known sequences. Researchers can then examine any remarks, or
annotations, written by other scientists about the characteristics, activity or
function of the previously studied sequence, and draw inferences about the
function of the new gene sequence based on its structural similarity, or
homology, to the known gene sequence. It is possible to find similarities among
gene sequences from different species, because researchers find many gene
families in certain groups of organisms, and some are even found in all
organisms.

Although gene annotation and homology determination may provide insight
into the function of a newly discovered gene, researchers can infer only
information with limited value. First, even if researchers

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have studied a similar gene, very few of the studied genes have reliable
annotation about function. Second, of the genes researchers have currently
annotated for function, most annotations relate to fundamental processes, such
as respiration, which address only a fraction of the potential commercial
applications of functional genomics, which is the assignment of a function to a
gene. Third, genes with similar sequences often have very different functions.

Gene Expression Profiling

A gene expression profile provides a snapshot of genes that are expressed
in specific tissues of specific organisms at specific points in time. This
snapshot tells an investigator where, when and to what extent a particular gene
is expressed in a cell, tissue or organism and what physiological pathways are
active in the cell. Gene expression technology has progressed rapidly over the
past few years. Currently, investigators use various profiling technologies
such as gene chips to analyze the expression patterns of tens of thousands of
genes at once.

Although gene expression profiling may provide clues to a gene's function
in a particular process or pathway, it does not provide sufficient information
to conclusively determine a gene's function or its commercial value. A gene
expression profile shows that a gene was expressed in a cell at the time a
certain biological function occurred in the cell. However, the profile does not
show whether the expression of the gene was causally related to the cellular
activity, or how the gene interacted with other genes that were expressed at
the same time. Also, the profile does not show the chemical and physical
effects of changes in gene expression in an organism.

Model Organism Functional Genomics

We believe the most reliable way to determine a gene's precise function is
to study the effects of modified, or variant, forms of the gene on an organism.
The biology and genetics of certain organisms, which we call model organisms,
make them effective tools for investigating the function of genes of other
organisms with commercial value, which we refer to as target organisms.
Generally, model organisms must be similar enough to associated target
organisms to allow meaningful comparisons. They must also be easier, faster and
less costly to investigate. Model organisms may also serve as targets for gene
discovery when there is commercial potential for the model organism itself.
Researchers use model organisms to determine the function of a gene from a
target organism by comparing the physical and chemical characteristics produced
by normal and variant forms of a comparable gene from the model organism, and
extrapolating the results to the target organism. We refer to this process as
model organism functional genomics.

Companies utilizing model organism functional genomics face several
critical challenges. First, they must choose a model organism that is relevant
to target organisms with commercial value. Second, they must choose model
organisms with physical and chemical characteristics that make them efficient
research tools. Third, they must collect large amounts of information about a
small number of genes in a model in their normal and variant states. Fourth,
they must have powerful informatics tools to manage and analyze collected data.
However, even when these challenges are met, determination of gene function
using model organisms typically occurs on a small scale, with individual
investigators studying a small number of genes at a time.

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<PAGE>

Our Approach to Industrializing Gene Function Discovery: Our GeneFunction
Factory

The existing approaches to determining gene function have produced limited
results, as evidenced by the fact that the functions of most genes are still
unknown. We believe that an inexpensive, rapid, large-scale approach to
determining gene function is necessary to address this problem. We have
responded to this need by developing our GeneFunction Factory to study gene
function for numerous genes simultaneously in our selected organisms. We
designed our GeneFunction Factory to be an integrated, rapid, reliable,
industrial scale laboratory through which we can discover and modify genes,
measure the consequences of the modifications and reliably determine the
function of those genes. We believe that by determining gene function we will
be able to develop novel products in our target markets. In effect, we are
industrializing the discovery of gene function.

[GRAPH]

Our GeneFunction Factory

Model and Target Organisms

(Arabidopisis, rice, six multi-cell fungi)

Industrial Process

Gene Expression
Profiling

Gene Discovery
and Variant Metabolic Profiling Data Management Data Analysis
Generation

Phenotype
Profiling

FunctionFinder Bioinformatics System

Our GeneFunction Factory is organized as a series of steps. Each step
consists of one or more work stations designed to perform complex tasks
rapidly, efficiently, routinely and repetitively in an assembly-line manner.
Organisms and genetic material pass from station to station to be studied for
gene function. We can scale each step in the process to increase the number of
genes that move through our GeneFunction Factory. Scalability, speed and our
proprietary processes distinguish this method of gene function determination
from other methods. Our GeneFunction Factory presently is capable of
determining the function of approximately 50 genes per week, and we believe it
will be capable of determining the function of up to 200 genes per week by the
end of 2000.

In the steps of our GeneFunction Factory, we first identify genes and
produce organisms with modified forms of the genes, leading to an over- or
under-expression of the encoded protein. We then

25
<PAGE>

measure thousands of physical and chemical characteristics of the variant
organisms at different times of the organisms' life using gene expression,
metabolic and phenotype profiling. Next, we organize and store the data
associated with the measurements taken in the previous step. Finally, we
analyze the data to elucidate function of the genes.

Our Model and Target Organisms

We carefully select the organisms we study in our GeneFunction Factory.
Some researchers use yeast and the bacterium Escherichia coli as general model
organisms, and others use the mouse as a model for humans. Yeast and bacteria
are efficient model organisms, but are such simple organisms that extrapolating
information about gene function to more complex target organisms is often not
meaningful. Mice are more useful for annotating genes of higher organisms, but
have long life cycles and are expensive to maintain and study. We conduct our
research directly in target organisms when feasible, but when a model organism
is needed, we have chosen, and will likely continue to choose, those organisms
that are comparable to the target organism, are economical and efficient to
maintain and study, have short life cycles and whose genes are easy to modify.
The first eight organisms we have decided to study are a mustard plant known as
Arabidopsis, rice and six fungi.

Arabidopsis is a useful model organism because it is related to soybeans,
cotton, vegetables and oil seed crops. It is an efficient model organism
because it has a short life cycle of seven weeks and a small genome. Rice is an
important target and model organism because it is one of the world's most
important grains, and it is closely related to corn, wheat, barley, sugarcane,
oats and rye. We are currently studying three fungi that cause diseases in
cereals, rice and broadleaf plants. We intend to study three additional fungi
that have commercial value for fermentation, human fungal disease and natural
product discovery. We believe we can use our GeneFunction Factory to study the
function of essentially every gene in these organisms.

Gene Discovery and Variant Generation

One constraint in gene function discovery has been the time consuming
nature of constructing gene variants. In gene discovery, researchers construct
libraries of DNA fragments for an organism. The researchers sequence and alter
the DNA fragments to produce a gene variant. In plants, we produce two types of
variants: knock-out variants, in which we have modified the selected gene to
under-produce its encoded protein, and over-expression variants, in which we
have modified the selected gene to over-produce its protein. In fungi, we use
proprietary technology to activate or inactivate genes using specialized DNA
fragments that we can insert into genes to modify the gene. We then introduce
the modified gene into the fungal nucleus where it efficiently and precisely
replaces the normal gene. Using these proprietary technologies, we have
modified hundreds of plant genes and thousands of fungal genes.

Variant Analysis

Traditionally, the process of understanding the often-subtle difference
between a variant and normal organism has required years of experimentation. We
have solved this problem by rapidly and accurately collecting large volumes of
data for many different gene modifications with our automated workstations,
sample tracking and data collection software that constitute our GeneFunction
Factory. The three types of data that we collect for each variant are gene
expression profiles, metabolic profiles and phenotype profiles.

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.

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<PAGE>

Metabolic Profiling. Metabolic profiling provides a snapshot of the
chemicals in an organism's cell, including vitamins, minerals and other
biochemicals, at a given time. We are collaborating to develop a proprietary
method for extracting chemicals from an organism, which has traditionally been
the most time-consuming step in the metabolic profiling process. We detect and
measure these extracted chemicals using combinations of mass spectroscopy,
which separates molecules by electrical charge and size, and chromatography,
which separates molecules by size and chemical properties.

Phenotype Profiling. Phenotype profiling is the measurement of physical
and chemical characteristics of an organism at one or more times during its
life cycle. Characteristics of our target and model organisms that we measure
include flowering time, plant height, plant weight, seed set, seed shape, leaf
shape, color reflectance, root density, nutrient utilization and appearance.
Different measurements, when taken at specified times, produce a phenotype
profile for a variant that we can compare to a phenotype profile for a normal
organism to help understand the function of the modified gene. We have
developed a proprietary method for obtaining a phenotype profile for an
organism that is an important part of our variant analysis.

Our FunctionFinder Bioinformatics System

Data Management. Laboratory researchers typically track and collect data
using notebooks, which makes it difficult to organize, store and access the
volumes of data generated. We are addressing the issue of data management by
developing a proprietary Laboratory Information Management System, or LIMS,
utilizing barcodes and other automated data collection devices to track samples
and store data. We have also developed technology to improve the organization,
formatting and storage of data collected from our variant analyses. Our LIMS
system allows us to record and manage the thousands of daily measurements
produced by our GeneFunction Factory.

Data Analysis. The challenge with the vast amounts of data that have been
collected and stored for so many genes is being able to retrieve and make sense
of relevant information to determine the function of genes. To meet this
challenge, we have developed our FunctionFinder bioinformatics system, which
incorporates information obtained from our variant analyses and from public
sources. FunctionFinder includes tools for storing, retrieving, analyzing and
mining data to create knowledge about genes. The FunctionFinder bioinformatics
system contains proprietary software that we have developed.

Market Opportunities

By determining the function of genes in Arabidopsis, rice and six
filamentous fungi, we believe that we and our strategic partners will be able
to develop novel products in four major sectors of the global economy. We have
focused our initial efforts on generating gene function information that can be
used to develop crop and nutrition products. In the future, we intend to use
our GeneFunction Factory to discover gene function information on an industrial
scale that we and our strategic partners can use to develop human health and
industrial products. Our target sectors and markets are:

<TABLE>
<CAPTION>
Crop
Production Nutrition Human Health Industrial Products
---------- --------- ------------ -------------------
<S> <C> <C> <C>
Herbicides Additives Anti-Fungals Fermentation
Fungicides Botanicals Nutraceuticals Fiber
Fertilizers Foods Pharmaceuticals Industrial Enzymes
Seeds Health Foods Vaccines Specialty Chemicals
Crop Outputs
</TABLE>

Our near-term strategy in these sectors is to establish strategic
alliances with leading companies in order to develop commercial products. To
date, we have entered into strategic alliances with Bayer to develop novel
herbicides and with Monsanto to develop crop outputs and nutritional and human
health products.

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<PAGE>

Crop Production

The crop production sector consists of crop inputs and crop outputs.
Herbicides, fungicides, fertilizers and seeds are examples of crop inputs.
Harvested grain, vegetables and fiber are examples of crop outputs. We intend
to utilize the information derived from our GeneFunction Factory to develop
commercial products, independently or with strategic partners, in the following
areas:

Crop Inputs

Herbicides. Herbicides are chemicals that kill weeds that cause
substantial crop loss. The herbicide market is a mature market in which
innovative products have historically been introduced only about once per
decade. In 1998, global sales of herbicides were approximately $15 billion,
with Roundup(R) being the leading product. While there are many herbicides
on the market today, there is still a need for new types of products. For
example, there is a need for a herbicide that can be applied at the same
time seeds are planted, remains active in the field for several weeks, is
environmentally friendly and kills a broad spectrum of weeds quickly.

Conventionally, researchers have discovered new herbicide products by
spraying various chemicals on weeds in the hope of finding a chemical that
kills weeds without killing crops. Once a promising chemical is discovered,
researchers use labor-intensive genetics, physiology and biochemistry
techniques to determine the protein in the weed that the chemical affects.
This conventional approach is expensive and slow and has a low success
rate. Typically, researchers must screen 80,000 chemicals to find a
commercial product.

We believe our GeneFunction Factory may provide new herbicide targets
for chemical screening faster and more economically than the conventional
method. As part of our collaboration with Bayer, we use our GeneFunction
Factory to identify Arabidopsis genes that may be promising targets for new
herbicides. We then produce the proteins encoded by these promising genes
in quantities that are sufficient for large-scale high-throughput, or high
volume, chemical screening for herbicides. Finally, our assay group
produces assays, or test kits, containing those proteins that can be used
to screen for new herbicides. By narrowly focusing our discovery efforts on
finding chemicals that disable specific genes within weeds, we believe
that, together with our strategic partners, we may be able to discover
environmentally friendly herbicides more efficiently than our competition.

Fungicides. Fungal plant diseases impose greater costs upon food growers
than any other plant disease. Chemicals used to control these diseases are
called fungicides. The global market for fungicides, such as Tilt(R) and
Ridomil PC(R), was approximately $6 billion in 1998. There is a need for
better and safer fungicides, particularly those that treat currently
untreatable fungal diseases or fungal strains that become resistant to
existing fungicides.

As with herbicides, researchers conventionally have discovered
fungicides by spraying various chemicals on crops in the hope of finding a
chemical that inhibits fungal infections on crops without killing the crops
themselves. Until recently, researchers had not used an approach based upon
the determination of gene function for fungicide discovery. We believe our
GeneFunction Factory will provide potential new fungicide targets for
screening chemicals faster and more economically than the conventional
method. We are currently examining three filamentous fungi, including
Magnaporthe grisea, a rice pathogen, and Mycosphaerella graminicola, a
wheat pathogen. We plan to identify genes in these fungi that are essential
for the survival of the fungi, but not the crop. We believe that these
genes will provide promising targets for chemical screening using assays
that we or our strategic partners produce.

Fertilizers. Fertilizers are products that are applied to the soil to
provide crops with the nutrients needed to produce high yields. The primary
ingredients of most fertilizers are nitrogen, potassium and phosphorus. The
global market for fertilizers in 1998 was about $50 billion. In general,
current product

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<PAGE>

discovery efforts for fertilizers are focused on blending or reformulating
known fertilizer compounds and reducing production costs. Plants are
limited in their ability to utilize fertilizers. Excess fertilizer enters
the environment either as run-off or ground water seepage, both of which
are major environmental concerns. We believe that products that enhance
fertilizer utilization will dramatically improve the economics and lessen
environmental concerns of crop production because growers will be able to
use less fertilizer to produce the same yields. We believe that our
GeneFunction Factory may allow us to identify genes in crops that improve
their ability to utilize fertilizer.

Seeds. Typical commercial seeds include hybrid corn seeds, registered
wheat seeds and vegetable seeds. The global market for commercial seeds in
1998 was over $15 billion. Currently, there is a need for new commercial
seeds that can increase crop yields and improve the quality of foods and
fibers. One commercial seed that has successfully increased crop yield
while reducing the use of pesticides is the Bollgard(TM) cottonseed. Its
developers inserted a microbial gene into cottonseed that encodes a protein
that kills the cotton budworm, a significant pest of cotton. The resulting
seed produces a high yield of cotton while avoiding both the cost and
negative environmental impact of budworm pesticide.

Historically, time-consuming plant breeding techniques have dominated
research in the seed industry. Recently, the seed industry has invested
heavily in the genetic modification of crops, which has resulted in a
number of commercialized products and products in development. The seed
industry now has the technology to efficiently insert genes into seeds, and
products such as the Bollgard cottonseed have demonstrated the commercial
viability of this technology. We believe that there is a market need for a
technology that can rapidly generate information about the function of a
large number of genes and identify those genes that code for commercially
valuable crop traits that the seed industry could then breed or insert into
crops. Examples of valuable crop traits are disease resistance, vitamin
content and resistance to herbicides and fungicides.

Crop Outputs

The output side of crop production consists of harvested crops. The
global value of harvested crops in 1998 was approximately $700 billion with
additional value created through crop processing. While there are more than
170 crops grown worldwide, only a few key crops, such as corn, soybean,
rice, wheat, potatoes and tomatoes, account for most of the value. Two
major market opportunities involve improving processing and product
attributes. An example of a processing improvement is a reduction in the
soluble fiber present in wheat. Pasta made from this type of wheat would be
faster drying than ordinary pasta and therefore companies could produce and
package pasta at a reduced cost. An example of an improved product
attribute is an increased amount of oil in each ton of processed canola. We
believe that our GeneFunction Factory may allow us to quickly and
efficiently identify novel genes that control processing and product
attributes.

Nutrition

We believe that advances in functional genomics will make it possible for
companies to enhance the nutritional content of foods and develop foods that
can reduce the risk of disease in consumers. The nutrition market includes
additives, botanicals, foods and health foods. Product examples include
cholesterol-reducing margarines and nutritionally enhanced breakfast cereals.
It has been estimated that the size of the market for enhanced nutrition foods
will reach $15 billion in 2000 and $500 billion by 2010. Some of these foods
will result from genetic variants, while companies will produce others through
methods that do not involve genetic variants. For example, functional genomics
can identify which plants have certain nutritional qualities and researchers
can isolate these qualities and add them to foods. Because many foods and
additives come from plants and microbes, we believe that we and our strategic
partners can use our GeneFunction Factory to develop food products with
improved nutritional content.

Food production companies are exploring ways to create foods with
pharmaceutical benefits. For example, in January 2000, DuPont's Protein
Technologies International and General Mills, Inc. announced

29
<PAGE>

plans to collaborate in developing and marketing functional foods containing
proprietary soy technology consistent with the FDA approved health claim that
there is an association between consumption of soy protein and the reduced risk
of coronary heart disease. According to General Mills, sales for soy foods are
expected to top $2.5 billion in 2000 and grow at a 15% to 20% compound annual
rate over the next five years.

We believe that our GeneFunction Factory may, in the future, generate gene
function information that companies could use to develop food products that
contain:

. elevated levels of vitamins and essential amino acids in foods;

. novel proteins useful in the prevention or treatment of medical
conditions;

. elevated levels of compounds that are present in plants and reduce
serum cholesterol levels; and

. reduced levels of saturated fats.

Human Health

We are focusing our efforts in the human health sector on the discovery of
novel anti-fungal targets for drug discovery and the use of our model organisms
and our FunctionFinder bioinformatics system to understand the genetic basis of
human disease. There is a need for novel anti-fungals to treat immune-
compromised individuals coping with AIDS, recovering from transplant surgery or
undergoing cancer therapy.

We believe that the model organisms that we are studying may be useful in
discovering novel gene targets for the prevention and treatment of human
disease. By using the sequence and function information of each gene in our
model organisms and identifying the similarity of these known genes to human
genes using our FunctionFinder bioinformatics system, we may provide a powerful
tool for human drug discovery.

Industrial Products

Within the industrial products sector, we are targeting the markets for
industrial enzymes, fermentation, fiber and specialty chemicals. Proteases for
laundry detergent, paper and plastic are examples of products from such
markets. These industries are capital intensive, and research has focused on
improving current products. There is a need for industrial products that are
novel, effective, inexpensive and environmentally friendly. To fill this need,
major companies in each of these industries have recently made significant
investments in biotechnology. For example, companies are developing a new
plastic made from natural plant chemicals that researchers expect to be as
versatile and strong as some common synthetic plastics, yet less expensive and
more biodegradable.

Since many industrial products are derived from biological sources, we
believe that by understanding how gene function dictates product
characteristics, we may be able to develop information that will significantly
reduce production costs as well as lead to the creation of novel products. We
believe that the use of our GeneFunction Factory may lead to the discovery of
gene function information useful for the development of various industrial
products, including:

. improved or novel fermentation products, such as enzymes and specialty
chemicals;

. improved fiber products such as wood, plastics, cotton and linen; and

. improved industrial processes such as wastewater treatment.

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<PAGE>

Our Strategy

Our goal is to be the leading provider of gene function information to
accelerate the commercialization of improved applications in crop production,
nutrition, human health and industrial products. The key elements of our
strategy are to:

Determine the Function of Genes in Our Target and Model Organisms.

Using our GeneFunction Factory, we intend to determine the function of
essentially every gene in each of our target and model organisms and
incorporate this data into our FunctionFinder bioinformatics system. We intend
to establish our FunctionFinder bioinformatics system as the definitive source
of gene function information for these target and model organisms, as well as
other target organisms related to our model organisms.

Continue to Develop Our GeneFunction Factory.

In order to expand our capability in the industrialization of gene
function determination, we will continue to develop our GeneFunction Factory.
In addition to internal efforts to further streamline our industrialization
process, we plan to license and acquire technologies that complement our core
capabilities. We intend to utilize our partners' expertise and information to
expand our FunctionFinder bioinformatics system and improve the capabilities of
our GeneFunction Factory. In addition to expanding our technology, we plan to
expand our facilities, equipment and personnel in order to increase
productivity.

Develop Products Both with Strategic Partners and Internally.

We intend to establish additional strategic alliances with leading
companies in the crop production, nutrition, human health and industrial
products industries. We seek to receive short-term financial support to advance
our internal discovery and development efforts, as well as generate long-term
revenues from milestone and royalty payments on any commercialized products. We
also intend to develop products independently when opportunities arise.

Focus Our Development Efforts on Large Market Opportunities.

We intend to utilize our GeneFunction Factory to develop products in the
crop production, nutrition, human health and industrial products sectors. We
believe there are substantial opportunities in these sectors for novel products
that we and any of our future strategic partners can efficiently develop with
information from our GeneFunction Factory. We intend to focus our development
efforts on large opportunities within these sectors.

Pursue Intellectual Property Protection for Our GeneFunction Factory and Gene
Function Information.

We intend to continue to aggressively pursue patents for our discovery
methods, our research platform and aspects of our bioinformatics system.
Additionally, we intend to aggressively pursue patents on discoveries of novel
genes and gene functions. As of May 2, 2000, we have rights to 33 U.S. patent
applications and 1 international patent application, relating to our
technologies and genes. We intend to protect and build on our existing patent
portfolio and also rely on trade secrets to protect our proprietary
technologies. Where necessary, we will seek licenses to implement aspects of
our research platform subject to ownership rights of others.

Strategic Alliances

As part of our business strategy, we have established strategic alliances
with pharmaceutical and agricultural companies in the fields of herbicide
development, crop production and nutrition. To date, we have entered into
significant strategic alliances with Bayer and Monsanto.

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<PAGE>

Bayer

In September 1998, we entered into a collaboration research agreement with
Bayer for the development of new chemical herbicides. Under the terms of the
agreement, we have agreed to use our GeneFunction Factory to identify
Arabidopsis genes that may be targets for herbicide discovery. We will provide
exclusively to Bayer assays based on these targets for use in high throughput
screening for herbicides, as well as access to customized Arabidopsis-based
releases of FunctionFinder for use in herbicide discovery. The collaboration
has an initial term of three years, ending in September 2001, unless Bayer
terminates it at an earlier date because we do not achieve specific milestones,
and Bayer has the option to extend it for two additional years. The agreement
provides that we are entitled to committed research funds, additional fees
based on the number of assays we deliver and our success in delivering
customized releases of FunctionFinder, and milestone and royalty payments for
any products that might emerge from the collaboration. Under the terms of the
agreement, Bayer is obligated to pay us approximately $14.7 million in
committed funding and as much as an additional $25 million in performance fees,
milestone payments and payments made in connection with the exercise of options
to extend the agreement. To date, we have received approximately $9.2 million
of this funding from Bayer pursuant to the agreement. We will also earn sales
royalties and product milestones in the event that our strategic alliance with
Bayer yields commercial products.

We have achieved three milestones in our collaboration research agreement
with Bayer. These milestones include the delivery of the first two assays for
high throughput screening and the delivery of the first release of a customized
FunctionFinder bioinformatics system for discovery of novel herbicide targets.

Monsanto

In November 1999, we entered into a collaboration agreement with Monsanto
to provide certain Arabidopsis-based gene function data for the development of
crop inputs and outputs. Under the terms of this agreement, Monsanto is to
provide us with thousands of genes from Arabidopsis and other organisms. We are
to perform a functional analysis of such genes for Monsanto using our
GeneFunction Factory. Monsanto will either own or have exclusive licenses to
certain patents that result from this project. The collaboration has an initial
term of six years, ending in November 2005, unless Monsanto terminates it at an
earlier date because we do not achieve specific milestones, and Monsanto has
the option to extend it for up to two years and nine months. Monsanto may
expand the collaboration either by increasing the number of genes that we are
to analyze in Arabidopsis or by requiring us to analyze gene function in a
second model, or both, for additional research and possible milestone payments.
The agreement provides that we are entitled to committed research funds,
additional fees based on the number of genes analyzed and royalty payments for
any products that might emerge from the collaboration. Under the terms of the
agreement, Monsanto is obligated to pay us approximately $41.5 million in
committed funding and as much as an additional $107.5 million in performance
fees, milestone payments and payments made in connection with the exercise of
options to extend the agreement. To date, we have received approximately $10.7
million of this funding from Monsanto pursuant to the agreement. We will also
earn sales royalties and product milestones in the event that our strategic
alliance with Monsanto yields commercial products.

LION bioscience

We have entered into a binding letter of intent with LION bioscience to
negotiate an agreement for the co-development and co-marketing of
bioinformatics software products for analyzing gene function. The companies
initially intend to focus on the development of metabolic profiling informatics
tools, and later develop improved phenotype profiling tools. We may not
successfully negotiate a definitive agreement with LION bioscience.

Research and Development

Our research and development efforts are directed towards the development
of our GeneFunction Factory, including our FunctionFinder bioinformatics system
and research activities in connection with our strategic alliances and our
government grant. We spent approximately $72,000 in 1997, approximately $3.6
million in 1998 and approximately $7.5 million in 1999 on our research and
development efforts.

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Competition

We face competition from functional genomics companies, including
Exelixis, Inc., CuraGen Corporation, Rosetta Inpharmatics, Inc. and Large Scale
Biology Corporation (formerly known as Biosource Technologies, Inc.). We expect
competition to intensify in genomics research as technology advances are made
and become widely known. 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 the genomics
field, and particularly in the functional genomics field. We or others may make
rapid technological development which may result in products or technologies
becoming obsolete or noncompetitive before we recover the expenses we incur in
connection with our development. Products that we or our strategic partners
offer could be made obsolete by less expensive or more effective crop
production, nutrition enhancement, human health and industrial application
product development technologies, including technologies that may be unrelated
to genomics. We may not be able to make the enhancements to our technology
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 FunctionFinder bioinformatics system, we face
competition from plant genomics, pharmaceutical, agrochemical and biotechnology
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 crop enhancement, nutrition, human health and
industrial product sectors. We have entered into strategic alliances with Bayer
and Monsanto in the crop production and nutrition sectors, but have not yet
entered into any strategic alliances or commenced development work in the human
health and industrial products sectors. Moreover, our competitors may obtain
patent protection or other intellectual property rights that could limit our
rights or our strategic partners' ability to use our technologies or
commercialize products in the crop production, nutrition, human health and
industrial products sectors.

Our ability to compete in the human health sector and the industrial
products sector may be limited by our exclusive use of plant and fungal model
organisms. We believe that our ability to compete in the human health sector
will depend on the degree to which information we develop on plant and fungal
gene and pathway function is useful in developing information about how similar
human genes and pathways code for human pathology. Although our models have
several advantages, competing companies that use model organisms with greater
similarities to human genes, such as mice, as well as companies that do direct
studies of human populations, may have a substantial advantage in developing
products for humans. Similarly, we believe that as it relates to industrial
products, our FunctionFinder bioinformatics system will only be useful in the
development of products that are plant or fungal based, such as enzymes and
alcohols.

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 strategic
partners, to develop and commercialize genetically enhanced nutrition and crop
products. These regulations and agencies may prevent us and our strategic
partners from developing and marketing nutrition and 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 FDA has adopted the policy that it will apply the same regulatory
standards to genetically modified foods that it applies to foods developed
through traditional plant breeding. This means that a food or food ingredient
developed by genetic modification must meet the same rigorous safety standards
under the Federal Food, Drug, and Cosmetic Act as other food products. Under
this policy, the FDA will

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ordinarily only require premarket review of genetically modified foods if they
raise significant safety concerns, such as elevated levels of toxicants or the
presence of allergens, or if the FDA deems them to contain a food additive. The
FDA requires premarket approval as food additives for products from introduced
genes only if the product differs substantially in structure and function from
similar naturally occurring substances. Also, the FDA does not currently
require that genetically modified products be labeled as such, as long as they
are as safe and have the same nutritional characteristics as conventional
products. The FDA is considering the adoption of a Premarket Notification
procedure, pursuant to which our strategic partners and we would have to inform
the FDA when we intend to commercialize a genetically modified food product and
that our internal safety procedure is complete.

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 nutrition and 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
strategic 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 nutrition and 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.

Regulation of Drug Development and Commercialization

Prior to the marketing of any new drug developed by us or our strategic
partners, that new drug must undergo an extensive regulatory review process in
the United States and other countries. This regulatory process, which includes
preclinical studies and clinical trials, and may include post-marketing
surveillance of any compound to establish its safety and efficacy, can take
many years and require the expenditure of substantial resources. Data obtained
from preclinical studies and clinical trials are subject to varying
interpretations that could delay, limit or prevent marketing. We and our
strategic partners may also encounter delays or rejections based on changes in
government agency policies for drug review. Delays in obtaining marketing
clearance could delay the commercialization of any drugs or diagnostic products
developed by us or our strategic partners, impose costly procedures on our
strategic partners' activities, diminish any competitive advantages that our
strategic partners may attain and lessen our potential royalties.

Even if regulatory clearance is obtained, a marketed product and its
manufacturer are subject to continuing review. Discovery of previously unknown
problems with a product may result in withdrawal of the product from the
market, which could reduce our revenue sources and hurt our financial results.

No agency has approved any product resulting from the use of our
FunctionFinder bioinformatics system for commercialization in the United States
or elsewhere. In addition, we and our strategic partners have not submitted any
investigational new drug applications for any such product candidate. We cannot
be certain if or when we or our strategic partners will submit an application
for regulatory review, or whether we or our strategic partners will be able to
obtain marketing approval for any products on a timely basis, if at all. If we
and our strategic partners fail to obtain required governmental approvals, it
will prevent us 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.

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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
GeneFunction Factory. 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 May 2, 2000, we had
filed 33 U.S. patent applications and 1 international patent application, which
are subject to rights that we have granted to various collaborators and
development partners. We have filed 17 trademark applications in the United
States and have received allowances on six of them.

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:

. our pending patent applications may not result in issued patents;

. the claims of any issued patents may not provide meaningful
protection;

. we may be unsuccessful in developing additional proprietary
technologies that are patentable;

. our patents may not provide a basis for commercially viable products
or provide us with any competitive advantages and may be challenged by
third parties; and

. others may have patents that relate to our technology or business.

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.

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

. methods relating to gene sequencing, phenotype analysis, gene
expression profiling, metabolic profiling and other methods for
determination of gene function;

. bioinformatic technologies;

. function specific patterns of gene expression we identify; and

. individual genes and targets we discover.

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.

With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade secret
protection and confidentiality agreements to protect our interests, including
several elements of our FunctionFinder bioinformatics system. In addition, we
are developing a proprietary index of plant and fungal gene and gene fragment
sequences which we update on an ongoing basis. We will apply for patents on
some of this data, whereas we will maintain other data as proprietary trade
secret information. We have taken security measures to protect our proprietary
know-how and technologies and confidential data and continue to explore further
methods of protection. While we require all employees, consultants and
strategic partners to enter into confidentiality agreements, we cannot be
certain that others will not disclose proprietary information, or will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, or that we can
meaningfully protect our trade secrets. In the case of arrangements with our
strategic partners that require the sharing of data, our policy is to make
available to our strategic partners only such data as is relevant to our
agreements with such strategic partners, under controlled circumstances, and
only during the contractual term of those agreements, and subject to a duty of
confidentiality on the part of our customer. However, such measures may not
adequately protect our data. Any material leak of confidential data into the
public domain or to third parties may harm our business.

We are a party to various license agreements that give us rights to use
technologies and biological materials in our research and development
processes. We may not be able to maintain such rights on commercially
reasonable terms, if at all. Failure by us to maintain such rights could harm
our business.

Employees

As of May 2, 2000, we had 136 full-time employees, of whom 36 hold Ph.D.
degrees. Of our total workforce, 99 are engaged in research and development
activities and 37 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.

Facilities

We currently lease an aggregate of approximately 48,000 square feet of
single-story office and laboratory facilities in Research Triangle Park, North
Carolina. The first building lease, for approximately 28,000 square feet on
Alexander Drive in Research Triangle Park, expires on May 31, 2000 but then is
automatically renewable on a month-to-month basis. The second building lease,
for approximately 20,000 square feet on S. Miami Boulevard in Durham, expires
August 31, 2002. We have the option to renew both leases.

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In July 1999, we entered into an agreement with a real estate investment
trust to develop and finance long-term laboratory and office facilities for us
on 11 acres adjacent to our current facilities in Research Triangle Park. Under
the terms of the agreement, the real estate investment trust has agreed to
develop a two-story laboratory and office complex covering approximately 54,000
square feet and a single-story plant facility incorporating growth rooms and
greenhouse space covering approximately 32,000 square feet. Both facilities are
scheduled to be completed by the end of 2000. We also have an option to require
the real estate investment trust to develop and finance an additional two-story
laboratory and office facility covering approximately 50,000 square feet on the
same site.

Legal Proceedings

We are not a party to any material legal proceedings.

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MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information regarding our executive
officers and directors as of May 2, 2000.

<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John A. Ryals, Ph.D. ..... 46 Chief Executive Officer, President and Director
Henry P. Nowak, Esq. ..... 44 Vice President of Intellectual Property,
General Counsel and Secretary
Richard E. Kouri, Ph.D. .. 56 Vice President of Business Development
Ian A.W. Howes............ 41 Vice President of Finance and Operations,
Chief Financial Officer and Treasurer
Athanasios Maroglou,
Ph.D. ................... 42 Vice President of Project Management
Scott J. Uknes, Ph.D. .... 39 Vice President of Business Strategy
John Hamer, Ph.D. ........ 42 Vice President of Research
Craig Liddell, Ph.D. ..... 41 Vice President of Informatics
James D. Bucci............ 55 Vice President of Human Resources
G. Steven Burrill (1)..... 55 Director and Chairman of the Board
Dennis Dougherty (1)...... 52 Director
Robert Goodman, Ph.D.
(2)...................... 54 Director
Terrance McGuire (2)...... 44 Director
Michael Summers (2)....... 58 Director
Henri Zinsli, Ph.D. (1)... 59 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

John A. Ryals, Ph.D. co-founded our company in September 1997 and has
served as our Chief Executive Officer and President since inception. From
October 1996 to September 1997, Dr. Ryals was Vice President of Research for
Novartis Crop Protection, Inc. and Head of the Biotechnology and Genomics
Center of Novartis in Research Triangle Park, North Carolina, where he was
responsible for worldwide biotechnology and genomics research and target-based
discovery. Dr. Ryals has 15 years of experience in agricultural biotechnology
working in various positions at the Agricultural Biotechnology Research Unit of
Ciba-Geigy Corporation, including Head of Agricultural Biotechnology Research
and Vice-President of Biotechnology at Ciba Seeds, a position which he held
from 1993 to 1996. Dr. Ryals received his Ph.D. in Molecular Biology from the
University of Texas at Dallas in 1982 and is an Adjunct Professor at North
Carolina State University.

Henry P. Nowak, Esq. has been our Vice President of Intellectual Property,
General Counsel and Secretary since May 1998. From March 1995 to April 1998,
Mr. Nowak served as the legal and patent counsel at Novartis Pharmaceuticals
and Systemix. Previously, he served as legal and patent counsel for Somatogen,
Amgen, Ciba-Geigy Agriculture and Schering-Plough. He is a member of three
state bars and the Federal Patent Bar. Mr. Nowak received his joint J.D./M.B.A.
degree from Florida State University in 1986 and a M.S. in Biochemistry from
Utah State University in 1981.

Richard E. Kouri, Ph.D. has served as our Vice President of Business
Development since June 1999. From January 1997 to January 1999, he was Senior
Vice President of Research at VIMRX Pharmaceuticals, Inc. and President and
Chief Executive Officer of VIMRX Genomics, Inc., a subsidiary of VIMRX
Pharmaceuticals, Inc. From June 1994 to January 1997, he was Chief Operating
Officer, Chief Technical Officer and Senior Vice President at Gene Logic, Inc.
Dr. Kouri received the Ph.D. degree in Radiation Biology from the University of
Tennessee and was a post-doctoral fellow at the Roche Institute of Molecular
Biology.

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<PAGE>

Ian A. W. Howes has served as our Vice President of Finance and Operations
and Chief Financial Officer since January 1999. From February 1997 to December
1998, Mr. Howes was Chief Financial Officer at Analytika, Inc., a provider of
pharmaceutical data mining software and services. From October 1995 to January
1997, he was Chief Financial Officer at American Care Communities. From May
1991 to August 1995, Mr. Howes was Chief Financial Officer at EnSys, Inc., a
publicly traded biotechnology company. Mr. Howes received his M.B.A. from the
Kenan-Flagler Business School at the University of North Carolina at Chapel
Hill in 1997 and is a Chartered Accountant in England and Wales.

Athanasios Maroglou, Ph.D. has served as our Vice President of Project
Management since October 1999. From 1985 to 1999, Dr. Maroglou was Research and
Development Manager at E. I. DuPont De Nemours & Company. As Research and
Development Manager, he was responsible for discovery and commercialization of
new herbicides and for product support and renewal. In his 14 years at DuPont,
Dr. Maroglou also served as Process Development Manager, Operations Supply
Chain Manager and Manufacturing Area Manager. He received his Ph.D. in Chemical
Engineering at the University of Birmingham, England.

Scott J. Uknes, Ph.D. co-founded our company in September 1997 and has
served as our Vice President of Business Strategy since March 1999. From
inception to March 1999, he served as our Vice President of Fungal Research.
From 1990 to September 1997, Dr. Uknes held various positions at Ciba-Geigy
Corporation, including Research Director for the Seeds Disease Control
projects, where he led a research program aimed at meeting the market need for
disease resistant crops. Dr. Uknes is an adjunct professor at North Carolina
State University and serves on the Scientific Advisory Board of Biolex, Inc.
Dr. Uknes received his Ph.D. in Plant Molecular Biology from Washington
University, St. Louis, Missouri, in 1990.

John Hamer, Ph.D. has served as our Vice President of Research since
February 2000. From March 1999 to February 2000, Dr. Hamer served as our
Director of Microbial Research. From September 1998 to March 1999, he served as
our Director of Fungal Biology. From September 1989 to September 1998, Dr.
Hamer served as Professor of Biological Sciences and Adjunct Professor of
Microbiology and Immunology at Purdue University. While at Purdue, Dr. Hamer
was awarded the David and Lucille Packard Fellowship and the National Science
Foundation Presidential Faculty Fellowship. He is currently editor-in-chief of
the academic press journal Fungal Genetics and Biology and currently serves on
the NSF-Microbial Genetics Study Panel. Dr. Hamer received his Ph.D. in
Microbiology from the University of California, Davis in 1987.

Craig Liddell, Ph.D. has served as our Vice President of Informatics since
February 2000. Since July 1998 through February 2000, Dr. Liddell served as our
Director of Informatics. Dr. Liddell has been an Adjunct Professor of Plant
Pathology and since 1991 he has been a Principal Investigator at the Computing
Research Laboratory at New Mexico State University. From July 1996 to July
1998, Dr. Liddell was an Associate Professor of Plant Pathology and from 1989
to July 1996, Dr. Liddell was an Assistant Professor of Plant Pathology at New
Mexico State University. Dr. Liddell was a Postdoctoral Research Scientist in
the Departments of Plant Pathology at the University of California, Davis and
the University of Wisconsin - Madison. He is the senior editor of the journal
Phytopathology. Dr. Liddell received his Ph.D. in Plant Pathology from the
University of Sydney, Australia in 1986.

James Bucci has served as our Vice President of Human Resources since
February 2000. From November 1997 to February 2000, Mr. Bucci was Senior Vice
President of Human Resources for Suburban Hospital Healthcare Systems in
Bethesda, Maryland, a not-for-profit integrated healthcare provider. From April
1993 to October 1997, he served as Group Vice President of Human Resources at
First Citizens Bank in Raleigh, North Carolina, a closely held regional bank.
Mr. Bucci has prior senior level human resources experience at Hallmark Cards,
Inc. and Fidelity Investments. Mr. Bucci received his Masters degree in Human
Development in 1984 from the University of Rhode Island. His undergraduate
degree is from Brown University.

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G. Steven Burrill has been a member of our board of directors since March
1999, and has served as the chairman of our board of directors since December
1999. Mr. Burrill is the Chief Executive Officer of Burrill & Company, a
private merchant bank focused on life science companies, which he founded in
1996. Prior to starting Burrill & Company, Mr. Burrill spent 27 years with
Ernst & Young, including the last 17 years as partner of the firm. Mr. Burrill
received his BBA degree from the University of Wisconsin - Madison. Mr. Burrill
currently serves on the boards of directors of DepoMed, Inc. and Transgene SA.

Dennis Dougherty has been a member of our board of directors since
February 1998. Since October 1984, Mr. Dougherty has been a General Partner of
Intersouth Partners, a series of venture capital funds which invests in life
science and technology companies throughout the Mid-Atlantic and Southeast. Mr.
Dougherty currently serves on the boards of directors of six private life
science companies, which include Xanthon, Inc., Cogent Neuroscience, Inc.,
Biolex, Inc., Insmed Pharmaceuticals, Inc. and Encelle, Inc.

Terrance McGuire has been a member of our board of directors since
February 1998. Mr. McGuire is a founder and has been a general partner of
Polaris Venture Funds, Inc., a venture capital fund, since March 1996. Since
1992, he has served as a general partner of Burr, Eagan, Deleage and Co., a
venture capital firm, and since 1989 he has served as general partner of Beta
Partners, a venture capital firm. He is also a member of the board of directors
of Akamai Technologies, Inc., Aspect Medical Systems, Inc., Inspire
Pharmaceuticals, Inc., Wrenchead.com, Inc. and deCODE Genetics, Inc. Mr.
McGuire received his B.S. in Physics and Economics from Hobart College, his
M.S. in Engineering from Dartmouth College and his M.B.A. from the Harvard
Business School.

Michael Summers has been a member of our board of directors since March
1998. Since October 1990, Mr. Summers has been a managing partner of Summers
Associates, a specialized international business development organization. Mr.
Summers is also managing director of Floranova Limited. He received his B.S. in
Botany from the University of Exeter in 1964.

Robert M. Goodman, Ph.D. has been a member of our board of directors since
June 1998. Since September 1991, Dr. Goodman has been a Professor of Plant
Pathology at the University of Wisconsin-Madison. Dr. Goodman is also a member
of the Department of Microbiology graduate program, the interdepartmental
program in plant genetics and plant breeding, the Institute of Environmental
Studies, the graduate program in cellular and molecular biology and the
biotechnology training program. Dr. Goodman received a Ph.D. in plant virology
from Cornell University in 1973.

Henri Zinsli, Ph.D. has been a member of our board of directors since June
1998. Since 1997, Dr. Zinsli has served as the Chairman of Discovery
Technologies Ltd. in Allschwil, Switzerland, and since 1999, he has also served
as the Chief Executive Officer of Discovery Technologies Ltd. Since 1998, he
has served as the Chairman of Zeptosens Inc. in Witterswil, Switzerland. He is
also a non-executive Director of Plasmon, plc, in Royston, UK, a position which
he has held since 1996. Until 1996, he was the head of Corporate Business
Development at Ciba-Geigy Ltd. in Basel. Dr. Zinsli has over 30 years of
experience at Ciba-Geigy Ltd. He received his Ph.D. in economics at the
University of St. Gallen, Switzerland in 1968.

Our executive officers are appointed by our board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our directors or executive officers. No director has
a contractual right to serve as a member of our board of directors.

Scientific Advisory Board

The following individuals are members of our Scientific Advisory Board:

Michael Bevan, Ph.D. heads the Molecular Genetics Department at the John
Innes Institute in the United Kingdom. Dr. Bevan also leads the European arm of
the Arabidopsis genome sequencing effort.

Joseph R. Ecker, Ph.D. is Professor of Plant Biology at the Salk Institute
in La Jolla California. In addition, he leads the U.S. Arabidopsis genome
sequencing effort.

Luis Herrera-Estrella, Ph.D. is Professor of Plant Genetic Engineering in
the Department of Genetics, Centro de Investigacion y Estudios Avanzanidos del
I.P.N.

40
<PAGE>

Mark Johnston, Ph.D. is Professor of Genetics at Washington University
School of Medicine. Dr. Johnston led the U.S. effort to sequence the genome of
Baker's yeast.

Ingo Potrykus, Ph.D. is Professor of Plant Sciences at the Institute of
Plant Sciences, Swiss Federal Institute of Technology in Zurich, Switzerland.

A. Ian Scott, Ph.D. is Distinguished Professor of Chemistry at Texas A&M
University and is the C.J. Davidson Chair in Science. He is a Fellow of the
Royal Society and the American Association for the Advancement of Science.

Bruce C. Weir is the William Neal Reynolds Professor of Statistics and
Genetics at North Carolina State University.

Board Composition

Upon completion of this offering, our board of directors will consist of
seven members divided into three classes, with two members in two of the
classes and three members in the third class. Each year, the stockholders will
elect the members of one of the three classes to a three-year term of office.
Upon completion of this offering, Mr. McGuire and Mr. Dougherty will serve in
the class whose term will expire at the annual meeting of our stockholders in
2001; Mr. Summers and Dr. Zinsli will serve in the class whose term will expire
at the annual meeting of our stockholders in 2002; and Mr. Burrill, Dr. Ryals
and Dr. Goodman will serve in the class whose term will expire at the annual
meeting of our stockholders in 2003. In addition, our certificate of
incorporation provides that the authorized number of directors may be changed
only by resolution of the board of directors. This classification of the board
of directors may have the effect of delaying or preventing changes in control
or management of us.

Board Committees

Audit Committee. Our audit committee, consisting of Dr. Goodman, Mr.
McGuire and Mr. Summers, reviews our internal accounting procedures and the
services provided by our independent auditors.

Compensation Committee. Our compensation committee, consisting of Mr.
Burrill, Mr. Dougherty and Dr. Zinsli, reviews and recommends to our board of
directors the compensation and benefits of all our officers and executive
management and establishes and reviews general policies relating to
compensation and benefits of our employees.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has at any time been one
of our officers or employees. No member of the compensation committee serves a
member of the board of directors or compensation committee of any entity that
has an executive officer serving as a member of our board of directors or
compensation committee.

Compensation of Directors

Our directors who are also our employees receive no compensation for
serving on the board of directors. We provide cash compensation to our non-
employee directors of $2,000 per board meeting attended in person, $1,000 per
board meeting via telephone and $500 per committee meeting that does not occur
on the same day as a board meeting. We reimburse our non-employee directors for
reasonable expenses incurred in attending board and committee meetings. Our
non-employee directors also receive on the date of each annual meeting of our
stockholders non-qualified options to purchase 5,000 shares of our common
stock, which vest immediately and have an exercise price equal to the fair
market value of our common stock on the date of grant.

41
<PAGE>

In June 1998, Dr. Goodman, Mr. Summers and Dr. Zinsli each received
options to purchase 50,000 shares of our common stock at an exercise price of
$0.08 per share. In December 1999, Dr. Goodman, Mr. Summers and Dr. Zinsli each
received options to purchase 2,666 shares of our common stock at an exercise
price of $0.60 per share. These options vest ratably beginning on the grant
date of the option and extending through the next four years of service. In
March 2000, Mr. Burrill, Mr. Dougherty and Mr. McGuire each received options to
purchase 50,000 shares of our common stock, which vest ratably beginning on the
grant date of the option and extending through the next three years of service
and have an exercise price of $7.00 per share. For more information, see
"Benefit Plans--1998 Stock Option Plan."

Limitations of Liability; Indemnification of Directors and Officers

The Delaware General Corporation Law authorizes corporations to limit or
eliminate, subject to certain conditions, the personal liability of directors
to corporations and their stockholders for monetary damages for breach of their
fiduciary duties. In connection with the consummation of this offering, we will
adopt and file a restated certificate of incorporation and amended and restated
bylaws. Our restated certificate of incorporation will limit the liability of
our directors to the fullest extent permitted by Delaware law.

Our restated certificate of incorporation and amended and restated bylaws
will also provide that we will indemnify any of our directors and officers who,
by reason of the fact that he or she is one of our officers or directors, is
involved in a legal proceeding of any nature. We will repay certain expenses
incurred by a director or officer in connection with any civil or criminal
action or proceeding, specifically including actions by us or in our name
(derivative suits). Such indemnifiable expenses include, to the maximum extent
permitted by law, attorney's fees, judgments, civil or criminal fines,
settlement amounts and other expenses customarily incurred in connection with
legal proceedings. A director or officer will not receive indemnification if he
or she is found not to have acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, our best interest.

Such limitation of liability and indemnification does not affect the
availability of equitable remedies. In addition, we have been advised that in
the opinion of the SEC, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is therefore unenforceable.

There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.

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<PAGE>

Executive Compensation

The following table sets forth the total compensation, during the year
ended December 31, 1999, paid to or accrued by our Chief Executive Officer and
each of our four other most highly compensated executive officers whose total
salary and bonus for 1999 exceeded $100,000:

Summary Compensation Table

<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Number of
Compensation Securities
----------------- Underlying All Other
Name and Principal Position Salary Bonus Options Compensation
- --------------------------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C>
John A. Ryals, Ph.D. ............ $221,825 $ 58,438 77,917 $ 600(1)
Chief Executive Officer,
President and Director
Ian A.W. Howes................... 155,400 41,250 303,300 --
Vice President of Finance and
Operations, Chief Financial
Officer and Treasurer
Henry P. Nowak, Esq.............. 145,000 41,250 303,300 --
Vice President of Intellectual
Property, General Counsel and
Secretary
Scott J. Uknes, Ph.D. ........... 131,250 33,750 9,000 --
Vice President of Business
Strategy
John Hamer, Ph.D. ............... 142,500 37,500 167,500 5,000(2)
Vice President of Research
</TABLE>
- ------------------
(1) Represents life insurance premiums paid on behalf of Dr. Ryals.
(2) Represents reimbursements for moving expenses paid to Dr. Hamer.

Option Grants in 1999

The following table presents each grant of stock options during the fiscal
year ended December 31, 1999, to each of the individuals listed in the Summary
Compensation Table.

All options were granted under our 1998 Stock Option Plan. The following
options are immediately exercisable in full at the date of grant, but shares
purchased on exercise of unvested options are subject to a repurchase right in
our favor that entitles us to repurchase unvested shares at their original
exercise price on termination of the employee's services with us.

The potential realizable value is calculated based on the ten year term of
the option at the time of grant. Stock price appreciation of 0%, 5% and 10% is
assumed pursuant to the rules promulgated by the SEC and does not represent our
estimate of future stock price performance. The potential realizable value at
0%, 5% and 10% appreciation are calculated by:

. multiplying the number of shares of common stock under the option by
the public offering price of $7.00 per share;

. assuming that the aggregate stock value derived from that calculation
compounds at the annual 0%, 5% or 10% rate shown in the table until
the expiration of the options; and

. subtracting from that result the aggregate option exercise price.

43
<PAGE>

Percentages shown under "Percentage of Total Options Granted to Employees
in 1999" are based on an aggregate of 1,362,819 options granted to our
employees and directors under our 1998 Stock Option Plan during 1999.
<TABLE>
<CAPTION>

Individual Grants Potential Realization
---------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in Price Per Expiration ----------------------------
Name Granted 1999 Share Date 0% 5% 10%
- ---- ---------- ------------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
John A. Ryals, Ph.D. ... 77,917(1) 5.7% $0.60 12/14/2006 $498,669 $841,680 $1,367,926

Ian A.W. Howes.......... 33,000(1) 2.4% 0.60 12/14/2006 211,200 356,475 579,355

Henry P. Nowak, Esq. ... 33,000(1) 2.4% 0.60 12/14/2006 211,200 356,475 579,355

Scott J. Uknes, Ph.D.... 9,000(1) 0.7% 0.60 12/14/2006 57,600 97,220 158,006

John Hamer, Ph.D........ 50,000(2) 3.7% 0.22 06/29/2006 339,000 559,113 896,810
17,500(1) 1.3% 0.60 12/14/2006 112,000 189,040 307,233
</TABLE>
- ------------------
(1) Our repurchase right lapses in equal monthly installments over the four
years commencing on the grant date.
(2) Includes 12,500 options as to which our repurchase right will lapse on the
first anniversary of the grant date and 37,500 options as to which our
repurchase right will lapse in equal monthly installments over the 36
months following the first anniversary of the grant date.

44
<PAGE>

Option Values at December 31, 1999

The following table presents the number and value of unexercised options
and securities issuable upon the exercise of options that were held by each of
the individuals listed in the Summary Compensation Table as of December 31,
1999.

These options are immediately exercisable in full at the grant date, but
shares purchased by exercise of unvested options are subject to a repurchase
right in our favor that entitles us to repurchase unvested shares at their
original exercise price on termination of the employee's services with us. The
value realized is based on the fair market value of the underlying securities
as of the date of exercise, minus the per share exercise price, multiplied by
the number of shares underlying the option. The value of unexercised in-the-
money options is based on a value of $4.50 per share, the fair market value of
our common stock on December 31, 1999 as determined in good faith by our board
of directors. Amounts reflected are based on the value of $4.50 per share,
minus the per share exercise price, multiplied by the number of shares
underlying the option.

Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Value

<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at the-Money Options at
Shares December 31, 1999 December 31, 1999
Acquired Value -------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John A. Ryals, Ph.D. ... -- -- 77,919(1) -- 83,371 --

Ian A.W. Howes.......... 303,300 132,618 -- -- -- --

Henry P. Nowak, Esq. ... 270,300 97,308 33,000(1) -- 35,310 --

Scott J. Uknes, Ph.D. .. -- -- 9,000(1) -- 9,630 --

John Hamer, Ph.D. ...... 33,333 52,999 134,167(2) -- 197,226 --
</TABLE>
- ------------------
(1) As of December 31, 1999, our repurchase right had not lapsed as to any of
these options. Accordingly, these options were exercisable but not vested
on that date.
(2) As of December 31, 1999, our repurchase right had lapsed as to 33,333.
Accordingly, the remaining 134,167 options were exercisable, but not
vested, on that date.

Employment Agreements and Termination of Employment Agreements

At the time of commencement of employment, most of our employees sign
offer letters and employment agreements. These employment agreements provide
for employment at will and contain standard provisions relating to confidential
information and invention assignment by which the employee agrees not to
disclose any confidential information received during his or her employment
with us and that, with some exceptions, he or she will assign to us any and all
inventions conceived or developed during employment.

In February 1998, we entered into employment agreements with Dr. Ryals and
Dr. Uknes. Pursuant to these employment agreements, initial annual base
salaries were set at $180,000 for Dr. Ryals and $120,000 for Dr. Uknes. In
addition, each is entitled to receive annual bonuses of 25% of base salary to
be awarded on the basis of mutually agreed upon objectives and criteria between
each of Dr. Ryals and Dr. Uknes and us. The agreements provide that the
employment relationship may be terminated with or without cause at any time by
the individual or us. Furthermore, the agreements provide that, if we terminate
either of Dr. Ryals or Dr. Uknes with or without "cause", as defined in the
agreements, we have no obligation to pay severance beyond the individual's
accrued base salary and bonus up to the date of termination. However, if we
continue to pay either of Dr. Ryals or Dr. Uknes an amount equal to his current
monthly salary for a three month period following a termination without cause,
he shall be prohibited from competing with us for that three month period.
Moreover, upon proper notice to Dr. Ryals or Dr. Uknes, we may extend the non-
compete period to a total of twelve months provided we continue to pay him such
amounts. If we terminate Dr. Ryals or Dr. Uknes for cause or if either
terminates his employment relationship, he shall be prohibited from

45
<PAGE>

competing with us for a period of twelve months following the date of
termination. These employment agreements also provide that employment is
contingent upon execution of separate agreements pursuant to which Dr. Ryals or
Dr. Uknes agrees that he will not disclose any confidential information
received during his employment with us and, that, with some exceptions, he will
assign to us any and all inventions conceived or developed during his
employment with us. Termination for any reason other than for cause results in
accelerated vesting of all of their restricted stock.

Benefit Plans

2000 Employee, Director and Consultant Stock Option Plan

Our 2000 Employee, Director and Consultant Stock Option Plan was approved
by our board of directors in February 2000 and by our stockholders in March
2000. Under this plan, we may grant both incentive stock options and
nonqualified stock options. As of May 2, 2000, a total of 1,800,000 shares of
common stock have been reserved for issuance under this plan. As of May 2,
2000, options to purchase an aggregate of 14,261 shares of common stock at an
exercise price of $7.00 per share were outstanding under the 2000 Plan.

Our board of directors administers the 2000 plan. Our board of directors
may delegate authority to administer the 2000 plan to a committee of our board
of directors. Subject to the terms of the plan, our board of directors or its
authorized committee determines recipients and the terms of options granted
pursuant to this plan including:

. the exercise price and the number of shares subject to each option;

. the vesting schedule for options;

. the termination or cancellation provisions applicable to options; and

. the conditions relating to our right to reacquire shares subject to
options.

The maximum term of options granted under this plan is ten years.

If we are acquired, our board of directors or its designated committee
will provide that outstanding options under this plan shall be: (1) assumed by
the successor or acquiring company; (2) exercised within a specified number of
days or the options will terminate; or (3) terminated in exchange for a cash
payment equal to the value of the option at the time we are acquired. If we are
acquired, our board of directors or its designated committee may also provide
that all outstanding options fully vest.

2000 Employee Stock Purchase Plan

Our 2000 Employee Stock Purchase Plan was approved by our board of
directors in March 2000 and by our stockholders in April 2000. Under this plan,
we may issue up to a total of 500,000 shares of our common stock to
participating employees. All employees that work 20 hours or more per week and
who are employed as of the first day of an offering period are eligible to
participate in the plan. However, any employee who would own more than 5% of
the voting power of our stock immediately after a grant under the plan is not
eligible to participate and no participant may purchase more than $25,000 of
common stock, based on the undiscounted value of the common stock at the
beginning of each offering period, in any one calendar year.

The plan is implemented by a series of offering periods, with a new
offering period starting on June 1 and December 1 of each year (or such other
times as our board of directors may determine). To participate in the plan, an
eligible employee authorizes us to deduct a percentage of the employee's pay,
not to exceed $21,250 per year, beginning on the first day of each designated
offering period. On the first day of each offering period, each eligible
employee who has elected to participate in the plan is granted an option to
purchase shares of our common stock. Unless a participating employee withdraws
from the plan prior to the

46
<PAGE>

end of the offering period, on the last day of the offering period the employee
is deemed to have automatically exercised the option for the purchase of a
number of shares of our common stock determined by dividing the employee's
contributions during the offering period by the lesser of:

. 85% of the fair market value of the common stock on the first day of
the offering period; or

. 85% of the fair market value of the common stock on the last day of
the offering period.

Our board of directors may amend or terminate the plan at any time and in
any respect without shareholder approval unless applicable law requires
shareholder approval of the amendment. The plan will continue in effect for a
term of ten years, subject to the right of the board of directors to terminate
the plan at any earlier time.

In the event we are acquired, each option under the Plan may be assumed or
substituted with an equivalent option by the successor corporation. In lieu of
assumption or substitution, our board of directors in its discretion may
shorten the offering period in progress.

1998 Stock Option Plan

In October 1998, we adopted our 1998 Stock Option Plan. The stockholders
approved the plan in June 1999. We amended the 1998 Plan in November and
December 1999 to increase its number of options that could be issued. The 1998
Plan authorizes the issuance of up to 4,015,000 shares of common stock. Since
March 21, 2000, after our stockholders approved our new stock option plan, no
additional grants of stock options are being made under the 1998 Plan. As of
May 2, 2000, options to purchase an aggregate of 1,486,642 shares of common
stock at a weighted average exercise price of $1.82 per share were outstanding
under the 1998 Plan.

Options granted to purchase shares of our common stock under our 1998
Stock Option Plan are generally immediately exercisable by the optionee but are
subject to a right of repurchase pursuant to the vesting schedule of each
specific grant. In the event that a purchaser ceases to provide service to us
and our affiliates, we have the right to repurchase any of that person's
unvested shares of common stock at the original option exercise price.

Our board of directors or its designated committee may, in its sole
discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1998 Plan may be exercised. In
the event of a decline in the value of our common stock, our board of directors
or its designated committee has the authority to offer optionees the
opportunity to replace outstanding higher priced options with new options below
our priced options.

The maximum term of options granted under this plan is ten years.

If we are acquired, all our outstanding options under the plan either will
be assumed or substituted for by any surviving entity or our parent or
subsidiary corporation, if any. For stock options granted, if the surviving
entity or our parent or subsidiary corporation, if any, determines not to
assume or substitute the options, the board of directors shall provide for the
options to be fully exercisable for a period of 30 days from the date of
notice. If the board of directors makes the options fully exercisable for this
30-day period, the options will terminate at the end of this period.

401(k) Plan

We maintain a retirement and deferred savings plan for our employees that
is intended to qualify as a tax-qualified plan under the Internal Revenue Code.
The 401(k) Plan provides that each participant may contribute up to 15% of his
or her pre-tax compensation to the savings plan, subject to statutorily
prescribed annual limits, which is $10,500 in the calendar year 2000. Under
this plan each participant who makes pre-tax contributions is eligible to have
a matching contribution in cash made by us to his or her matching plan account
in an amount up to 25% of the participant's savings plan contribution with a
maximum annual employer contribution of 6% of each participant's annual salary,
subject to statutorily prescribed annual limits. The matching contributions
vest annually over a three year period. We may make additional discretionary
contributions for all participants to their matching plan accounts.

47
<PAGE>

CERTAIN TRANSACTIONS

The following executive officers, directors, founders or holders of more
than five percent of our voting securities purchased securities in the amounts
as set forth below. Each share of our Series A, Series B and Series C Preferred
Stock is convertible into one share of our common stock.

<TABLE>
<CAPTION>
Shares of Preferred Stock
-----------------------------
Common Stock Series A Series B Series C Warrants (10)
------------ --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers
John A. Ryals (1)....... 1,201,181
Henry P. Nowak (2)...... 271,300
Richard E. Kouri........
Ian A.W. Howes ......... 303,300
Athanasios Maroglou..... 165,000
Scott J. Uknes.......... 852,272
John Hamer (3).......... 39,333
Craig Liddell........... 43,750
G. Steven Burrill (4)... 1,395,349 400,000
Dennis Dougherty (5).... 2,687,500 516,389 200,000 250,000
Robert Goodman.......... 52,666
Terrance McGuire (6).... 1,875,000 329,610 1,800,000
Michael Summers.........
Henri Zinsli............ 50,000

Founders
Sandy Stewart........... 852,272
Jorn Gorlach............ 852,272

Five Percent
Stockholders
The Burrill AgBio
Capital Fund L.P. ..... 1,395,349 400,000
Intersouth Partners
(7).................... 2,687,500 516,389 200,000 250,000
Polaris Venture Funds
(8).................... 1,875,000 329,610 1,800,000
Innotech Investments
Limited (9)............ 2,937,500 549,350 200,000 187,500
</TABLE>
- ------------------
(1) Includes 8,000 shares held by Dr. Ryals' wife.
(2) Includes 1,000 shares held by Mr. Nowak's wife.
(3) Includes 6,000 shares held by Dr. Hamer's wife.
(4) Represents shares held of record by The Burrill AgBio Capital Fund L.P.
Mr. Burrill, the chairman of our board directors, is Chief Executive
Officer of Burrill & Company, the General Partner of Burrill AgBio
Capital Fund L.P.
(5) Represents shares and warrants held of record by Intersouth Partners IV,
L.P. and Intersouth Partners III, L.P. Mr. Dougherty, one of our
directors, is General Partner of Intersouth Partners IV, L.P. and
Intersouth Partners III, L.P.
(6) Represents shares held of record by Polaris Venture Partners III, L.P.,
Polaris Venture Partners Founders' Fund L.P. and Polaris Venture Partners
L.P. Mr. McGuire is a founding partner of Polaris Venture Partners
Founders' Fund L.P., Polaris Venture Partners, L.P. and Polaris Venture
Partners III, L.P.
(7) Represents shares and warrants held of record by Intersouth Partners IV,
L.P. and Intersouth Partners III, L.P.
(8) Represents shares held of record by Polaris Venture Partners L.P.,
Polaris Venture Partners Founders' Fund L.P. and Polaris Venture Partners
III, L.P.
(9) Represents shares of our common stock and warrants to purchase shares of
our common stock held of record by Innotech Investments Limited, an
investment company incorporated in the United Kingdom which has
investment and voting power over the shares. All of the issued capital
stock of Innotech Investments Limited is owned by a Blind Trust, the sole
Trustee of which is Miss J S Portrait, who, as a result of her control of
the shares of Innotech, may be deemed to be the beneficial owner of the
Paradigm shares held by Innotech.
(10) Consists of warrants issued in connection with the Series A Preferred
Stock round. They are warrants to purchase shares of Series A Preferred
Stock at an exercise price of $0.80 per share. These warrants expire on
February 2008.

48
<PAGE>

Four of our existing shareholders have agreed to purchase an aggregate of
1,000,000 of the shares of our common stock that we are selling in this
offering at a price of $7.00 per share. Polaris Venture Funds has agreed to
purchase 692,308 shares, Innotech Investments Limited has agreed to purchase
76,923 shares, Intersouth Partners has agreed to purchase 76,923 shares and The
Burrill AgBio Capital Fund L.P. has agreed to purchase 153,846 shares in this
offering. Any shares that these shareholders purchase in this offering will not
be subject to the 180-day lock-up period to which all other shares held by
these shareholders prior to this offering are subject.

We have entered into the following agreements and transactions with our
executive officers, directors and holders of more than five percent of our
voting securities:

We, our founders, including Drs. Ryals and Uknes, the preferred
stockholders listed above and other stockholders have entered into an Amended
and Restated Registration Rights Agreement, which the parties amended in April
2000. Under this Agreement, they will have registration rights with respect to
their shares of common stock following this offering. See "Description of
Capital Stock -- Registration Rights" on page 54 for a more detailed
description of the terms of this agreement.

In June 1998, Dr. Zinsli, Mr. Summers and Dr. Goodman each received
options to purchase a total of 50,000 shares at an exercise price of $0.08 per
share. In December 1999, Dr. Zinsli, Mr. Summers and Dr. Goodman each received
options to purchase a total of 2,666 shares of common stock at an exercise
price of $0.60 per share. In March 2000, Mr. Burrill, Mr. Dougherty and Mr.
McGuire each received options to purchase a total of 50,000 shares of our
common stock, which options vested immediately and have an exercise price of
$7.00 per share.

In February 1998, we entered into Founder Stock Repurchase and Vesting
Agreements with our founders, including Drs. Ryals and Uknes, which we amended
in April 2000. Pursuant to the terms of these vesting agreements, we have the
right to repurchase unvested shares of common stock held by each of them at the
initial purchase price in the event that he ceases his employment with us.
These vesting agreements apply to 1,193,181 shares of common stock held by Dr.
Ryals and 852,272 shares of common stock held by Dr. Uknes. As of March 2000,
50% of the shares subject to these vesting agreements had vested, and the
remaining shares vest in equal monthly installments over the following 24
months. Our repurchase right with respect to these shares will terminate in
connection with the closing of this offering.

In February 2000, the Company agreed to pay Deborah Ryals, the wife of Dr.
Ryals, $14,250 and agreed to grant to Mrs. Ryals stock options to purchase
8,000 shares of common stock in settlement of her prior employment with the
Company during the period from September 1997 to January 1998.

We believe that all of the transactions described above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. All future transactions, including loans, between us and our officers,
directors, principal stockholders and our affiliates will be approved by a
majority of the board of directors, including a majority of the independent and
disinterested directors, and will continue to be on terms no less favorable to
us than could be obtained from unaffiliated third parties.

49
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table provides summary information known to us regarding the
beneficial ownership of our outstanding common stock as of May 2, 2000, as
adjusted to reflect the sale of 6,000,000 shares of common stock in this
offering and the conversion of all outstanding shares of our convertible
preferred stock into shares of common stock, by:

. each person or group known to us who beneficially owns more than 5% of
outstanding our common stock;

. each of our directors and each named executive officer; and

. all of our directors and executive officers as a group.

Beneficial ownership of shares is determined under the rules of the
Securities and Exchange Commission. Unless otherwise indicated, the persons
included in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws, where
applicable.

Shares of common stock subject to options currently exercisable or
exercisable within 60 days of May 2, 2000 are treated as outstanding for the
purpose of computing the percentage ownership of the person holding such
options. However, these shares are not treated as outstanding for the purposes
of computing the percentage ownership of any other person. Applicable
percentage ownership in the following table is based on 18,962,372 shares of
common stock outstanding as of May 2, 2000, after giving effect to the
conversion of all outstanding shares of preferred stock into common stock upon
the closing of this offering, and 24,962,372 shares of common stock outstanding
immediately following the completion of this offering. Unless otherwise
indicated, the address of each of the named individuals is c/o Paradigm
Genetics, Inc., 104 Alexander Drive, Research Triangle Park, North Carolina
27709. The percentages in the "After Offering" Column assumes that the
underwriters do not exercise their over-allotment option to purchase up to
900,000 shares.
<TABLE>
<CAPTION>
Percentage of
Number of Shares Common Stock
Beneficially Owned Beneficially Owned
--------------------- ---------------------
Before After Before After
Beneficial Owner Offering Offering Offering Offering
- ---------------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Directors and Executive Officers
Terrance McGuire (1)............. 4,054,610 4,746,918 21.3% 19.0%
Dennis Dougherty (2)............. 3,703,889 3,780,812 19.2% 15.0%
G. Steven Burrill (3)............ 1,845,349 1,999,195 9.7% 8.0%
John A. Ryals (4)................ 1,279,195 1,279,195 6.7% 5.1%
Scott J. Uknes (5)............... 861,272 861,272 4.5% 3.4%
Henry P. Nowak (6)............... 304,300 304,300 1.6% 1.2%
Ian A.W. Howes (7)............... 280,300 280,300 1.5% 1.1%
Craig Liddell (8)................ 167,500 167,500 * *
John Hamer (9)................... 183,700 183,700 * *
Robert Goodman (10).............. 52,666 52,666 * *
Michael Summers (11)............. 52,666 52,666 * *
Henri Zinsli (12)................ 52,666 52,666 * *
Richard E. Kouri (13)............ 290,725 290,725 1.5% 1.2%
Athanasios Maroglou (14)......... 170,260 170,260 * *
James D. Bucci (15).............. 100,000 100,000 * *
All executive officers and
directors as a group (15
persons)........................ 13,399,098 14,322,175 66.3% 54.7%

Five Percent Stockholders
Polaris Venture Funds (1)........ 4,054,610 4,746,918 21.3% 19.0%
Innotech Investments Limited
(16)............................ 3,874,350 3,951,273 20.2% 15.7%
Intersouth Partners (2).......... 3,703,889 3,780,872 19.2% 15.0%
The Burrill AgBio Capital Fund
L.P. (3)........................ 1,845,349 1,999,195 9.7% 8.0%
</TABLE>
- ------------------
* Less than one percent (1%).

(1) The number of shares beneficially owned before this offering represents
shares held of record by Polaris Venture Partners III, L.P., Polaris
Venture Partners Founders' Fund L.P. and Polaris Venture Partners L.P.
Mr. McGuire is

50
<PAGE>

a founding partner of each of those entities. Mr. McGuire disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest in those entities. Includes 50,000 shares subject to immediately
exercisable stock options. As of May 2, 2000, we had the right to
repurchase all 50,000 of the shares issuable upon exercise of these options
if Mr. McGuire ceases his directorship with us. In addition, the number of
shares beneficially owned after this offering includes 692,308 shares that
Polaris Venture Funds has agreed to purchase in this offering at a price of
$7.00 per share.

(2) The number of shares beneficially owned before this offering includes
shares held of record by Intersouth Partners IV, L.P. and Intersouth
Partners III, L.P. Includes a warrant to purchase 31,250 shares of
common stock held by Intersouth Partners IV, L.P. and a warrant to
purchase 218,750 shares of common stock held by Intersouth Partners III,
L.P. Mr. Dougherty is General Partner of those entities. Mr. Dougherty
disclaims beneficial ownership of these shares except to the extent of
his pecuniary interest in those entities. Includes 50,000 shares subject
to immediately exercisable stock options. As of May 2, 2000, we had the
right to repurchase all 50,000 of the shares issuable upon exercise of
these options if Mr. Dougherty ceases his directorship with us. In
addition, the number of shares beneficially owned after this offering
includes 76,923 shares that Intersouth Partners has agreed to purchase
in this offering at a price of $7.00 per share.

(3) The number of shares beneficially owned before this offering represents
shares held of record by The Burrill AgBio Capital Fund L.P. Mr. Burrill
is Chief Executive Officer of Burrill & Company, the General Partner of
Burrill Ag Bio Capital Fund L.P. Mr. Burrill disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
in Burrill AgBio Capital Fund L.P. Includes 50,000 shares subject to
immediately exercisable stock options. As of May 2, 2000, we had the
right to repurchase all 50,000 of the shares issuable upon exercise of
these options if Mr. Burrill ceases his directorship with us. In
addition, the number of shares beneficially owned after this offering
includes 153,846 shares that The Burrill AgBio Capital Fund L.P. has
agreed to purchase in this offering at a price of $7.00 per share.

(4) Includes 8,000 shares which were issued upon the exercise of immediately
exercisable options and 97 immediately exercisable options held by Dr.
Ryals' wife. Also includes 77,917 shares that are subject to immediately
exercisable stock options. As of May 2, 2000, we had the right to
repurchase 71,424 shares issuable upon exercise of these options if Dr.
Ryals ceases his employment with us. Includes 1,193,181 shares of common
stock subject to a vesting agreement described in "Certain
Transactions."

(5) Includes 9,000 shares which are subject to immediately exercisable
options. As of May 2, 2000, we had the right to repurchase 8,250 shares
issuable upon exercise of these options if Dr. Uknes ceases his
employment with us. Includes 852,272 shares of common stock subject to a
vesting agreement described in "Certain Transactions."

(6) Includes 1,000 shares held by Mr. Nowak's wife, 33,000 shares that are
subject to immediately exercisable stock options and 270,300 shares
which were issued upon the exercise of immediately exercisable stock
options. As of May 2, 2000, we had the right to repurchase 171,031 of
the shares issued or issuable upon exercise of these options if Mr.
Nowak ceases his employment with us.

(7) As of May 2, 2000, we had the right to repurchase 192,430 shares which
were issued upon exercise of options if Mr. Howes ceases his employment
with us.

(8) Includes 43,750 shares of common stock that were issued upon exercise of
immediately exercisable options and 123,750 shares that are subject to
immediately exercisable stock options held by Dr. Liddell. As of May 2,
2000 we had the right to repurchase 109,792 shares that are issuable
upon exercise of Dr. Liddell's options if Dr. Liddell ceases his
employment with us.

(9) Includes 6,000 shares which were issued upon the exercise of immediately
exercisable options and 10,200 immediately exercisable options held by
Dr. Hamer's wife. Also includes 33,333 shares of common stock that were
issued upon the exercise of immediately exercisable options and 134,167
shares that are subject to immediately exercisable stock options held by
Dr. Hamer. As of May 2, 2000, we had the right to repurchase 124,375
shares that are issuable upon exercise of Dr. Hamer's options if Dr.
Hamer ceases his employment with us.

(10) Includes 52,666 shares which were issued upon the exercise of stock
options. As of May 2, 2000, we had the right to repurchase 29,527 shares
issued upon exercise of options if Dr. Goodman ceases his directorship
with us.

(11) Includes 52,666 shares that are subject to immediately exercisable stock
options. As of May 2, 2000, we had the right to repurchase 29,527 shares
issuable upon exercise of these options if Mr. Summers ceases his
directorship with us.

(12) Includes 2,666 shares that are subject to immediately exercisable stock
options and 50,000 shares which were issued upon the exercise of stock
options. As of May 2, 2000, we had the right to repurchase 29,527 of
these shares issued or issuable upon exercise of these options if Dr.
Zinsli ceases his directorship with us.

(13) Includes 290,725 shares that are subject to immediately exercisable
stock options. As of May 2, 2000, we had the right to repurchase 289,448
shares issuable upon exercise of these options if Dr. Kouri ceases his
employment with us.

(14) Includes 5,260 shares that are subject to immediately exercisable
options and 165,000 shares that were issued upon the exercise of
immediately exercisable stock options. As of May 2, 2000, we had the
right to repurchase 169,931 of the shares issued or issuable upon
exercise of these options if Mr. Maroglou ceases his employment with us.

51
<PAGE>

(15) Consists of options to purchase 100,000 shares that are subject to
immediately exercisable stock options. As of May 2, 2000, we had the
right to repurchase all of the shares issuable upon exercise of these
options if Mr. Bucci ceases his employment with us.

(16) The number of shares beneficially owned before this offering represents
3,686,850 shares of our common stock and warrants to purchase 187,500
shares of our common stock held of record by Innotech Investment Limited,
an investment company incorporated in the United Kingdom which has
investment and voting power over the shares. All of the issued capital
stock of Innotech Investment Limited is owned by a Blind Trust, the sole
Trustee of which is Miss J S Portrait, who as a result of her control of
the shares of Innotech, may be deemed to be the beneficial owner of the
Paradigm shares held by Innotech. In addition, the number of shares
beneficially owned after this offering includes 76,923 shares that
Innotech Investments Limited has agreed to purchase in this offering at a
price of $7.00 per share.

52
<PAGE>

DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering and the filing of our restated
certificate of incorporation, we will be authorized to issue 50 million shares
of common stock, $0.01 par value per share, and 5 million shares of preferred
stock, $0.01 par value per share, and there will be 24,962,372 shares of common
stock and no shares of preferred stock outstanding. Assuming the conversion of
our preferred stock, as of May 2, 2000, we had 18,962,372 shares of common
stock outstanding held of record by 156 stockholders, and there were
outstanding options to purchase 1,500,903 shares of common stock and
outstanding warrants to purchase 763,779 shares of common stock.

Common Stock

The holders of common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders, and do not
have cumulative voting rights. Subject to preferences that may be applicable to
any outstanding shares of preferred stock, holders of common stock are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by our board of directors out of funds legally available for dividend payments.
All outstanding shares of common stock are fully paid and nonassessable, and
the holders of common stock have no preferences or rights of conversion,
exchange or pre-emption. In the event of any liquidation, dissolution or
winding-up of our affairs, holders of common stock will be entitled to share
ratably in our assets that are remaining after payment or provision for payment
of all of our debts and obligations and after liquidation payments to holders
of outstanding shares of preferred stock, if any.

Preferred Stock

The preferred stock, if issued, would have priority over the common stock
with respect to dividends and other distributions, including the distribution
of assets upon liquidation. Our board of directors has the authority, without
further stockholder authorization, to issue from time to time shares of
preferred stock in one or more series and to fix the terms, limitations,
relative rights and preferences and variations of each series. Although we have
no present plans to issue any shares of preferred stock, the issuance of shares
of preferred stock, or the issuance of rights to purchase such shares, could
decrease the amount of earnings and assets available for distribution to the
holders of common stock, could adversely affect the rights and powers,
including voting rights, of the common stock, and could have the effect of
delaying, deterring or preventing a change in control of us or an unsolicited
acquisition proposal.

Warrants

As of May 2, 2000 the following warrants were outstanding.

. Warrants to purchase 437,500 shares of Series A Preferred Stock at an
exercise price of $0.80 per share. These warrants expire five years
after the completion of this offering.

. A warrant to purchase 150,000 shares of our common stock at an
exercise price of $3.00 per share. The warrant expires five years
after the completion of this offering.

. A warrant to purchase 116,279 shares of our common stock at an
exercise price of $ 2.15 per share. The warrant expires in July 2006.

. A warrant to purchase 60,000 shares of our common stock at an exercise
price of $5.00 per share. The warrant expires January 2010. The
issuance of the warrant is subject to the terms of an escrow
agreement.

Each of these warrants contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon the exercise of
the warrant in the event of stock dividends, stock splits, reorganizations, and
reclassifications and consolidations.

53
<PAGE>

Registration Rights

The holders of the following shares of our common stock are entitled to
certain registration rights with respect to those shares. These registration
rights are subject to certain conditions and limitations, including the right
of the underwriters of an offering to limit the number of shares included in
any such registration under certain circumstances. All expenses incurred in
connection with registrations effected in connection with the following rights
will be borne by us.

Demand Rights. Beginning 180 days after completion of this offering, the
holders of 17,103,195 shares of common stock and 553,779 shares of common stock
issuable upon the exercise of outstanding warrants will have certain rights to
cause us to register those shares under the Securities Act. We may be required
to effect only one such registration. Stockholders with these registration
rights who are not part of an initial registration demand are entitled to
notice and are entitled to include their shares of common stock in the
registration.

Piggyback Rights. If at any time after this offering we propose to
register any of our equity securities under the Securities Act, other than in
connection with a registration relating solely to our stock option plans or
other employee benefit plans, or a registration relating solely to a business
combination or merger involving us, the holders of 17,103,195 shares of common
stock and 703,779 shares of common stock issuable upon the exercise of
outstanding warrants are entitled to notice of such registration and are
entitled to include their common stock in the registration.

S-3 Registration Rights. In addition, the holders of 17,103,195 shares of
common stock and 553,779 shares of common stock issuable upon the exercise of
outstanding warrants will have the right to cause us to register these shares
on a Form S-3, provided that we are eligible to use this form, subject to
certain limitations. We are not required to effect such a registration unless
the aggregate offering price of the shares to be registered, based on the then
current market price is at least $750,000. Also, we are only required to effect
one such registration during any 12-month period. Stockholders with these
registration rights who are not part of an initial registration demand are
entitled to notice and are entitled to include their shares of common stock in
the registration.

Delaware Law and Certain Charter and By-Law Provisions

Upon completion of this offering, the provisions of Delaware law and of
our restated certificate of incorporation and amended and restated by-laws
discussed below could discourage or make it more difficult to accomplish a
proxy contest or other change in our management or the acquisition of control
by a holder of a substantial amount of our voting stock. It is possible that
these provisions could make it more difficult to accomplish, or could deter,
transactions that stockholders may otherwise consider to be in their best
interests or the best interests of Paradigm Genetics.

Delaware Statutory Business Combinations Provision. In general, Section
203 prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is, or the transaction in which
the person became an interested stockholder was, approved in a prescribed
manner or another prescribed exception applies. For purposes of Section 203, a
"business combination" is defined broadly to include a merger, asset sale or
other transaction resulting in a financial benefit to the interested
stockholder, and, subject to certain exceptions, an "interested stockholder" is
a person who, together with his or her affiliates and associates, owns (or
within three years prior, did own) 15% or more of the corporation's voting
stock.

Classified Board of Directors. Upon completion of this offering, our board
of directors will be divided into three classes. Each year the stockholders
will elect the members of one of the three classes to a three-year term of
office.

54
<PAGE>

All directors elected to our classified board of directors will serve
until the election and qualification of their respective successors or their
earlier resignation or removal. Only the board of directors will be authorized
to create new directorships and to fill such positions so created and be
permitted to specify the class to which any such new position is assigned. The
person filling such position would serve for the term applicable to that class.
Only the board of directors (or its remaining members, even if less than a
quorum) will be empowered to fill vacancies on the board of directors occurring
for any reason for the remainder of the term of the class of directors in which
the vacancy occurred. Members of the board of directors will only be able to be
removed for cause. These provisions are likely to increase the time required
for stockholders to change the composition of the board of directors. For
example, in general, at least two annual meetings will be necessary for
stockholders to effect a change in a majority of the members of the board of
directors.

Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our amended and restated by-laws will provide that,
for nominations to the board of directors or for other business to be properly
brought by a stockholder before a meeting of stockholders, the stockholder must
first have given timely notice of the proposal in writing to our Secretary. For
an annual meeting, a stockholder's notice generally must be delivered not less
than 45 days nor more than 75 days prior to the anniversary of the mailing date
of the proxy statement for the previous year's annual meeting. For a special
meeting, the notice must generally be delivered by the later of 90 days prior
to the special meeting or ten days following the day on which public
announcement of the meeting is first made. Detailed requirements as to the form
of the notice and information required in the notice will be specified in the
by-laws. If it is determined that business was not properly brought before a
meeting in accordance with our by-law provisions, such business will not be
conducted at the meeting.

Special Meetings of Stockholders. Special meetings of the stockholders
will be able to be called only by our board of directors pursuant to a
resolution adopted by a majority of the total number of directors.

No Stockholder Action by Written Consent. Our restated certificate of
incorporation will not permit our stockholders to act by written consent. As a
result, any action to be effected by our stockholders must be effected at a
duly called annual or special meeting of the stockholders.

Super-Majority Stockholder Vote Required for Certain Actions. The Delaware
General Corporation Law provides generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless the corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Our restated certificate of incorporation will require the
affirmative vote of the holders of at least 80% of our outstanding voting stock
to amend or repeal any of the provisions discussed in this section of this
prospectus entitled "Delaware Law and Certain Charter and By-law Provisions".
This 80% stockholder vote would be in addition to any separate class vote that
might in the future be required pursuant to the terms of any preferred stock
that might then be outstanding. A 80% vote will also be required for any
amendment to, or repeal of, our by-laws by the stockholders. Our amended and
restated by-laws will be able to be amended or repealed by a simple majority
vote of the board of directors.

Transfer Agent and Registrar

The transfer agent and registrar for the common stock will be American
Stock Transfer and Trust Company.

55
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices. Furthermore, because
only a limited number of shares will be available for sale shortly after this
offering because of contractual and legal restrictions on resale as described
below, sales of substantial amounts of our common stock in the public market
could occur after these restrictions lapse. This may adversely affect the
prevailing market price and our ability to raise equity capital in the future.

Upon completion of this offering, we will have outstanding 24,962,372
shares of common stock, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants after May
2, 2000. Of these shares, the 6,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by affiliates, including the
aggregate of 1,000,000 shares that Polaris Venture Funds, Innotech Investments
Limited, Intersouth Partners and The Burrill AgBio Capital Fund L.P. have
agreed to purchase. The remaining 18,962,372 shares of common stock held by
existing stockholders are restricted securities. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration described below under Rules 144, 144(k) or 701
promulgated under the Securities Act.

As a result of the contractual 180 day lock-up period described below and
the provisions of Rules 144, 144(k) and 701, the restricted shares will be
available for sale in the public market as follows:

<TABLE>
<CAPTION>
Number of Shares Date
---------------- ----
<S> <C>
62,500 ............ On the date of this prospectus
16,550 ............ After 90 days from the date of this prospectus
15,883,322 ............ After 180 days from the date of this prospectus
(subject, in some cases, to volume limitations)
3,000,000 ............ After various times after 180 days from the date of
this prospectus (subject, in some cases, to volume
limitations)
</TABLE>

Lock-Up Agreements

We, our directors and executive officers and certain of our stockholders
and option holders have each agreed not to offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common
stock, for a period of at least 180 days after the date of this prospectus,
without the prior written consent of Chase Securities Inc., subject to limited
exceptions. Chase Securities Inc., however, may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to lock-
up agreements. The aggregate of 1,000,000 shares that Polaris Venture Funds,
Innotech Investments Limited, Intersouth Partners and The Burrill AgBio Capital
Fund L.P. have agreed to purchase in this offering are not subject to the 180-
day lock-up period.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after
this offering, a person, or persons whose shares are aggregated, who owns
shares that were purchased from us, or any affiliate, at least one year
previously, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of our then-outstanding shares of
common stock, which will equal about 249,113 shares immediately after this
offering, or the average weekly trading volume of our common stock on the

56
<PAGE>

Nasdaq National Market during the four calendar weeks preceding the filing of a
notice of the sale on Form 144. Sales under Rule 144 are also subject to manner
of sale provisions, notice requirements and the availability of current public
information about us. Any person, or persons whose shares are aggregated, who
is not deemed to have been one of our affiliates at any time during the three
months preceding a sale, and who owns shares within the definition of
"restricted securities" under Rule 144 that were purchased from us, or any
affiliate, at least two years previously, would be entitled to sell shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.

Rule 701

Subject to limitations on the aggregate offering price of a transaction
and other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers
or consultants prior to the date we become subject to the reporting
requirements of the Securities Exchange Act of 1934, or the Exchange Act, under
written compensatory benefit plans or written contracts relating to the
compensation of these persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Exchange Act, along with the shares acquired upon exercise of the options,
including exercises after the date of this prospectus. Securities issued in
reliance on Rule 701 are restricted securities and, subject to the contractual
restrictions described above, beginning 90 days after the date of this
prospectus, may be sold by persons other than affiliates subject only to the
manner of sale provisions of Rule 144 and by affiliates under Rule 144 without
compliance with its minimum holding period requirements.

Registration Rights

Upon completion of this offering, the holders of 17,103,195 shares of
common stock and 763,779 shares of common stock issuable upon the exercise of
and warrants or their transferees, will be entitled to various rights with
respect to the registration of these shares under the Securities Act.
Registration of these shares under the Securities Act would result in these
shares becoming freely tradable without restriction under the Securities Act
immediately upon the effectiveness of the registration, except for shares
purchased by affiliates. See "Description of Capital Stock--Registration
Rights" on page 54 for a more complete description of these registration
rights.

Stock Options

As of May 2, 2000 options to purchase a total of 1,500,903 shares of
common stock under our stock option plans were outstanding and 1,500,903 were
exercisable. All of the shares subject to options are subject to lock-up
agreements. An additional 1,785,739 shares of common stock were available for
future option grants under our stock plans.

Upon completion of this offering, we intend to file a registration
statement under the Securities Act covering all shares of common stock subject
to outstanding options or issuable pursuant to our stock option and stock
purchase plans. Subject to Rule 144 volume limitations applicable to
affiliates, shares registered under any registration statements will be
available for sale in the open market, beginning 90 days after the date of the
prospectus, except to the extent that the shares are subject to vesting
restrictions with us or the contractual restrictions described above.

57
<PAGE>

UNDERWRITING

We have entered into an underwriting agreement with the underwriters named
below. Chase Securities Inc., J.P. Morgan & Co., Incorporated, Pacific Growth
Equities, Inc. and Stephens Inc. are acting as representatives of the
underwriters.

The underwriting agreement provides for the purchase of a specific number
of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Chase Securities Inc. ............................................ 2,125,000
J.P. Morgan Securities Inc. ...................................... 1,375,000
Pacific Growth Equities, Inc. .................................... 1,250,000
Stephens Inc. .................................................... 250,000
---------
Total........................................................... 5,000,000
=========
</TABLE>

Four of our existing stockholders, Polaris Venture Funds, Innotech
Investments Limited, Intersouth Partners and The Burrill AgBio Capital Fund
L.P., have agreed to purchase an aggregate of 1,000,000 of the shares that we
are selling in this offering at $7.00 per share. The underwriters are not
underwriting the sale of these shares and we are not paying any underwriting
discount with respect to those shares.

This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other
than those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances. We have agreed to indemnify the underwriters against certain
civil liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of such liabilities.

The representatives have advised us that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to certain securities dealers at such price less a concession of
$0.27 per share. The underwriters may also allow to dealers, and such dealers
may reallow, a concession not in excess of $0.10 per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at
various times.

We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 900,000 additional shares
from us to cover over-allotments. If the underwriters exercise all or part of
this option, they will purchase shares covered by the option at the public
offering price that appears on the cover page of this prospectus, less the
underwriting discount. If this option is exercised in full, the total price to
public will be $48.3 million and our net proceeds will be approximately $44.4
million net of offering costs of approximately $3.9 million, which includes
underwriting discounts. The underwriters have severally agreed that, to the
extent the over-allotment option is exercised, they will each purchase a number
of additional shares proportionate to the underwriter's initial amount
reflected in the above table.

58
<PAGE>

The following table provides information regarding the amount of the
discount to be paid to the underwriters by us. Such amount is shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares.

UNDERWRITING DISCOUNT PAID BY US

<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
---------- ----------
<S> <C> <C>
Per Share ............................................ $ 0.49 $ 0.49
Total................................................. $2,450,000 $2,891,000
</TABLE>

We estimate that the total expenses of the offering, excluding the
underwriting discount, will be approximately $1.0 million.

We have agreed to indemnify each underwriter against all liabilities to
which they may become subject under the federal securities laws or other law,
including reimbursement of expenses, arising out of any untrue statements or
alleged untrue statement of a material fact contained in the registration
statement, including the prospectus, or the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements not misleading, except that there is no indemnification for specific
information furnished by the underwriters. This includes contribution to any
payments which may be made by the underwriters in the event that
indemnification is not available.

Our executive officers, directors and certain of our stockholders, who
will own in the aggregate 18,273,448 shares of our common stock after the
offering, have agreed that they will not, without the prior written consent of
Chase Securities Inc., offer, sell, pledge or otherwise dispose of any shares
of common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock owned by
them during the 180-day period following the effectiveness of the registration
statement, except for 1 million of these shares, as set forth in the last
sentence of this paragraph. We have agreed that we will not, without the prior
written consent of Chase Securities Inc., offer, sell or otherwise dispose of
any shares of common stock, options or warrants to acquire shares of common
stock or securities exchangeable for or convertible into shares of common stock
during the 180-day period following the date of this prospectus, except that we
may (1) issue shares upon the exercise of options granted prior to the date
hereof or upon the exercise of warrants outstanding as of the date hereof, (2)
grant additional options under our stock option plan, provided that, without
prior written consent of Chase Securities Inc., such additional options shall
not be exercisable during such period, (3) issue any shares of common stock or
other rights to acquire shares of common stock issued pursuant to equipment or
lease financing activities entered into in the ordinary course of our business
and (4) issue any shares of common stock or other rights to acquire shares of
common stock issued in connection with any strategic alliance, collaboration,
license, acquisition, marketing agreement, distribution agreement, advertising
arrangement, promotional arrangement or similar agreement, arrangement or
transaction, provided that the total amount of securities issued pursuant to
clauses (3) and (4) would not exceed 2 million shares of common stock or
securities exchangeable or convertible into shares of common stock and provided
further that securities may only be issued pursuant to clauses (3) and (4) to
the extent the recipient of such securities agrees to the same transfer
restrictions imposed on us by Chase Securities Inc. as set forth above. The
aggregate of 1,000,000 shares of our common stock that Polaris Venture Funds,
Innotech Investments Limited, Intersouth Partners and The Burrill AgBio Capital
Fund L.P. have agreed to purchase will not be subject to the 180-day lock-up
period to which all other shares held by these shareholders prior to this
offering are subject.

The underwriters have reserved for sale up to 500,000 shares for
employees, directors and certain other persons associated with us. These
reserved shares will be sold at the public offering price that appears on the
cover of this prospectus. The number of shares available for sale to the
general public in the offering will be reduced to the extent reserved shares
are purchased by these persons. The underwriters will offer to the general
public, on the same terms as other shares offered by this prospectus, any
reserved shares that are not purchased by these persons.

59
<PAGE>

Prior to this offering, there was no public market for our common stock.
Consequently, the offering price for our common stock was determined by
negotiations between us and the underwriters and is not necessarily related to
our asset value, net worth or other established criteria of value. The factors
considered in these negotiations, in addition to prevailing market conditions,
included the history of and prospects for the industry in which we compete, an
assessment of our management, our prospects, our capital structures, our
results of operations in recent periods and other factors as we deemed
relevant.

Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However,
the underwriters may engage in the following activities in accordance with the
rules:

. Stabilizing transactions. The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the price
of the shares, so long as stabilizing bids do not exceed a specified
maximum.

. Over-allotments and syndicate covering transactions. The underwriters
may create a short position in the shares by selling more shares than
are shown on the cover page of this prospectus. If a short position is
created in connection with this offering, the representatives may
engage in syndicate covering transactions by purchasing shares in the
open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option.

. Penalty bids. If the representatives purchase shares in the open
market in a stabilizing transaction or syndicate covering transaction,
they may reclaim a selling concession from underwriters and selling
group members who sold those shares as part of this offering.

Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of those transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.

Neither we nor the underwriters makes any representation or prediction as
to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.

Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.

The representatives have informed us that they do not intend to confirm
the sales to discretionary accounts that exceed 5% of the total number of
shares of common stock offered by them.

One or more members of the underwriting selling group may make copies of
the preliminary prospectus available over the Internet to certain customers
through its or their websites. The representatives expect to allocate a limited
number of shares to that member or members of the selling group for sale to
brokerage account holders.

60
<PAGE>

LEGAL MATTERS

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., One Financial Center,
Boston, Massachusetts 02111 will provide us with an opinion as to the validity
of the common stock offered under this prospectus. Morgan, Lewis & Bockius LLP,
101 Park Avenue, New York, New York 10178 will pass upon certain legal matters
related to this offering for the underwriters.

EXPERTS

The financial statements as of December 31, 1998 and 1999 and for the
period from inception (September 9, 1997) to December 31, 1997 and for the
years ended December 31, 1998 and 1999 included in this prospectus have been so
included in reliance upon the report of PricewaterhouseCoopers LLP, independent
accountants, given as the authority of said firm as experts in accounting and
auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered under this prospectus. This prospectus does not
contain all of the information in the registration statement and the exhibits
and schedule to the registration statement. For further information with
respect to us and our common stock, we refer you to the registration statement
and to the exhibits and schedule to registration statement. Statements
contained in this prospectus as to the contents of any contract or any other
document referred to are not necessarily complete, and in each instance, we
refer you to the copy of the contract or other document filed as an exhibit to
the registration statement. Each of these statements is qualified in all
respects by this reference. You may inspect a copy of the registration
statement without charge at the SEC's principal office in Washington, D.C., and
copies of all or any part of the registration statement may be obtained from
the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of fees prescribed by the SEC. The SEC maintains a
website that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the web site is http://www.sec.gov. The SEC's toll free investor
information service can be reached at 1-800-SEC-0330. Information contained on
the web site does not constitute part of this prospectus.

Upon completion of this offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.

We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and
quarterly reports for the first three fiscal quarters of each fiscal year
containing unaudited interim financial information. Our telephone number is
(919) 425-3000.

61
<PAGE>

PARADIGM GENETICS, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Accountants........................................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Paradigm Genetics, Inc.

In our opinion, the accompanying balance sheets and related statements of
operations, of stockholders' equity (deficit), and of cash flows present
fairly, in all material respects, the financial position of Paradigm Genetics,
Inc. (the "Company") at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the period from inception (September 9, 1997)
through December 31, 1997 and the years ended December 31, 1998 and 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

As discussed in Note 12, the Company has restated its financial statements
for the year ended December 31, 1999, to record additional deferred
compensation and stock based compensation expense.

/s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina
February 17, 2000 except as to Note 12,
which is as of April 24, 2000

F-2
<PAGE>

PARADIGM GENETICS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
Pro Forma
December 31,
December 31, 1999
------------------------- (unaudited)
1998 1999 (Note 2)
----------- ------------ ------------
(restated)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 970,688 $ 468,342 $ 468,342
Short-term investments................ 2,484,132 3,488,108 3,488,108
Accounts receivable................... 89,025 256,844 256,844
Prepaid expenses...................... 48,166 1,157,851 1,157,851
----------- ------------ -----------
Total current assets................. 3,592,011 5,371,145 5,371,145
Property and equipment, net............ 3,822,293 8,816,665 8,816,665
Other assets, net...................... 20,667 37,494 37,494
----------- ------------ -----------
Total assets......................... $ 7,434,971 $ 14,225,304 $14,225,304
=========== ============ ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 319,421 $ 1,327,423 $ 1,327,423
Accrued liabilities................... 222,462 571,184 571,184
Deferred revenue...................... 1,484,850 5,825,237 5,825,237
Long-term debt--current portion....... 327,244 1,182,456 1,182,456
Capital lease obligation--current
portion.............................. 90,365 100,075 100,075
----------- ------------ -----------
Total current liabilities............ 2,444,342 9,006,375 9,006,375
Long-term debt......................... 3,215,737 7,823,780 7,823,780
Capital lease obligation............... 322,925 222,850 222,850
----------- ------------ -----------
Total liabilities.................... 5,983,004 17,053,005 17,053,005
----------- ------------ -----------

Commitments (Note 11)

Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par
value; 15,000,000 shares authorized:
Series A Convertible Preferred Stock,
8,000,000 shares designated;
7,562,500 shares issued and
outstanding as of December 31, 1998
and 1999, respectively; no shares
issued and outstanding pro forma.... 5,950,899 5,950,899 --
Series B Convertible Preferred Stock;
2,790,698 shares designated; -0- and
2,790,698 shares issued and
outstanding as of December 31, 1998
and 1999, respectively; no shares
issued and outstanding pro forma.... -- 5,967,819 --
Common Stock, $.01 par value;
30,000,000 shares authorized;
3,750,247 and 5,224,257 shares issued
and outstanding as of December 31,
1998 and 1999, respectively,
15,577,455 shares issued and
outstanding pro forma................ 37,502 52,242 155,775
Additional paid-in capital (restated).. 6,389 3,529,452 15,344,637
Deferred compensation (restated)....... -- (3,165,430) (3,165,430)
Accumulated deficit.................... (4,542,823) (15,162,683) (15,162,683)
----------- ------------ -----------
Total stockholders' equity
(deficit)........................... 1,451,967 (2,827,701) (2,827,701)
----------- ------------ -----------
Total liabilities and stockholders'
equity (deficit).................... $ 7,434,971 $ 14,225,304 $14,225,304
=========== ============ ===========
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-3
<PAGE>

PARADIGM GENETICS, INC.

STATEMENTS OF OPERATIONS

For the
Period from
Inception
(September 9,
1997) to Year Ended December 31,
December 31, -------------------------
1997 1998 1999
------------- ----------- ------------
(restated)
<S> <C> <C> <C>
Revenues:
Collaborative research agreements.... $ -- $ 820,150 $ 2,052,113
Grant revenues....................... -- 50,409 144,862
--------- ----------- ------------
Total revenues...................... -- 870,559 2,196,975
--------- ----------- ------------
Operating expenses:
Research and development (excludes
$0, $0 and $87,365, respectively, of
stock based compensation)........... 71,534 3,641,033 7,527,866
Selling, general and administrative
(excludes $0, $6,371 and $112,147,
respectively, of stock based
compensation)....................... 148,663 1,523,365 4,713,675
Stock based compensation (restated).. -- 6,371 199,512
--------- ----------- ------------
Total operating expenses............ 220,197 5,170,769 12,441,053
--------- ----------- ------------
Loss from operations.................. (220,197) (4,300,210) (10,244,078)
--------- ----------- ------------
Interest income (expense), net:
Interest income...................... -- 139,494 246,896
Interest expense..................... (13) (128,797) (622,678)
--------- ----------- ------------
Interest income (expense), net....... (13) 10,697 (375,782)
--------- ----------- ------------

Net loss.............................. $(220,210) $(4,289,513) $(10,619,860)
========= =========== ============
Net loss per share--basic and
diluted.............................. $ (0.19) $ (1.14) $ (2.51)
========= =========== ============

Weighted average Common shares
outstanding--basic and diluted....... 1,160,958 3,750,036 4,236,409
========= =========== ============
Pro forma net loss per share--basic
and diluted.......................... $ (0.76)
============

Pro forma weighted average Common
shares outstanding-- basic and
diluted.............................. 14,046,759
============
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-4
<PAGE>

PARADIGM GENETICS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional
-------------------- -------------------- ----------------- Paid In Deferred Accumulated
Shares Amount Shares Amount Shares Amount Capital Compensation Deficit
--------- ---------- --------- ---------- --------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
inception
(September 9,
1997)........... -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of
Common Stock... -- -- -- -- 3,749,997 37,500 -- -- (33,100)
Net loss........ -- -- -- -- -- -- -- -- (220,210)
--------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at
December 31,
1997............ -- -- -- -- 3,749,997 37,500 -- -- (253,310)
Stock based
compensation... -- -- -- -- -- -- 6,371 -- --
Issuance of
Series A
Preferred
Stock.......... 7,125,000 5,600,899 -- -- -- -- -- -- --
Notes payable
converted to
Series A
Preferred
Stock.......... 437,500 350,000 -- -- -- -- -- -- --
Exercise of
stock options.. -- -- 250 2 18 -- --
Net loss........ -- -- -- -- -- -- -- -- (4,289,513)
--------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at
December 31,
1998............ 7,562,500 5,950,899 -- -- 3,750,247 37,502 6,389 -- (4,542,823)
Issuance of
Series B
Preferred
Stock.......... -- -- 2,790,698 5,967,819 -- -- -- -- --
Exercise of
stock options.. -- -- -- -- 1,474,010 14,740 158,121 -- --
Deferred
compensation
(restated) .... -- -- -- -- -- -- 3,364,942 (3,364,942) --
Amortization of
deferred
compensation
(restated)..... -- -- -- -- -- -- -- 199,512 --
Net loss........ -- -- -- -- -- -- -- -- (10,619,860)
--------- ---------- --------- ---------- --------- ------- ---------- ----------- ------------
Balance at
December 31,
1999............ 7,562,500 $5,950,899 2,790,698 $5,967,819 5,224,257 $52,242 $3,529,452 $(3,165,430) $(15,162,683)
========= ========== ========= ========== ========= ======= ========== =========== ============
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
--------------
<S> <C>
Balance at
inception
(September 9,
1997)........... $ --
Issuance of
Common Stock... 4,400
Net loss........ (220,210)
--------------
Balance at
December 31,
1997............ (215,810)
Stock based
compensation... 6,371
Issuance of
Series A
Preferred
Stock.......... 5,600,899
Notes payable
converted to
Series A
Preferred
Stock.......... 350,000
Exercise of
stock options.. 20
Net loss........ (4,289,513)
--------------
Balance at
December 31,
1998............ 1,451,967
Issuance of
Series B
Preferred
Stock.......... 5,967,819
Exercise of
stock options.. 172,861
Deferred
compensation
(restated) .... --
Amortization of
deferred
compensation
(restated)..... 199,512
Net loss........ (10,619,860)
--------------
Balance at
December 31,
1999............ $ (2,827,701)
==============
</TABLE>

The accompanying notes are an integral part of the financial statements

F-5
<PAGE>

PARADIGM GENETICS, INC.

STATEMENTS OF CASH FLOWS

For the
Period from
Inception
(September 9,
1997) to Year Ended December 31,
December 31, --------------------------
1997 1998 1999
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(220,210) $ (4,289,513) $(10,619,860)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Deferred revenue.................... -- 1,484,850 4,340,387
Depreciation and amortization....... 312 299,044 1,588,762
Stock based compensation............ -- 6,371 199,512
Changes in operating assets and
liabilities
Accounts receivable................ (500) (88,525) (167,819)
Prepaid expenses................... (41,570) (27,263) (1,126,512)
Accounts payable................... 29,017 290,404 1,008,002
Accrued liabilities................ -- 222,462 348,722
--------- ------------ ------------
Net cash used in operating
activities....................... (232,951) (2,102,170) (4,428,806)
--------- ------------ ------------

Cash flows from investing activities:
Purchase of property and equipment.. (3,741) (3,650,783) (6,583,134)
Purchase of investments............. -- (15,021,015) (26,214,499)
Maturities of investments........... -- 12,536,883 25,210,522
--------- ------------ ------------
Net cash used in investing
activities....................... (3,741) (6,134,915) (7,587,111)
--------- ------------ ------------

Cash flows from financing activities:
Borrowings under notes payable...... 250,000 3,682,506 5,765,761
Repayments of notes payable......... -- (39,525) (302,506)
Repayments of capital lease
obligations........................ -- (53,835) (90,364)
Proceeds from issuance of
convertible preferred stock, net... -- 5,600,899 5,967,819
Proceeds from issuance of Common
Stock.............................. 4,400 -- --
Proceeds from exercise of stock
options............................ -- 20 172,861
--------- ------------ ------------
Net cash provided by financing
activities....................... 254,400 9,190,065 11,513,571
--------- ------------ ------------
Net increase in cash and cash
equivalents......................... 17,708 952,980 (502,346)
Cash and cash equivalents, beginning
of period........................... -- 17,708 970,688
--------- ------------ ------------
Cash and cash equivalents, end of
period.............................. $ 17,708 $ 970,688 $ 468,342
========= ============ ============
</TABLE>

The accompanying notes are an integral part of the financial statements.

F-6
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS

1. The Company

Paradigm Genetics, Inc. (the "Company" or "Paradigm") was organized on
September 9, 1997 to discover the function of genes in plant and fungal
organisms. The Company is industrializing the process of determining gene
function by creating an assembly-line process to generate information that will
enable it to develop novel products in four major sectors of the global
economy: crop production, nutrition, human health and industrial products. The
Company has developed its GeneFunction Factory to simultaneously study the
functions of many genes in plants and fungi. The GeneFunction Factory is
designed to be an integrated, rapid, industrial-scale laboratory through which
it can discover and alter genes, understand the consequences of the
modifications and reliably determine the function of those genes. The Company
stores and annotates gene function information in its FunctionFinder
bioinformatics system. Paradigm generates revenues by licensing information
mined from the data in FunctionFinder for the development of products in crop
production, nutrition, human health and industrial applications. If the
Company's strategic partners commercialize products resulting from this
information, the Company is entitled to receive royalty payments based upon
product revenues.

2. Summary of Significant Accounting Policies

Unaudited Pro Forma Balance Sheet

The Board of Directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of Common Stock in an initial public offering ("IPO"). If the IPO
is consummated as presently anticipated, all shares of Series A and Series B
Preferred Stock will automatically convert into 10,353,198 shares of the
Company's Common Stock at a one-for-one conversion ratio. The unaudited pro
forma balance sheet reflects the subsequent conversion of the Series A and
Series B Preferred Shares into Common Stock as if such conversion had occurred
as of December 31, 1999.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.

Investments

The Company considers all investments in debt and equity securities
purchased with a maturity of between three months and one year from the balance
sheet date to be short-term investments. All investments are considered as
available for sale and are carried at fair value. Unrealized gains and losses
on investments are recognized as a component of other comprehensive income
(loss). At December 31, 1998 and 1999, the amortized costs of the Company's
investments approximated their fair value. Realized gains and losses on sales
of investments are determined using the specific identification method.
Realized gains and losses on sales of investments were not significant during
the period from inception (September 9, 1997) to December 31, 1997 or the years
ended December 31, 1998 and 1999.

F-7
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Property and Equipment

Property and equipment is primarily comprised of laboratory equipment,
computer equipment, furniture, and leasehold improvements which are recorded at
cost and depreciated using the straight-line method over their estimated useful
lives which range from one to seven years. Expenditures for maintenance and
repairs are charged to operations as incurred; major expenditures for renewals
and betterments are capitalized and depreciated. Property and equipment
acquired under capital leases are being depreciated over their estimated useful
lives or the respective lease term, if shorter.

Other Assets

Other assets includes deposits for building leases which will be returned
to the Company upon the expiration of related leases.

Capitalized Software Costs

The Company accounts for the costs of development of software applications
to be sold to or used by third parties in accordance with Statement of
Financial Accounting Standards No. 86 "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed." Software development costs
are required to be capitalized beginning when a product's technological
feasibility has been established and ending when a product is available for
general release.

Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, investments, accounts payable,
capital lease obligations and long-term debt, at December 31, 1998 and 1999
approximated their fair value due to the short term nature of these items.

Impairment of Long-Lived Assets

The Company evaluates the recoverability of its property and equipment and
other long-lived assets when circumstances indicate that an event of impairment
may have occurred in accordance with the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of'' ("SFAS No. 121"). SFAS No. 121 requires recognition of impairment
of long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets or the business to
which such assets relate. Impairment is measured based on the difference
between the carrying value of the related assets or businesses and the
discounted future cash flows of such assets or businesses. No impairment was
required to be recognized during the period from inception (September 9, 1997)
to December 31, 1997 or the years ended December 31, 1998 and 1999.

Income Taxes

The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the
temporary differences between financial reporting and tax bases of the
Company's assets and liabilities and for tax carryforwards at enacted statutory
rates in effect for the years in which the differences are expected to reverse.
The effect on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date. In addition, valuation
allowances are established where necessary to reduce deferred tax assets to the
amounts expected to be realized.

F-8
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Revenue Recognition

Revenues are derived from collaborative research agreements with strategic
partners and from government grants. Revenues related to fixed nonrefundable
payments are recognized under collaborative research agreements based on
progress to completion in accordance with the applicable performance
requirements of each collaboration agreement. The Company earns these revenues
as it meets the deliverable requirements in its collaborative research
agreements. Refundable fees received under collaborative research agreements
are initially deferred and recognized as revenues based on progress to
completion over the term of the collaborative research agreement beginning at
the date that the refund right expires, which is the date on which the related
performance requirements have been met. Nonrefundable fees received at the
initiation of a collaborative research agreement are deferred and recognized as
revenues on a progress to completion basis over the term of the collaboration
agreement with all other fixed nonrefundable payments received under the
collaborative research agreements. This is required as the Company has a future
performance obligation under these agreements which is met as the Company
delivers the results of its gene analysis to its collaborative partners.
Progress to completion under collaborative research agreements is measured
based on a comparison of the number of genes analyzed and delivered to the
total number of genes to be analyzed, on a contract by contract basis. The
Company does not segment its collaborative research agreements for purposes of
the calculation of revenues to be recognized as the Company does not meet the
criteria to allow segmentation specified in the relevant authoritative
accounting guidance. Milestone payments under collaborative agreements will be
recognized as revenue when the applicable milestone has been achieved and such
achievement has been acknowledged by the other party to the collaboration
agreement. Revenues from government grants are recognized as expenses are
incurred over the period of each grant. Cash received in excess of revenues
recognized under collaborative agreements and government grants is recorded as
deferred revenue. Payments received under the Company's collaborative research
agreements and government grants are generally non-refundable regardless of the
outcome of the future research and development activities to be performed by
the Company under these arrangements.

Research and Development

Research and development costs include expenses incurred by the Company to
develop its proprietary Gene Function Factory, perform required services under
collaborative research agreements and government grants and perform research
and development on internal projects. Research and development costs are
expensed as incurred.

Stock Based Compensation

The Company accounts for stock-based compensation based on the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25") which states that no compensation expense
is recorded for stock options or other stock-based awards to employees that are
granted with an exercise price equal to or above the estimated fair value of
the Company's Common Stock on the grant date. In the event that stock options
are granted with an exercise price below the estimated fair value of the
Company's Common Stock at the grant date, the difference between the fair value
of the Company's Common Stock and the exercise price is recorded as deferred
compensation. The Company recognized deferred compensation of $3,364,942
(restated) to reflect the difference between the aggregate fair market value
and exercise price of all options granted during 1999 with an exercise price
below the fair market value of the Company's Common Stock at the date of grant.
Deferred compensation is amortized to compensation expense over the vesting
period of the related stock option. The Company recognized $199,512 (restated)
in non-cash compensation expense related to amortization of deferred
compensation during the year ended December 31, 1999. The Company did not
recognize any non-cash compensation expense for the year ended December 31,
1998 or the period from inception (September 9, 1997) through December 31, 1997
related to stock options granted to employees as

F-9
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

no stock options were granted to employees with an exercise price below the
estimated fair value of the Company's Common Stock until 1999. The Company has
adopted the disclosure requirements of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") as it relates to stock
options granted to employees, which requires compensation expense to be
disclosed based on the fair value of the options granted at the date of grant.
Stock options or warrants granted to non-employees for services are accounted
for in accordance with SFAS 123, which requires that these options and warrants
be valued using the Black-Scholes model and the resulting charge is recognized
as the related services are performed.

Cash Flow

The Company made cash payments for interest of $13, $128,797, and $622,678
for the period from inception (September 9, 1997) to December 31, 1997 and the
years ended December 31, 1998 and 1999, respectively.

The Company acquired property and equipment through the assumption of
capital lease obligations amounting to $467,125 for the year ended December 31,
1998.

Concentration of Credit Risk

Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of temporary cash and short-
term investments and trade receivables. The Company primarily places its
temporary cash and short-term investments with high-credit quality financial
institutions which invest primarily in U.S. Government securities, commercial
paper of prime quality and certificates of deposit guaranteed by banks which
are members of the FDIC. Cash deposits are all in financial institutions in the
United States. The Company performs ongoing credit evaluations to reduce credit
risk and requires no collateral from its customers. Management estimates the
allowance for uncollectible accounts based on their historical experience and
credit evaluation.

The Company has one strategic partner which accounted for 100% of the
Company's collaborative research revenues and 94% and 93% of total revenues for
the years ended December 31, 1998 and 1999, respectively (see Note 8).

Comprehensive Income (Loss)

Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display comprehensive income and its
components in the financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources. The
Company had no items of other comprehensive income during the period from
inception (September 9, 1997) to December 31, 1997 or during the years ended
December 31, 1998 and 1999.

Net Income (Loss) Per Common Share

Historical

The Company computes net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS 128") and SEC Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the
provisions of SFAS 128 and SAB No. 98, basic net income (loss) per Common share
("Basic EPS") is computed by dividing net income (loss) by the weighted average
number of Common shares outstanding. Diluted net income (loss) per Common share
("Diluted EPS") is computed by dividing net income (loss) by the weighted
average number of Common shares and dilutive potential Common shares
equivalents then outstanding. Potential Common shares consist of shares
issuable

F-10
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

upon the exercise of stock options and warrants and shares issuable upon the
conversion of outstanding convertible Preferred Stock. The calculation of the
net loss per share for the years ended December 31, 1998 and 1999 does not
include zero and 8,487,520 potential shares of Common Stock equivalents,
respectively, as their impact would be antidilutive.

Pro Forma (Unaudited)

Pro forma net income (loss) per common share is calculated assuming the
conversion of all convertible Preferred Stock which will convert automatically
upon the effectiveness of the Company's initial public offering into 10,353,198
shares of Common Stock (see Note 9) at January 1, 1999 or the date of issuance,
if later.

Segment Reporting

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement requires companies to report information about
operating segments in interim and annual financial statements. It also requires
segment disclosures about products and services, geographic areas and major
customers. The Company adopted SFAS 131 effective for its year ended December
31, 1998. The Company has determined that it operates in only one segment as of
December 31, 1998 and 1999.

Internal Use Software

In March 1998, the Accounting Standards Executive Committee of the
American Institute of Public Accountants ("AICPA"), issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP No. 98-1"), which provides guidance regarding
when software developed or obtained for internal use should be capitalized. The
Company adopted SOP No. 98-1 effective January 1, 1999. The Company accounts
for the development of software for internal uses in accordance with SOP No.
98-1. The adoption of SOP No. 98-1 did not have a material impact on the
Company's financial position or results of operations as the predominant
portion of the software applications used by the Company were purchased from
third parties. The Company expenses the cost of accumulating and preparing data
for use in its database applications as such costs are incurred.

Recent Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as "derivatives"), and for hedging
activities. SFAS 133, as amended by SFAS 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000, with earlier
application encouraged. The Company does not currently, nor does it intend in
the future, to use derivative instruments and therefore does not expect that
the adoption of SFAS 133 will have any impact on its financial position or the
results of operations.

F-11
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

3. Property and Equipment

Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Buildings.............................................. $ -- $ 408,079
Leasehold improvements................................. 240,923 2,700,467
Furniture and laboratory equipment..................... 1,974,561 4,513,141
Computer equipment..................................... 1,906,165 3,083,096
---------- -----------
Total costs.......................................... 4,121,649 10,704,783
Less accumulated depreciation.......................... (299,356) (1,888,118)
---------- -----------
Property and equipment, net.......................... $3,822,293 $ 8,816,665
========== ===========
</TABLE>

Depreciation and amortization expense for the years ended December 31,
1998 and 1999 was $299,044 and $1,588,762, respectively.

The Company leases certain equipment under capital lease agreements. The
cost of equipment under capital leases at December 31, 1998 and 1999 was
$467,125. The accumulated amortization for equipment under capital leases was
$116,701 at December 31, 1999.

4. Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts payable and
accounts receivable at December 31, 1998 and 1999 approximated their fair value
due to the short-term nature of these items.

The fair value of the Company's short-term investments at December 31,
1998 and 1999 was determined based on quoted financial market prices and
approximated their carrying values as these investments were primarily in
short-term corporate obligations.

The historical carrying value of the Company's capital lease obligations
and long-term debt approximated their fair value because the interest rates on
these obligations approximate rates currently available to the Company.

5. Accrued Liabilities

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
Payroll...................................................... $109,024 $539,184
Taxes other than income...................................... 50,000 --
Other........................................................ 63,438 32,000
-------- --------
$222,462 $571,184
======== ========
</TABLE>

6. Income Taxes

No provision for federal or state income taxes has been recorded as the
Company has incurred net operating losses since inception.

F-12
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 and 1999 consist of the following:

<TABLE>
<CAPTION>
1998 1999
Deferred tax assets: ----------- -----------
<S> <C> <C>
Domestic net operating loss carryforwards........... $ 1,265,198 $ 3,778,046
Deferred revenue.................................... 575,899 2,259,318
Stock based compensation............................ -- 79,852
Compensation accruals............................... 25,594 60,004
Other .............................................. 19,393 2,795
----------- -----------
Total deferred tax assets........................... 1,886,084 6,180,015
Valuation allowance for deferred tax assets......... (1,733,030) (5,831,327)
----------- -----------
Deferred tax assets, net ........................... 153,054 348,688
----------- -----------
Deferred tax liabilities:
Property and equipment.............................. 153,054 348,688
----------- -----------
Total deferred tax liabilities...................... 153,054 348,688
=========== ===========
Net deferred tax asset (liability).................. $ -- $ --
=========== ===========
</TABLE>

At December 31, 1998 and 1999, the Company provided a full valuation
allowance against its net deferred tax assets since it could not be determined
that it was more likely than not that the Company would realize these deferred
tax assets. The increase in the valuation allowance in 1999 resulted primarily
from the additional net operating loss carryforward generated.

As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of $9,741,000. These net operating loss carryforwards begin
to expire in 2012. The utilization of the federal net operating loss
carryforwards is subject to an annual limitation of $1,569,000 under the rules
regarding a change in stock ownership as determined by the Internal Revenue
Code due to changes in ownership resulting from the Company's preferred stock
financings.

Taxes computed at the statutory federal income tax rate of 34% are
reconciled to the provision for income taxes as follows:

<TABLE>
<CAPTION>
1997 1998 1999
-------- ----------- -----------
<S> <C> <C> <C>
Effective Rate............................ 0% 0% 0%
-------- ----------- -----------
United States federal tax at statutory
rate..................................... $(74,871) $(1,458,434) $(3,610,752)
State taxes (net of federal benefit)...... (8,902) (203,635) (505,617)
Change in valuation allowance............. 82,460 1,650,571 4,098,297
Other nondeductible expenses.............. 1,313 11,498 18,072
-------- ----------- -----------
Provision for income taxes................ $ -- $ -- $ --
-------- ----------- -----------
</TABLE>

7. Long Term Debt

The Company's long term debt at December 31, 1998 and 1999 consists of the
following:

<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Senior note payable................................... $ -- $ 2,000,000
Notes payable for equipment financing................. 3,542,981 7,006,236
----------- -----------
Total Notes payable................................. 3,542,981 9,006,236
Less current maturities............................... (327,244) (1,182,456)
----------- -----------
Long-term portion................................... $ 3,215,737 $ 7,823,780
=========== ===========
</TABLE>

F-13
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In February 1998, a bridge loan in the amount of $250,000 was converted
into 312,500 shares of the Company's Series A Preferred Stock at a conversion
price of $0.80 per share in conjunction with the closing of the Company's
initial round of financing (See Note 9).

The equipment financing consists of several notes payable to two financial
institutions for the financing of equipment purchases made in 1998 and 1999.
The payment amount is specified in each note agreement and is approximately 1%
of the outstanding balance for the first twelve months and then increases to 3%
of the outstanding balance for the remaining 36 months. A balloon payment of
the remaining balance on the notes is due at the maturity date of the
respective notes. The stated interest rate ranges from 11.3% to 14.2%. The
notes are collateralized by the equipment pledged against these proceeds by the
Company.

Subsequent to December 31, 1999, the Company entered into an additional
equipment financing loan agreement for $3.5 million with an additional $3.5
million available upon completion of an initial public offering. The loan term
will commence upon delivery of equipment with a monthly payment equal to 2.519%
of original principal for a period of 48 months. No additional borrowings will
be available under this loan agreement after January 31, 2001.

During July 1999, the Company entered into a $2 million senior debt
agreement with a financial institution. The note has interest-only payments
until March 1, 2002, followed by six equal principal and interest payments. The
loan is collateralized by the Company's equipment, intellectual property and
receivables. In connection with the debt, Paradigm issued the financial
institution 116,279 warrants to purchase the Company's Common Stock at an
exercise price of $2.15. The Company did not record any debt discount related
to these warrants as their fair value as determined by the Black-Scholes
valuation method was deminimis. This loan agreement prohibits the payment of
any cash dividends until we have fully repaid this loan.

Annual maturities of the long-term debt for the years subsequent to
December 31, 1999 are as follows:

<TABLE>
<S> <C>
2000............................................................ $1,182,456
2001............................................................ 2,081,292
2002............................................................ 4,278,615
2003............................................................ 1,273,607
2004............................................................ 190,266
----------
Total....................................................... $9,006,236
==========
</TABLE>

8. Collaborative Agreements

In September 1998, Paradigm entered into a collaborative research
agreement with Bayer in which the Company is developing assays for the
development of new herbicides. If the collaborative agreement continues for the
full initial research term, the Company will receive a minimum of $14.7 million
in quarterly and up front payments during the three-year period from September
1998 through October 2001. If the agreement is extended and the Company meets
all of its milestones, the Company will receive up to a maximum of an
additional $25.1 million. The Company has recognized $2.9 million in cumulative
revenues from the collaboration agreement through December 31, 1999.

In addition, the Company is entitled to receive a royalty of the annual
net sales of herbicides developed by Bayer for a defined period of time.

F-14
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In November 1999, Paradigm entered into a collaborative agreement with
another strategic partner for the development of crop products and nutrition
products. If the collaborative agreement continues for the full research term,
the Company will receive $41.5 million in quarterly and up front payments
during the six-year period from November 1999 through January 2006. The
strategic partner has options to extend the agreement. If the agreement is
extended and all the required milestones are met, the Company will also receive
up to an additional $107.5 million.

9. Stockholders' Equity (Deficit)

In September 1997, the Company issued 4,400 shares of Common Stock to the
founders of the Company for gross proceeds of $4,400. On February 12, 1998, the
Company issued a Common Stock dividend of 851.2727 shares for each issued and
outstanding share of Common Stock which increased the number of shares of
outstanding Common Stock to 3,749,997. All share amounts in the accompanying
financial statements for all periods presented prior to the date of this
dividend have been retroactively adjusted to reflect this dividend.

During 1998, the Company's Articles of Incorporation were amended and
restated to authorize 20,000,000 shares of Common Stock with a par value of
$0.01 per share and 10,000,000 shares of Preferred Stock with a par value of
$0.01 per share, of which 9,275,000 shares were designated as Series A
Preferred Stock. The remaining 725,000 shares were undesignated.

In March 1999, the Company's Articles of Incorporation were amended and
restated to increase the number of authorized shares of Preferred Stock to
15,000,000, of which 8,000,000 shares were designated Series A Preferred Stock,
of which 7,562,500 shares were issued and outstanding at December 31, 1998 and
1999, and 2,790,698 shares were designated Series B Preferred Stock, of which
all were issued and outstanding as of December 31, 1999. The remaining
4,209,302 shares were undesignated. Also, in March 1999 the number of
authorized shares of Common Stock was increased to 30,000,000 shares, of which
3,750,247 and 5,224,257 shares were issued and outstanding at December 31, 1998
and 1999, respectively.

The Company is required at all times to reserve a number of shares of
unissued Common Stock for the purpose of effecting the conversion of the issued
and outstanding shares of the Series A and Series B Preferred Stock and the
exercise of all outstanding warrants and options to purchase the Company's
Common Stock. At December 31, 1999, the Company had 17,755,020 shares of Common
Stock reserved for this purpose.

In February 1998, the Company sold a total of 4,625,000 shares of Series A
Preferred Stock in a private placement transaction in exchange for gross
proceeds of $3,700,000 or $0.80 per share and issued 375,000 shares of Series A
Preferred Stock in exchange for the cancellation of notes payable of $300,000.
The notes payable were issued in the last quarter of 1997 and in January 1998.
Two of the purchasers of the Series A Preferred Stock each received 187,500
warrants for the purchase of Series A Preferred Stock with an exercise price of
$0.80 per share. Also, in consideration for being a lead investor, the Company
issued an additional 62,500 warrants in total to one of the two purchasers with
an exercise price of $0.80 per share. The Company did not record any additional
paid-in capital related to the value of these warrants, because the fair market
value of the warrants, as calculated using the Black-Scholes pricing model, was
de minimis.

In March 1998, 62,500 shares of Series A Preferred Stock were issued to an
investor for the cancellation of convertible debt of $50,000, which borrowing
was made in January 1998.

In May 1998, 2,500,000 shares of Series A Preferred Stock were sold to the
same group of purchasers in a second private placement transaction for gross
proceeds of $2,000,000 or $0.80 per share.

F-15
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In March 1999, the Company sold 2,790,698 shares of Series B Preferred
Shares in a private placement transaction in exchange for gross proceeds of $
6,000,000 or $2.15 per share. The purchasers of the Series B Preferred Shares
were primarily the same as the holders of the Series A Preferred Stock. All of
the Series B Preferred Shares were issued at a price of $2.15. The rights and
preferences of the Series B Preferred Stock are essentially the same as the
Series A Preferred Stock with certain exceptions which are detailed below.

Rights, Preferences and Terms of Capital Stock

The following is a summary of the rights, preferences, and terms of the
Company's outstanding series of Common and Preferred Stock.

Dividends

The holders of the Series A and Series B Preferred Stock shall be entitled
to receive in any fiscal year of the Company, when and if declared by the Board
of Directors, dividends payable in cash in an amount per share of Series A and
Series B Preferred Stock for such fiscal year at least equal to the product of
(a) the per share amount multiplied by (b) the number of whole shares of Common
Stock into which each such share of Series A and B Preferred Stock is
convertible immediately after the close of business on the record date fixed
for such dividend. No dividend shall be paid on Series A Preferred Stock unless
an equivalent dividend can be paid on the Series B Preferred Stock. The right
to such dividends shall not be cumulative, and no right shall accrue. Nor shall
any undeclared or unpaid dividend bear or accrue interest.

Liquidity

In the event of any liquidation, the holders of Series B Preferred Stock
shall be entitled to receive prior and in preference to any distribution of any
of the assets or surplus funds of the Company to the holders of Series A
Preferred Stock and Common Stock an amount equal to $2.15 per share plus all
accrued or declared but unpaid dividends. The holders of Series A Preferred
Stock shall be entitled to receive, prior and in preference to any distribution
of any of the assets or surplus funds of the Company to holders of Common Stock
and any series of Preferred Stock the terms of which specifically provide that
such series ranks junior and subordinate to the Series A Preferred Stock with
respect to distribution of assets upon any liquidation or deemed liquidation,
an amount equal to $0.80 per share, adjusted for any stock splits or dividends,
plus all accrued but unpaid dividends. After payment to the holders of the
Series A Preferred Stock, the entire remaining assets and funds of the Company
legally available for distribution shall be distributed among the holders of
the Common Stock in proportion to the shares of Common Stock then held by the
holders of the Common Stock.

Voting

Series A Preferred Stock and Series B Preferred Stock shall be voted
equally with shares of Common Stock at any annual or special meeting of
stockholders of the Company. As long as twenty percent of each series of
Preferred shares originally issued remain outstanding, the affirmative vote or
written consent of the holders of at least two-thirds of the outstanding shares
shall be required to approve all matters brought before the stockholders for
approval.

Conversion

Each share of Series A or Series B Preferred Stock shall be convertible,
at the option of the holder, into shares of the Company's Common Stock. The
initial conversion price per share of Series A Preferred Stock shall be $0.80.
The initial conversion price and value for the Series B Preferred Shares is
$2.15. Each share of Series A and Series B Preferred Stock shall automatically
be converted into a share of Common

F-16
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Stock at the then-effective conversion rate, immediately upon the closing of
the sale of the Company's Common Stock in a firm commitment, underwritten
public offering, at a public offering price equal to or exceeding $6.00 per
share of Common Stock and with aggregate gross proceeds to the Company and any
selling stockholders which equal or exceed $20,000,000.

10. Stock Options and Warrants

In February 1998, the Company adopted the 1998 Stock Option Plan ("the
Plan") which provided for the grant of up to 1,765,000 employee stock options.
In March 1999, the Plan was amended to provide for the grant of up to 2,515,000
employee stock options. The board amended the Plan in November 1999 to increase
the options available for grant to 3,715,000. In December 1999, the board
authorized an additional 300,000 options for the Plan. Stock options granted
under the Plan are to have exercise periods not to exceed ten years. Options
granted under the Plan generally vest over a period of four years from the date
of grant. Option grants to new employees are generally made within 90 days of
commencement of service with the Company and vest over a period of four years
retroactively from the date of hire. The Plan provides the right to exercise
options before they are vested into shares of Common Stock subject to a
repurchase right by the Company.

A summary of the status of the Plan as of December 31, 1999 and changes
during the years ended December 31, 1998 and 1999 presented below:

<TABLE>
<CAPTION>
Shares Underlying Weighted Average
Options Exercise Price
----------------- ----------------
<S> <C> <C>
Outstanding at December 31, 1997............. -- $ --
Granted.................................... 1,683,050 0.08
Forfeited.................................. (2,000) 0.08
Exercised.................................. (250) 0.08
---------- -----
Outstanding at December 31, 1998............. 1,680,800 0.08
Granted.................................... 1,362,819 0.33
Forfeited.................................. (95,823) 0.08
Exercised.................................. (1,474,010) 0.12
---------- -----
Outstanding at December 31, 1999............. 1,473,786 $0.28
========== =====
</TABLE>

As of December 31, 1999, the Company had 831,340 shares of Common Stock
outstanding which were subject to the Company's lapsing right of repurchase in
the event the holder's association with the Company terminates. These shares
are the result of the exercise of unvested stock options by employees. The
shares which relate to the exercise of unvested stock options generally vest
over the four year vesting period of the underlying exercised stock options.

There were no options granted during the period from inception (September
9, 1997) to December 31, 1997. All options granted during the year ended
December 31, 1998 were granted with an exercise price equal to the fair value
of the underlying Common Stock on the grant date, as determined by the board of
directors.

During 1999, the Company issued stock options to certain employees with
exercise prices below the deemed fair value of its Common Stock at the date of
grant. In accordance with the requirements of APB 25, the Company has recorded
deferred compensation and additional paid-in capital for the difference between
the exercise price of the stock options and the estimated fair value of the
Company's Common Stock at the date of grant. This deferred compensation is
amortized to stock based compensation expense

F-17
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

over the period during which the options or restricted Common Stock, subject to
repurchase, vest using the straight line method over a period which is
generally four years. The Company recognized $3,364,942 (restated) in deferred
compensation related to 1999 option grants of which $199,512 (restated) was
amortized to expense during the year ended December 31, 1999.

The following is an analysis of stock options granted to employees
subsequent to December 31, 1999 (unaudited):

<TABLE>
<CAPTION>
Options Exercise
Date of Grant Granted Price
------------- ------- --------
<S> <C> <C>
January 17, 2000 57,052 $2.50
January 20, 2000 63,902 4.50
February 8, 2000 148,000 5.00
February 16, 2000 4,439 10.00
February 28, 2000 8,310 10.00
February 28, 2000 6,000 0.08
March 21, 2000 90 0.60
March 21, 2000 500 2.50
March 21, 2000 5,970 10.00
March 21, 2000 150,000 7.00
April 11, 2000 14,261 7.00
</TABLE>

The Company will record deferred compensation related to these option
grants in an amount of approximately $1,750,000, which represents the
difference between the estimated fair value of the Company's Common Stock and
the exercise price of these options at the respective dates of grant. In
addition, in February 2000 the Company granted 12,000 options with an exercise
price of $5.00 per share to members of its Scientific Advisory Board. The
Company will record a charge of $72,000 at the date of the grant which
represents the fair value of these options determined through use of the Black-
Scholes model.

The following table summarizes information about the Company's stock
options at December 31, 1999:

<TABLE>
<CAPTION>
Options Outstanding
----------------------------------------------------
Weighted Average Weighted Average
Range of Exercise Prices Number Outstanding Contracted Life Exercise Price
- ------------------------ ------------------ ---------------- ----------------
<S> <C> <C> <C>
$ 0.08 533,817 8.6 $0.08
$ 0.22 581,149 9.5 $0.22
$ 0.60 306,320 10.0 $0.60
$ 1.00 52,500 10.0 $1.00
</TABLE>

At December 31, 1999, the Company had 437,500 warrants outstanding to
purchase the Company's Common Stock at a price of $0.80 which expire in
February 2008. The warrants were issued in connection with the Series A
Preferred Stock financing.

In July 1999, the Company entered into a senior debt agreement. In
connection with the agreement the Company issued 116,279 warrants to purchase
the Company's Common Stock with an exercise price of $2.15 which will expire in
July 2009. Also in July 1999, the Company entered into an operating lease
agreement for a new facility being constructed. In connection with the
agreement, the Company issued 150,000 warrants to purchase the Company's Common
Stock with an exercise price of $3.00 per share which will expire in July 2009.
The fair value of these warrants as determined using the Black-Scholes model in
accordance with SFAS 123 was de minimis.

F-18
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The activity for stock warrants is presented in the following table:

<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1998 1999
--------------------------- ---------------------------
Shares Weighted Average Shares Weighted Average
Underlying Exercise Price Underlying Exercise Price
Warrants Per Share Warrants Per Share
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ -- $ -- 437,500 $0.80
Issued.................. 437,500 0.80 266,279 2.63
Outstanding at end of
year................... 437,500 0.80 703,779 1.49
Exercisable at end of
year................... 437,500 0.80 703,779 1.49
</TABLE>

Subsequent to December 31, 1999, and in connection with an expansion of
the July 1999 operating lease agreement for a new facility, the Company issued
an additional 60,000 warrants to purchase the Company's Common Stock with an
exercise price of $5.00 per share. These warrants have an exercise period of 10
years. The fair value of these warrants at the date of grant was determined
using the Black-Scholes option-pricing model to be $361,000. This amount will
be deferred and recognized as an increase to rent expense over the life of the
related lease.

The Company continues to apply APB No. 25 and related interpretations in
accounting for the Plan. Had compensation costs for the Plan been determined
based on the fair value at the grant date for awards under the Plan consistent
with the methods of SFAS No. 123, the Company's net loss for the years ended
December 31, 1998 and 1999 would have been increased to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
Net Loss Pro Forma
Per Share As Net Loss
As Reported Pro Forma Reported Per Share
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
1998 net loss................ $ (4,289,513) $ (4,293,951) $(1.14) $(1.15)
============ ============ ====== ======
1999 net loss................ $(10,619,860) $(11,288,414) $(2.51) $(2.66)
============ ============ ====== ======
</TABLE>

The per share weighted average fair value of stock options granted during
fiscal 1998 and 1999 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions for 1998
and 1999: expected dividend yield of 0%; risk free interest rate of 6.0% in
1998 and 6.1% in 1999; an expected option life of approximately five years; and
a volatility factor of 0%.

F-19
<PAGE>

PARADIGM GENETICS, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

11. Commitments

The Company leases software under a noncancellable capital lease and
leases office space and certain equipment under operating leases. Future
minimum lease payments required under the leases at December 31, 1999 are as
follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
2000.................................................. $ 128,560 $1,006,731
2001.................................................. 128,560 1,403,288
2002.................................................. 117,847 1,250,641
2003.................................................. 1,175,782
Thereafter............................................ 1,229,520
--------- ----------
Total minimum lease payments........................ 374,967 $6,065,962
==========
Less: amount representing interest.................... (52,042)
---------
Present value of net minimum lease payments......... 322,925
Less: current portion................................. (100,075)
---------
Long-term portion capital lease obligations......... $ 222,850
=========
</TABLE>

Rent expense under operating leases totaled $ 5,788, $282,206 and $604,418
for the period from inception (September 9, 1997) through December 31, 1997 and
the years ended December 31, 1998 and 1999, respectively.

In March 1998, the Company entered into an agreement with a consultant to
identify collaboration opportunities for the Company. The consultant will
receive a monthly fee for its services plus a success fee based on the amount
of funding received by the Company under collaboration agreements entered into
during the term of this consulting agreement.

Based on the amount of funds received by the Company from its
collaboration agreements through December 31, 1999, the Company has paid this
consultant success fees of approximately $296,000. If the Company receives the
maximum amount of funding under its existing collaboration agreements,
approximately an additional $1,900,000 in success fees will be required to be
paid to this consultant.

12. Deferred Compensation Adjustment

In the process of finalizing its Registration Statement on Form S-1, the
Company was required to restate its financial statements for the year ended
December 31, 1999, to record an additional $1,019,942 in deferred compensation
and an additional $133,300 in stock based compensation expense. An analysis of
the impact of these adjustments on the Company's 1999 financial statements are
as follows:

<TABLE>
<CAPTION>
Amount Amount After
Previously Recorded Restatement
------------------- ------------
<S> <C> <C>
Deferred compensation......................... $ 2,345,000 $ 3,369,942
Additional paid in capital.................... 2,509,510 3,529,452
Stock based compensation expense.............. 66,212 199,512
Net loss...................................... (10,486,560) (10,619,860)
Net loss per share............................ (2.48) (2.51)
Pro forma net loss per share.................. (0.75) (0.76)
</TABLE>

F-20
<PAGE>

13. Subsequent Events (unaudited)

In January 2000, the Company sold 3,000,000 shares of Series C Preferred
Stock to a group of investors for gross proceeds of $15,000,000 or $5.00 per
share. The Series C Preferred Stock automatically converts into shares of the
Company's Common Stock upon the effectiveness of a qualified initial public
offering at a one-to-one conversion ratio. The Company will record a beneficial
conversion feature charge of $12,000,000 to reflect the difference between the
estimated fair value of the Company's Series C Preferred Stock of $9.00 per
share and the $5.00 per share sales price of these shares.

On April 7, 2000, upon the consummation of the Company's reincorporation
as a Delaware corporation, the number of authorized shares of the Company's
Common Stock increased to 50,000,000 shares and an additional 5,000,000 shares
of Preferred Stock were authorized.

As part of the Company's initial public offering of the Common Stock, the
Company and its underwriters have determined to make available up to 500,000
shares at the initial public offering price for directors, employees, business
associates and related persons associated with the Company (the "directed share
program"). On February 28 and March 13, 2000, prior to effectiveness of the
Company's registration statement, the Company sent e-mail messages with respect
to the proposed directed share program to all of the Company's employees
setting forth procedural aspects for participating in the directed share
program and informing them about the administration of the program and that
their friends and families might have an opportunity to participate in the
proposed program. The Company did not deliver a preliminary prospectus prior to
distribution of the e-mails, and each e-mail may have constituted a non-
conforming prospectus under the Securities Act of 1933. As a result, the
Company may have a contingent liability under the Securities Act of 1933. Any
liability would depend upon the number of shares of our common stock purchased
by the recipients of the e-mails. The recipients of the e-mails who purchase
shares of our common stock in the initial public offering may have a right for
a period of one year from the date of the purchase to obtain recovery of the
consideration paid in connection with their purchase of shares of common stock
or, if they had already sold the stock, file a claim against the Company for
damages resulting from their purchase of the common shares. If any liability is
asserted with respect to the e-mails, the Company will vigorously contest the
matter. However, if all of the purchasers in the directed share program who
received the e-mails are awarded damages after an entire or substantial loss of
their investment, the damages could total up to approximately $2.1 million plus
interest based on the initial public offering price of $7.00 per share and
based on the Company's intention to allocate up to 300,000 of the potential
500,000 shares to such persons. Although the Company does not intend to
allocate more than 300,000 shares to employees who received the e-mails, or
their friends and families, if a violation of the Securities Act were deemed to
apply to the entire allocation of 500,000 shares in the directed share program,
the damages could total up to approximately $3.5 million plus interest based on
the initial public offering price of $7.00 per share. Although there can be no
assurance as to the ultimate disposition of this matter, it is the opinion of
the Company's management, based upon the information available at this time,
that the expected outcome of this matter would not have a material adverse
effect on the results of operations or on the financial condition of the
Company.

F-21
<PAGE>

[inside back cover]

[Graphic: pictures representing our four target market
sectors: crop production, nutrition, human health and
industrial products. Text above the pictures states: "We
have created an assembly-line process to determine gene
function and generate information that we believe will
enable us to develop novel products in four major sectors
of the global economy: crop production, nutrition, human
health, and industrial products.]
<PAGE>

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6,000,000 Shares

[LOGO OF PARADIGM]

Common Stock

----------------
PROSPECTUS

----------------

Chase H&Q

J.P. Morgan & Co.

Pacific Growth Equities, Inc.

Stephens Inc.

-------------
May 5, 2000

-------------

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This prospectus is not an offer to sell or a
solicitation of an offer to buy our common stock in any jurisdiction where it
is unlawful. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.

Until May 30, 2000 (or 25 days after the date of this prospectus) all
dealers that buy, sell or trade Paradigm's common stock, whether or not
participating in this offering may be required to deliver a prospectus. The
delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when serving as underwriters and with respect to their unsold
allotment or subscriptions.

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