**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**Form 10-Q**

 
| **(Mark  One)** | ** ** | ** **                                                                                             |
|-----------------|------------|--------------------------------------------------------------------------------------------------------|
| **ý**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2005**

** **

**OR**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**FOR THE TRANSITION PERIODFROM               TO**

 

**Commission File Number 0-24320**

 

**TAPESTRYPHARMACEUTICALS, INC.**

(Exactname of Registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **84-1187753**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

**4840 Pearl East Circle, Suite 300WBoulder, Colorado 80301**(Address of principal executive office, including zip code)

 

**(303) 516-8500**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of theAct). Yes ý  No o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Act). Yes o  No ý

 

As of October 27, 2005, the registrant had34,238,995 shares of common stock, $0.0075 par value, outstanding.

 

 

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**Tapestry Pharmaceuticals, Inc. and Subsidiaries**

**Table of Contents**

 
| **Part I**  | **Financial Information** |                                                                                        |
|------------------|---------------------------|---------------------------------------------------------------------------------------------|
| ** **       | ** **                |                                                                                        |
|             | Item 1                    | Financial Statements                                                                        |   |
|             |                      |                                                                                        |   |
|             | Item 2                    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
|             |                      |                                                                                        |   |
|             | Item 3                    | Quantitative and Qualitative  Disclosures about Market Risk                                 |   |
|             |                      |                                                                                        |   |
|             | Item 4                    | Controls and Procedures                                                                     |   |
|             |                      |                                                                                        |   |
| **Part II** | **Other Information**     |                                                                                        |
| ** **       | ** **                |                                                                                        |
|             | Item 1                    | Legal Proceedings                                                                           |   |
|             |                      |                                                                                        |   |
|             | Item 2                    | Unregistered Sales of Equity  Securities and Use of Proceeds                                |   |
|             |                      |                                                                                        |   |
|             | Item 3                    | Defaults upon Senior  Securities                                                            |   |
|             |                      |                                                                                        |   |
|             | Item 4                    | Submission of Matters to a  Vote of Security Holders                                        |   |
|             |                      |                                                                                        |   |
|             | Item 5                    | Other Information                                                                           |   |
|             |                      |                                                                                        |   |
|             | Item 6                    | Exhibits                                                                                    |   |
|             |                      |                                                                                        |   |
| **Signatures**   |                      |

 

2

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**Part I**

**FINANCIAL INFORMATION**

** **

**Item 1.  FinancialStatements**

 

**Tapestry Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Condensed Balance Sheets**

**(In thousands, except share data)**

 
| ** **                                                                                                                                                                              | ** ** | **September 28,  2005** | ** ** | **December 29,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                                                                                              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                         |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                               |       | $                            | 1,047      |                        | $          | 1,713 |   |
| Short-term investments                                                                                                                                                                  |       | 16,522                       |       | 29,378                      |       |
| Prepaid expense and other current assets                                                                                                                                                |       | 559                          |       | 538                         |       |
| Assets held for sale                                                                                                                                                                    |       | —                       |       | 112                         |       |
| Total current assets                                                                                                                                                                    |       | 18,128                       |       | 31,741                      |       |
|                                                                                                                                                                                    |       |                         |       |                        |       |
| Property, plant and  equipment, net                                                                                                                                                     |       | 689                          |       | 676                         |       |
| Long-term investments                                                                                                                                                                   |       | —                       |       | 4,631                       |       |
| Investment in ChromaDex, Inc.                                                                                                                                                      |       | 451                          |       | 1,414                       |       |
| Other assets                                                                                                                                                                            |       | 682                          |       | 831                         |       |
| Total assets                                                                                                                                                                            |       | $                            | 19,950     |                        | $          | 39,293 |   |
|                                                                                                                                                                                    |       |                         |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                    |       |                         |       |                        |       |
| Accounts payable and accrued liabilities                                                                                                                                                |       | $                            | 1,701      |                        | $          | 3,119 |   |
| Accrued payroll and payroll taxes                                                                                                                                                       |       | 1,164                        |       | 2,017                       |       |
| Notes payable — current portion, net                                                                                                                                               |       | 640                          |       | 3,132                       |       |
| Total current liabilities                                                                                                                                                               |       | 3,505                        |       | 8,268                       |       |
|                                                                                                                                                                                    |       |                         |       |                        |       |
| Notes payable — long term,  net                                                                                                                                                    |       | 2,703                        |       | 3,245                       |       |
|                                                                                                                                                                                    |       |                         |       |                        |       |
| Commitments and  contingencies                                                                                                                                                          |       |                         |       |                        |       |
|                                                                                                                                                                                    |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                              |       |                         |       |                        |       |
| Preferred stock, $.001 par value; 2,000,000 shares authorized; none  issued                                                                                                             |       | —                       |       | —                      |       |
| Common stock, $.0075 par value; 100,000,000 shares authorized;  34,238,995 and 33,435,401 shares issued and outstanding at September 28, 2005  and December 29, 2004, respectively |       | 257                          |       | 251                         |       |
| Additional paid-in capital                                                                                                                                                              |       | 117,838                      |       | 117,354                     |       |
| Accumulated deficit                                                                                                                                                                     |       | (104,243                     | )          | (89,724                     | )          |
| Accumulated other comprehensive loss                                                                                                                                                    |       | (110                         | )          | (101                        | )          |
| Total stockholders’ equity                                                                                                                                                         |       | 13,742                       |       | 27,780                      |       |
| Total liabilities and  stockholders’ equity                                                                                                                                        |       | $                            | 19,950     |                        | $          | 39,293 |   |
|                                                                                                                                                                                         |            |                              |            |                             |            |  |  |  |  |

 

Seeaccompanying notes to Consolidated Condensed Financial Statements.

 

3

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**Tapestry Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Condensed Statements of Operations**

**(In thousands, except share data)**

**(Unaudited)**

 
| ** **                                                    | ** ** | **Quarter Ended**            | ** ** | **Nine Months Ended**        | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** |
| Operating expenses:                                           |       |                         |       |                         |       |   |   |   |   |
| Research and development                                      |       | $                            | 3,139      |                         | $          | 4,910 |   | $ | 8,718 |   | $ | 9,827 |   |
| General and administrative                                    |       | 1,530                        |       | 2,019                        |       | 4,596 |   | 6,185 |   |
| Operating loss                                                |       | 4,669                        |       | 6,929                        |       | 13,314 |   | 16,012 |   |
|                                                          |       |                         |       |                         |       |   |   |   |   |
| Other income (expense):                                       |       |                         |       |                         |       |   |   |   |   |
| Interest and other income                                     |       | 274                          |       | 206                          |       | 656 |   | 501 |   |
| Interest and other expense                                    |       | (140                         | )          | (234                         | )          | (447 | ) | (501 | ) |
| Impairment charges                                            |       | (963                         | )          | —                       |       | (1,067 | ) | (205 | ) |
| Net loss from continuing  operations                          |       | (5,498                       | )          | (6,957                       | )          | (14,172 | ) | (16,217 | ) |
|                                                          |       |                         |       |                         |       |   |   |   |   |
| Discontinued operations:                                      |       |                         |       |                         |       |   |   |   |   |
| Income/(Loss) from discontinued operations                    |       | (43                          | )          | 2,179                        |       | (347 | ) | 77 |   |
|                                                          |       |                         |       |                         |       |   |   |   |   |
| Net loss                                                      |       | $                            | (5,541     | )                            | $          | (4,778 | ) | $ | (14,519 | ) | $ | (16,140 | ) |
|                                                          |       |                         |       |                         |       |   |   |   |   |
| Basic and diluted loss per share from continuing operations   |       | $                            | (0.16      | )                            | $          | (0.21 | ) | $ | (0.42 | ) | $ | (0.50 | ) |
| Basic and diluted loss per share from discontinued operations |       | $                            | —     |                         | $          | 0.07 |   | $ | (0.01 | ) | $ | — |   |
| Basic and diluted loss per share                              |       | $                            | (0.16      | )                            | $          | (0.14 | ) | $ | (0.43 | ) | $ | (0.50 | ) |
|                                                          |       |                         |       |                         |       |   |   |   |   |
| Basic and diluted weighted average shares outstanding         |       | 34,239                       |       | 33,310                       |       | 33,940 |   | 32,538 |   |
|                                                               |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes to Consolidated Condensed Financial Statements.

 

4

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**Tapestry Pharmaceuticals, Inc. and Subsidiaries**

**Consolidated Condensed Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended**        | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                   | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** |
| Operating activities:                                                        |       |                         |       |   |   |
| Net loss                                                                     |       | $                            | (14,519    | ) | $ | (16,140 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                         |       |   |   |
| Depreciation and amortization                                                |       | 197                          |       | 371 |   |
| Amortization of debt issue cost & debt discount                          |       | 440                          |       | 465 |   |
| Amortization of investment premium                                           |       | 198                          |       | 170 |   |
| Interest paid with common stock                                              |       | —                       |       | 54 |   |
| Compensation paid with common stock and options                              |       | 39                           |       | 110 |   |
| Retirement contributions paid with common stock                              |       | 315                          |       | 604 |   |
| Impairment charges                                                           |       | 1,067                        |       | 205 |   |
| Loss on disposal of assets, net                                              |       | 14                           |       | — |   |
| Gain on sale of investments                                                  |       | (72                          | )          | — |   |
| Changes in operating assets and liabilities:                                 |       |                         |       |   |   |
| Accounts receivable                                                          |       | —                       |       | 1,495 |   |
| Prepaid expense and other assets                                             |       | 128                          |       | (84 | ) |
| Accounts payable and accrued liabilities                                     |       | (1,418                       | )          | (233 | ) |
| Accrued payroll and payroll taxes                                            |       | (852                         | )          | (606 | ) |
| Net cash used in operating  activities                                       |       | (14,463                      | )          | (13,589 | ) |
|                                                                         |       |                         |       |   |   |
| Investing activities:                                                        |       |                         |       |   |   |
| Additions to property and equipment                                          |       | (216                         | )          | (143 | ) |
| Proceeds from sale of assets held for sale                                   |       | 104                          |       | — |   |
| Purchases of investments                                                     |       | (23,379                      | )          | (86,045 | ) |
| Proceeds from sale of investments                                            |       | 40,731                       |       | 94,979 |   |
| Net cash provided by  investing activities                                   |       | 17,240                       |       | 8,791 |   |
|                                                                         |       |                         |       |   |   |
| Financing activities:                                                        |       |                         |       |   |   |
| Payments of notes payable                                                    |       | (3,474                       | )          | (60 | ) |
| Proceeds from the sale of common stock, net of issuance cost                 |       | —                       |       | 4,837 |   |
| Proceeds from the exercise of common stock options                           |       | 31                           |       | 36 |   |
| Net cash (used in)  provided by financing activities                         |       | (3,443                       | )          | 4,813 |   |
| Net (decrease) increase in  cash and cash equivalents                        |       | (666                         | )          | 15 |   |
| Cash and cash equivalents  at beginning of period                            |       | 1,713                        |       | 2,281 |   |
| Cash and cash equivalents  at end of period                                  |       | $                            | 1,047      |   | $ | 2,296 |   |

 

Seeaccompanying notes to Consolidated Condensed Financial Statements.

 

5

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| ** **                                                       | ** ** | **Nine Months Ended**   | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** |
| Supplemental disclosure of  cash flow information:               |       |                    |       |   |   |
|                                                             |       |                    |       |   |   |
| Interest paid                                                    |       | $                       | 137        |   | $ | 167 |   |
|                                                             |       |                    |       |   |   |
| Non-cash investing and  financing activities:                    |       |                    |       |   |   |
| Issuance of common stock for payment of interest payable         |       | —                  |       | 107 |   |
| Issuance of common stock to prepay retirement plan contributions |       | 105                     |       | 188 |   |
|                                                                  |            |                         |            |  |  |  |  |

 

Seeaccompanying notes to Consolidated Condensed Financial Statements.

 

6

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**Tapestry Pharmaceuticals, Inc.**

**Notes to Consolidated Condensed Financial Statements**

**September28, 2005**

**(Unaudited)**

 

**Note 1.  Basisof Presentation and Summary of Significant Accounting Policies**

 

In the opinion ofmanagement, the accompanying unaudited condensed consolidated balance sheets,statements of operations and cash flows contain all adjustments, consisting ofonly normal, recurring adjustments necessary to present fairly the financialposition of Tapestry Pharmaceuticals, Inc. and its wholly owned subsidiaries(the “Company”) at September 28, 2005 and December 29, 2004, and the results oftheir operations for the three and nine month periods ended September 28, 2005and September 29, 2004, and cash flows for the nine month periods endedSeptember 28, 2005 and September 29, 2004.

 

The unaudited, condensed, consolidated financialstatements presented herein have been prepared in accordance with theinstructions to Form 10-Q and do not include all the information and notedisclosures required by accounting principles generally accepted in the UnitedStates.  The condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto contained in the Company’sAnnual Report on Form 10-K for the year ended December 29, 2004, filed with theSecurities and Exchange Commission on February 24, 2005.

 

During the next 12 months, management intends toraise additional capital to fund future operations and to provide additionalworking capital.  Raising additionalcapital at the current market price of our common stock will result in substantialdilution to existing stockholders and a possible change of control of theCompany because its capital requirements are substantial relative to theCompany’s current market capitalization.  In addition, a financing may requirestockholder approval.  There is noassurance that such financing will be consummated or obtained in sufficientamounts necessary to meet the Company’s requirements.

 

The accompanying financial statements do notinclude any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationsof liabilities that may result from the possible inability of the Company tocontinue as a going concern.

 

*ESTIMATES AND ASSUMPTIONS -*The preparationof the Company’s condensed consolidated financial statements in conformity withaccounting principles generally accepted in the United States requires theCompany’s management to make estimates and assumptions that affect the reportedamounts of assets and liabilities, and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenue and expenses during the reporting period.  Significant estimates are used whendetermining useful lives for depreciation and amortization, assessing the needfor impairment charges, accounting for income taxes, and various othersitems.  The Company evaluates theseestimates and judgments on an ongoing basis and bases its estimates onhistorical experience, current conditions and various other assumptions thatare believed to be reasonable under the circumstances.  The results of these estimates form the basisfor making judgments about the carrying values of assets and liabilities aswell as identifying and assessing the accounting treatment with respect tocommitments and contingencies.  Actualresults may differ from these estimates under different assumptions orconditions.

 

*NEW ACCOUNTING PRONOUNCEMENTS***-**InDecember 2004, the Financial Accounting Standards Board (“FASB”) reissuedStatement of Financial Accounting Standard (“SFAS”) No. 123, *Accounting for Stock-Based Compensation* as SFAS No. 123(R), *Share Based Compensation*. This statement replaces SFAS No. 123, amends SFAS No. 95, *Statement of Cash Flows*, and supersedes Accounting PrinciplesBoard (“APB”) Opinion No. 25, *Accounting for StockIssued to Employees*.  SFAS No.123(R) requires companies to apply a fair-value based measurement method inaccounting for share-based payment transactions with employees and to recordcompensation expense for all share-based awards granted, and to awardsmodified, repurchased or cancelled after the required effective date.  Compensation expense for outstanding awardsfor which the requisite service had not been rendered as of the effective datewill be recognized over the remaining service period using the compensationcost calculated for pro forma disclosure purposes under SFAS No. 123, adjustedfor expected forfeitures.  Additionally,SFAS No. 123(R) will require entities to record compensation expense foremployee stock purchase plans that may not have previously been consideredcompensatory under the existing rules.  SFASNo. 123(R) will be effective for the first annual period beginning after June15, 2005, which is the Company’s fiscal year beginning January 1, 2006.  The Company anticipates adopting theprovisions of SFAS No. 123(R) using a modified prospective application.  This statement is expected to have asignificant impact on the Company’s results of operations as the Company willbe required to record compensation expense in the consolidated statement ofoperations rather than disclose the impact within its notes to the consolidatedfinancial statements.

 

7

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On June 9, 2005, the FASB issued SFASNo. 154, *Accounting Changes and Error Corrections*. SFAS No. 154 replaces APB OpinionNo. 20, *Accounting Changes*, and SFASNo. 3, *Reporting Accounting Changes in Interim FinancialStatements*, and changes the requirements for the accounting for andreporting of a change in accounting principle.  SFAS No. 154 applies to all voluntary changesin accounting principle.  It also appliesto changes required by an accounting pronouncement in the unusual instance thatthe pronouncement does not include specific transition provisions.  SFAS No. 154 must be adopted for accountingchanges and corrections of errors made in fiscal years beginning afterDecember 15, 2005.  Early adoptionis permitted for accounting changes and corrections of errors made in fiscalyears beginning after the date SFAS No. 154 is issued.  The Company does not expect the adoption ofSFAS No. 154 to have a material impact on its financial results.

 

*RECLASSIFICATIONS -***Certain prior period amounts have been reclassified to conform to thecurrent period presentation.

 

 

# **Note 2.**  StockOptions

# ** **

Tapestry accounts for its stock options toemployees and directors in accordance with Accounting Principles Board OpinionNo. 25 (“APB 25”), *Accounting for StockIssued to Employees*, and related interpretations.  Pursuant to APB No. 25, compensationexpense to employees is recorded only if the fair value of the underlying stockexceeds the exercise price on the grant date. Stock options granted to consultants are accounted for under the fairvalue method, in accordance with Statement of Financial Accounting StandardsNo. 123 (“SFAS 123”), *Accounting for Stock-BasedCompensation*.

 

Proforma information regarding net income and earnings per share is required bySFAS 123 and Statement of Financial Accounting Standards No. 148, *Accounting for Stock-Based Compensation Transition and Disclosure*,which requires that the information be determined as if the Company hadaccounted for employee stock options granted subsequent to December 31,1994 under the fair value method of that statement.  Tapestry estimated the fair value for theseoptions at the date of grant using a Black-Scholes option pricing model withthe following weighted-average assumptions for the quarters ended September 28,2005 and September 29, 2004, respectively: risk-free interest rates of 3.77%and 3.81%; no expected dividend; volatility factors of 1.144 and 1.237, and anestimated expected life range of three to six years.  For the nine months ended September 28, 2005and September 29, 2004, respectively, Tapestry estimated the fair market valueof these options with the following assumptions: risk-free interest rates of3.58% to 3.77% and 2.51% to 3.81%; no expected dividend; volatility factors of1.144 to 1.233 and 1.028 to 1.237, and an estimated expected life range ofthree to six years.

 

For purposes of pro forma disclosures, theCompany amortizes to expense the estimated fair value of the options over theoptions’ vesting period.  Tapestry’s proforma information is as follows (in thousands, except per share amounts):

 
| ** **                                                                                              | ** ** | **Quarter Ended**            | ** ** | **Nine Months Ended**        | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                              | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** |
| Net loss as reported                                                                                    |       | $                            | (5,541     | )                            | $          | (4,778 | ) | $ | (14,519 | ) | $ | (16,140 | ) |
| Add: Compensation expense recognized in net loss                                                        |       | 15                           |       | 6                            |       | 39 |   | 110 |   |
| Deduct: Total stock based compensation expense determined under fair  value based method for all awards |       | (643                         | )          | (644                         | )          | (2,156 | ) | (2,564 | ) |
| Pro forma net loss                                                                                      |       | $                            | (6,169     | )                            | $          | (5,416 | ) | $ | (16,636 | ) | $ | (18,594 | ) |
|                                                                                                    |       |                         |       |                         |       |   |   |   |   |
| Basic and diluted loss per share — as reported                                                     |       | $                            | (0.16      | )                            | $          | (0.14 | ) | $ | (0.43 | ) | $ | (0.50 | ) |
| Pro forma basic and diluted loss per share                                                              |       | $                            | (0.18      | )                            | $          | (0.16 | ) | $ | (0.49 | ) | $ | (0.57 | ) |
|                                                                                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

8

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# **Note 3.**  NasdaqDelisting Notice

# ** **

OnFebruary 25, 2005, the Company received notice from the Nasdaq StockMarket, Inc. (“Nasdaq”) that its minimum bid price had fallen below $1.00for 30 consecutive business days and that its common stock is, therefore,subject to delisting from the Nasdaq SmallCap Market.  Accordingly, the Company had untilAugust 24, 2005 (180 calendar days from February 25, 2005) to regaincompliance.  At August 24, 2005, since theCompany had not met this criteria but did meet the Nasdaq SmallCap Marketinitial listing criteria (other than the minimum bid price requirement), itreceived a second and final grace period ending February 21, 2006.  The Company can regain compliance with theminimum bid price rule if the bid price of its common stock closes at$1.00 or higher for a minimum of 10 consecutive business days during thissecond  and final grace period, althoughNasdaq may, at its discretion, require the Company maintain a bid price of atleast $1.00 per share for a period in excess of ten consecutive business days(but generally no more than 20 consecutive business days) before determiningthat the Company has demonstrated the ability to maintain long-termcompliance.  Its common stock could alsobe delisted from the Nasdaq SmallCap Market if it fails to satisfy the requirementto maintain minimum stockholder equity of at least $2.5 million as a result ofcontinuing losses.  If the Companyfails to meet all applicable Nasdaq SmallCap Market requirements by February21, 2006 and Nasdaq determines to delist its common stock, the delisting couldadversely affect the market liquidity of its common stock and the market priceof its common stock could decrease.  Suchdelisting could then adversely affect the Company’s ability to obtain financingfor the continuation of its operations and/or result in the loss of confidenceby investors, suppliers and employees.

 

TheCompany received stockholder approval at its 2005 Annual Meeting granting theBoard of Directors the ability to affect a reverse stock split as one way toaddress the Nasdaq listing issues relating to minimum bid price.  The Board is not required to implement thereverse stock split and intends to do so only if it determines that a reversestock split would be in the best interest of the Company.

 

# **Note 4.  Discontinued Operations**

# ** **

Closureof the Genomics Division

 

In December 2003, the Company made adecision to sell its gene isolation and service business, which was acquired inDecember 2002.  Net operating lossesrelated to this business were $0 for the third quarters of 2005 and 2004,respectively.  For the first nine months,the net operating loss totaled $0 and $221,000 for 2005 and 2004,respectively.  In the first quarter of2004, the Company recorded an impairment charge of $205,000 related to its geneisolation and service business for assets that had been identified as held forsale.

 

In November 2004 the Companydiscontinued research on its remaining genomics programs, other than theHuntington’s Disease program, and sought a buyer for these programs.  After efforts to sell the intellectualproperty assets related to the genomics programs over the course of the fourthquarter of 2004, the Company determined that there were no actively interestedbuyers.  In the fourth quarter of 2004,the Company recorded a charge of $1.7 million primarily relating to animpairment of intangible assets acquired in connection with theDecember 2002 acquisition of the genomics business of Pangene Corporation($1.1 million), a charge for fixed assets likely to be disposed of at less thantheir book value ($150,000), severance costs ($250,000) and lease terminationcosts ($200,000).  Additional expensesrelated to the closure were charged to discontinued operations as incurred.  Most costs relating to the closure wereincurred by the end of January 2005, although certain lease costscontinued through May 2005.  InApril 2005, the Company received $104,000 for certain fixed assets of thegenomics business that were previously reserved for in the fourth quarter of2004 and classified as Assets Held for Sale.

 

Assets held for sale, at September 28, 2005and December 29, 2004, which relate to the discontinued operations of thegenomics business were as follows (in thousands):

 

| ** **                          | ** ** | **September 28,  2005** | ** ** | **December 29,  2004** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Property, plant and equipment,  net |       | $                            | —     |                        | $          | 112 |   |
|                                     |            |                              |            |                             |            |  |  |

 

Net losses related to the Genomics Divisionthat are included in discontinued operations totaled $43,000 and $816,000 forthe quarters ended September 28, 2005 and September 29, 2004,respectively.  Net losses related to theGenomics Division that are included in discontinued operations totaled $347,000and $2,958,000 for the nine months ended September 28, 2005 and September 29,2004, respectively.  No material revenuewas previously recognized in this division.

 

9

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Sale of PaclitaxelBusiness

 

On December 12,2003, the Company sold its worldwide generic injectable paclitaxel business toMayne Pharma (USA)Inc. (f/k/a/ Faulding Pharmaceutical Co.) (“MaynePharma”), a subsidiary of Mayne Group Limited,for cash inthe amount of $71.7 million minus an inventory adjustment of $4.6 millionto reflect the Company’s actual inventory as of the closing.  The sale resulted in a gain of $54.6 millionbefore taxes, and $54.1 million after taxes. Proceeds from the sale are being used to fund the development andcommercialization of products based on Tapestry’s proprietary oncologyplatforms and for general corporate purposes. In addition, approximately $21.9 million of the proceeds of thepurchase price was paid to Abbott Laboratories (“Abbott”) to retire alloutstanding debt, interest and payables the Company owed to Abbott.  The assets sold to Mayne Pharma includedpaclitaxel manufacturing assets, yew plantations, domestic and international issuedand pending paclitaxel patents, a worldwide registration dossier, worldwidedevelopment and supply agreements, inventories and settlement of accountsreceivable.  The Company retained all ofits intellectual property not used in connection with the business sold.

 

The paclitaxel business was reported as adiscontinued operation in 2004.   Summaryresults of the paclitaxel business’s third quarter and nine months endedoperations were (in thousands):

 

| ** **    | ** ** | **Quarter Ended**       | ** ** | **Nine Months Ended**   | ** ** |
|---------------|------------|-------------------------|------------|-------------------------|------------|
| ** **    | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** |
| Product sales |       | $                       | —     |                    | $          | — |   | $ | — |   | $ | — |   |
| Net income    |       | $                       | —     |                    | $          | 2,995 |   | $ | — |   | $ | 3,256 |   |

 

Paclitaxel income in 2004 consisted primarilyof a $3.0 million patent infringement settlement with Mylan Laboratories and a$250,000 business interruption insurance claim filed in 2004 for lossessustained in the third quarter of 2003, which resulted from a hurricane thatdisrupted operation of a contract manufacturer employed by Tapestry.

 

# **Note 5.  Investments**

# ** **

Short-term investments consisted ofinvestment grade commercial paper due within one year.  The Company’s investments in auction ratesecurities are recorded at cost, which approximates fair market value.  In accordance with ARB 43, despite the long-termnature of their stated contractual maturities, the Company has the ability andintent to liquidate investments in auction rate securities within six monthsand therefore has classified these investments as short-term.  Long-term investments consisted of investmentgrade commercial paper with maturities beyond one year.  All investments are classified asavailable-for-sale and are recorded at market value.  Unrealized gains and losses are reflected inother comprehensive net loss.

 

Comprehensive loss for the Company consistsof net loss and unrealized holding gains and losses on available-for-saleinvestments as presented below (in thousands):

 
| ** **                                                                                    | ** ** | **Quarter Ended**            | ** ** | **Nine Months Ended**        | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                    | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** |
| Net loss, as reported                                                                         |       | $                            | (5,541     | )                            | $          | (4,778 | ) | $ | (14,519 | ) | $ | (16,140 | ) |
| Unrealized gain (loss) on available-for-sale securities, net of  reclassification adjustments |       | 16                           |       | 28                           |       | (9 | ) | (57 | ) |
| Comprehensive net loss                                                                        |       | $                            | (5,525     | )                            | $          | (4,750 | ) | $ | (14,528 | ) | $ | (16,197 | ) |
|                                                                                               |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

# **Note 6.  Property, Plant and Equipment**

 

Property, plant and equipment consisted ofthe following (in thousands):

 

| ** **                                     | ** ** | **September 28,  2005** | ** ** | **December 29,  2004** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Furniture, fixtures and office equipment       |       | $                            | 707        |                        | $          | 678 |   |
| Laboratory equipment                           |       | 757                          |       | 589                         |       |
| Leasehold improvements                         |       | 56                           |       | 38                          |       |
| Construction in progress                       |       | —                       |       | 22                          |       |
|                                           |       | 1,520                        |       | 1,327                       |       |
| Less accumulated depreciation and amortization |       | (831                         | )          | (651                        | )          |
| Property, plant and equipment, net             |       | $                            | 689        |                        | $          | 676 |   |

 

10

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**Note7.  Investment in ChromaDex, Inc.**

 

In April 2003, the Company sold itstechnical and analytical services group to privately held ChromaDex, Inc.in exchange for approximately 15%, on a fully diluted basis, of the thenoutstanding common stock of ChromaDex. ChromaDex is a supplier of phytochemical reference standards for thenutraceutical, dietary supplement and functional food industries.  In the third quarter, in accordance withStatement of Financial Accounting Standards No. 144 (“SFAS 144”), *Accounting for the Impairment of Long-Lived Assets*, and inconjunction with the preparation of these interim financial statements for thequarter ending September 28, 2005, the Company recognized an impairment chargeof $963,000 on the carrying value of its investment in ChromaDex to revalue itto an estimated fair value of $451,000. This valuation analysis and resulting impairment charge was based inpart on newly available financial information on ChromaDex’s results.

 

**Note8.  Other Long-Term Assets - Land**

 

As part of the Company’s preparation of itsinterim financial statements for the quarter ending June 29, 2005, and inaccordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”),*Accounting for the Impairment of Long-Lived Assets*,the Company recognized an impairment charge on the carrying value of its landof $104,000 in the second quarter to revalue it to an estimated fair marketvalue of $614,000.

 

# **Note 9.  Notes Payable, Current and Long-Term**

# ** **

OnFebruary 18, 2005, the Company entered into an agreement with TL Venturesproviding for a complete settlement of its ongoing litigation with them, amutual release of claims, the payment of approximately $3,184,000 in cash andthe issuance by the Company of promissory notes in an aggregate amount of$4,670,000 in exchange for delivery for cancellation of debentures in theprincipal amount of $8,000,000 that had been issued by the Company.  The notes are payable in monthly installmentsof $50,000 beginning in February 2005, $110,000 in 2006 and $150,000 in2007, with a final payment of $1,000,000 due on January 31, 2008.  The notes do not bear interest; however, animputed interest rate of 18% was used to determine a fair carrying value of thenotes.  Accrued interest of approximately$134,000 was included in the cash payment made as part of the settlement.  The Company recorded the obligation resultingfrom the settlement on its balance sheet as of December 29, 2004.

 

# **Note 10.  Stockholders’ Equity**

# ** **

On March 26, 2004, the Company sold2,000,000 shares of common stock at $2.60 per share.  The net proceeds from the sale wereapproximately $4.9 million after payment of advisory fees and legal feesincurred in connection with the transaction.

 

In September 2005, the Company initiated aretention incentive program for non-executive employees that consisted of agrant of approximately 453,000 restricted stock units of the Company’s commonstock under its equity incentive plans to vest at future dates, as well as acash component related to the individual tax effects of the program.  The stock component of the program includes215,031 shares to vest on September 6, 2006 and 237,749 additional shares tovest on September 6, 2007, contingent upon participants being employed by theCompany on those dates.  The total valueof the common stock component of the program is $163,361 based on the value ofthe underlying common stock at the date of grant.  The cash component related to the tax effectsof the program amounted to $93,000 and was expensed in the third quarter.  Additionally, $10,000 of expense related tothe stock component of the program was recognized in the third quarter.  The remaining expense associated with theprogram will be recognized over the vesting period, through September 2007.

 

# **Note 11.  Reduction in Operations**

 

On July 20, 2005, the Board of Directorsauthorized a reduction in the Company’s operations.  During the third quarter, the Companyeliminated 14 positions (about 30% of its workforce), including executive andnon-executive employees and consultants in all areas of operations.  In conjunction with this reduction inoperations, Tapestry incurred one time severance costs of $262,000, all ofwhich was paid in cash in the third quarter. The Company took the action to preserve cash and to permit it to focusits primary effort on advancing its lead clinical programs.

 

# **Note 12.  Net Income (Loss) Per Share**

# ** **

Basic earnings per share is measured as netincome or loss divided by the weighted average outstanding common shares for theperiod.  Diluted earnings per share issimilar to basic earnings per share but presents the dilutive effect on a pershare basis of potential common shares (e.g. stock options, warrants andconvertible securities) as if they had been converted at the beginning of theperiods presented.  Potential commonshares that have an antidilutive effect are excluded from diluted earnings pershare (e.g. vested stock options that could be converted representing 568shares at September 28, 2005 and 136,000 shares at September 29, 2004).  Net loss per common share is computed usingthe weighted average number of shares of common stock outstanding.

 

11

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##### **Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

##### ** **

Thefollowing discussion and analysis provides information that management believesis relevant to an assessment and understanding of the results of operations ofTapestry Pharmaceuticals, Inc.  Youshould read this discussion in conjunction with the Financial Statements andNotes included elsewhere in this report and with Management’sDiscussion and Analysis of Financial Condition and Results of Operations forthe year ended December 29, 2004 contained in our 2004 Annual Report on Form 10-K.  Certain statementsset forth below constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended.  See “Special Note RegardingForward-Looking Statements.”

 

**General**

 

Tapestry Pharmaceuticals, Inc. (“we”, “Tapestry” or “the Company”) isa pharmaceutical company focused on the development of proprietary therapies for thetreatment of cancer.  The Company’sprimary development effort is focused on TPI 287, a novel taxane underdevelopment for the treatment of cancer. We filed an Investigational New Drug (“IND”) application on December 21,2004 covering TPI 287, and commenced human clinical trials with TPI 287 in thesecond quarter of 2005.  Other programsin development include our quassinoids, peptide linked cytotoxics and oligotherapy.  Currently, we cannot predictwhen or if any of these other programs will be advanced into clinicaldevelopment.  We are also activelyengaged in evaluating new therapeutic agents and/or related technologies.  Our evaluation of new products andtechnologies may involve the examination of individual molecules, classes ofcompounds, or platform technologies. Acquisitions of new products or technologies may involve the purchase orlicense of such products or technologies, or the acquisition of, or mergerwith, other companies.

 

In November 2004 we discontinuedresearch on our genomics programs, other than the Huntington’s Disease program,and sought a buyer ofthese programs.  After completingreasonable efforts to sell the intellectual property assets related to thegenomics programs over the course of the fourth quarter of 2004, we determinedthat there were no actively interested buyers and we proceeded to effect anorderly closure of such operations, which was substantially completed byJanuary 2005.

 

On July 20, 2005, our Board of Directorsauthorized a reduction in the Company’s operations.  During the third quarter of 2005, weeliminated 14 positions (30% of its work force), including executive andnon-executive employees and consultants in all areas of operations.  In conjunction with this reduction inoperations, we incurred one time severance costs of $262,000, all of which was paidin cash in the third quarter.  We tooksuch action to preserve cash and to permit us to focus our primary efforts onadvancing our lead clinical programs.

 

Wewill incur substantial research and development expense, including expenserelating to clinical trials, related to the development of our proprietaryanti-cancer agents.  We have incurredsignificant losses, including losses from continuing operations of $14.2million for the nine months ended September 28, 2005.  Our accumulated deficit was $104.2 million asof September 28, 2005.  We anticipatethat losses will continue until such time, if ever, as we are able tocommercialize our product candidates and generate sufficient sales to supportour development operations, including the research and development activitymentioned above.

 

Ourability to generate sufficient sales to support our operations currentlydepends upon the successful development and commercialization of products basedon our proprietary oncology technologies.

 

**Research and Development**

 

Our current business is focusedprimarily on theclinical development of TPI 287, along with research and development of other proprietary therapies forthe treatment of cancer.  The table belowshows our research and development expense by major category, with the expenserelated to our Genomics Division included in discontinued operations (in thousands):

 
| ** **                | ** ** | **Quarter Ended**       | ** ** | **Nine months ended**   | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** | **September 28,  2005** | ** ** | **September 29,  2004** | ** ** |
| Oncology                  |       | $                       | 2,918      |                    | $          | 4,600 |   | $ | 8,150 |   | $ | 9,025 |   |
| Huntington’s Disease |       | 221                     |       | 310                     |       | 568 |   | 802 |   |
| Discontinued operations   |       | 43                      |       | 808                     |       | 392 |   | 2,950 |   |
|                      |       | $                       | 3,182      |                    | $          | 5,718 |   | $ | 9,110 |   | $ | 12,777 |   |
|                           |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |

 

12

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The following chart identifies our fourtherapeutic candidate programs that are in the most advanced stages ofdevelopment.

** **
| **Program**               | ** ** | **Potential  Indication(s)**                                                   | ** ** | **Development  Status**  |
|---------------------------|------------|--------------------------------------------------------------------------------|------------|--------------------------|
| TPI 287                   |       | Prostate,  Non-Small Cell Lung, Pancreatic, Ovarian, Breast, and Colon Cancers |       | Phase  I                 |
|                      |       |                                                                           |       |                     |
| Quassinoids               |       | Cancers                                                                        |       | Preclinical  Development |
|                      |       |                                                                           |       |                     |
| Peptide Linked Cytotoxics |       | Cancers                                                                        |       | Preclinical  Development |
|                      |       |                                                                           |       |                     |
| Oligo Therapy             |       | Huntington’s Disease                                                      |       | Preclinical  Development |

 

•      TPI 287 is a novel third generation taxane.  On December 21, 2004, we filed anInvestigational New Drug (“IND”) application, and on January 21, 2005, wewere cleared to proceed into clinical trials by the U.S. Food and DrugAdministration (“FDA”).  In May 2005 webegan a Q7D Phase I clinical trial of TPI 287. In the fourth quarter of 2005, we expect to initiate a second Phase Iclinical trial of TPI 287 to evaluate an alternative dosing schedule.  In preclinical testing, TPI 287 demonstratedthe ability to inhibit tumor cell growth in a number of *in vitro*cell lines and has shown inhibition of tumors in certain animal xenograftmodels when tested against standard comparative agents.  The *in vitro*activity was seen across multiple cell lines including cell lines known to besensitive to taxanes and cell lines known to be resistant to taxanes.  Taxane sensitive cell lines in which TPI 287shows activity include cell lines derived from breast cancer, uterine cancerand small cell lung cancer.  Taxaneresistant cell lines in which TPI 287 shows activity include lines derived frombreast cancer, colon cancer, prostate cancer and pancreatic cancer.  In *in vivo* animaltesting, TPI 287 demonstrated tumor growth inhibition activity in four tumorcell lines with multiple drug resistance, or MDR1.

 

•      Quassinoids arecomplex polyfunctional, polycyclic natural products of the plant family *Simaroubaceae*, which exhibitantineoplastic activity.  We have in-licensed several quassinoidcompositions as well as processes for their isolation and synthesis.  Wehave completed several *in vitro*and *in vivo* preclinical studieson our proprietary quassinoid analogs, and additional preclinical studies arein progress to better delineate the antineoplastic activity of thesecompounds.  Currently, we cannot predict when or if any of thesequassinoids will be advanced into clinical development.

 

•      Peptide linked conjugates consist of a syntheticpeptide ligand chemically linked to a cytotoxic agent.  The new chemical entity thus created appearsto positively alter the therapeutic index of the cytotoxic agent in certaintumor models.  We have in-licensedintellectual property in this area.  Todate, we have completed several *in vitro*and *in vivo*preclinical studieson TPI 284, a proprietary peptide linked conjugate, which indicate that thiscompound has activity in certain cancer cell lines.  We are currently conducting studies onadditional proprietary peptide linked compounds to further determine theactivity and therapeutic indexes of peptide linked cytotoxics.  Currently, we can not predict when or if anyof these conjugates will be advanced into clinical development.

 

•     Huntington’s Disease is aprogressive, inherited, neurological disorder resulting in degeneration ofneural tissue.  We are developing anoligonucleotide therapy, which may slow the progression of the disease or mayeliminate the death of the nerve cells. We are in the early stages of this program and we can provide noassurance that we will be successful in this development effort.  To date, we have conducted several *in vitro* studies to determine the effectsof our oligonucleotide therapy in a model neuronal cell based assay and in abiochemical assay that detects molecules that disrupt protein aggregation.  We have also recently concluded an *in vivo* animal study of Huntington’s Disease.  The data from this study indicated that theoligonucleotide therapy may have an effect on mitigating the motor deficitsseen in Huntington’s Disease.    Thedosing phase of the study with the oligonucleotide therapy has been completed.  The effect of the oligonucleotide therapy on survivalhas not yet been determined and we expect to have data by the end of the fourthquarter.  Currently, we cannot predictwhen or if our oligonucleotide therapy will be advanced into clinicaldevelopment.

 

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Researchand development, which includes expenses related to our clinical programs, areexpected to be the most significant expense of our business going forward.  Since we began clinical testing of our thirdgeneration taxane product candidate, TPI 287, in the second quarter of 2005, weexpect that our research and development expenses will increase in connectionwith this activity.  We cannot estimatethe cost of the effort necessary to complete these programs, or when, if ever,we will receive any revenues from them. Completion of the development of any of our product candidates to anapproved product for sale in the United States and offshore will be dependentupon raising additionalcapital.  We cannot be certain that wewill be able to obtain capital on acceptable terms or at all. We have included a number of the risks and uncertainties associated withcompleting our product development plans in the “SpecialNote Regarding Forward-Looking Statements” below.

 

Resultsof Operations - Quarter Ended September 28, 2005 Compared to Quarter EndedSeptember 29, 2004

 

*Research and Development Expense.*  Research anddevelopment expense from continuing operations for the third quarter of 2005was $3.1 million, adecrease of $1.8 million from the third quarter of 2004.  Oncology research and developmentexpenditures decreased by $1.7 million to $2.9 million in the third quarter of2005, and Huntington’s Disease related spending decreased by $88,000 to$221,000.  The decrease in oncologyexpense was primarily due to a reduction in outside manufacturing costsassociated with preparing active pharmaceutical ingredient and drug productmaterial for the clinical trials of TPI 287 ($1.4 million) and a decrease inconsulting and outside service costs ($948,000), partially offset by increasesin compensation related expenses ($361,000). The increase in compensation expense in the current quarter was mostlyrelated to the employment agreement payout to the estate of one of our founders,Sterling Ainsworth, upon his death in August ($290,000), expense related to thenon-executive retention plan initiated in September ($73,000) and severancecosts related to the staffing reductions in July ($69,000), offset by theassociated reduction in salary expense. Legal costs related to the application for and maintenance of ourpatents was also greater in the current quarter by $164,000.  The decrease in expense related to theHuntington’s Disease program was due to lower compensation expenses associatedwith the program.

 

*General and Administrative Expense.*  General andadministrative expense for the current year quarter was $1.5 million, adecrease of $489,000 from the prior year quarter.  This decrease was primarily due to a reductionin outside service costs ($215,000), which included lower expenses related toinvestor relations consulting and costs associated with the Company’s namechange in mid 2004, lower outside legal costs ($178,000), and lowercompensation related expense ($136,000), partially offset by an increase in otherconsulting expense ($72,000).  Thereduction in compensation related expenses was the result of lower salaries dueto the staffing reductions in July, offset by the related severance costs($192,000), as well as expense related to the non-executive retention planinitiated in September ($30,000).

 

*Interest and Other Income.*  Interest and other income for the thirdquarter of 2005 of $274,000 represented an increase of $68,000 compared to theprior year quarter.  The increase wasattributable to other income from a Canadian tax refund ($114,000), which wasrelated to prior year’s income taxes for our Canadian subsidiary, partiallyoffset by lower interest income due to lower cash balances.

 

*Interest and Other Expense.*  Interest and other expense for the currentyear quarter of $140,000 was $94,000 less than the prior year quarter due to apartial repayment of our obligations to TL Ventures in February 2005 inconnection with the restructuring of our notes owed to them.

 

*Impairment Charges.*  Impairment charges for the current yearquarter of $963,000 were the result of a revaluation of our investment inChromaDex (see Note 8).  There were noimpairment charges in the prior year quarter.

 

*Discontinued Operations. *Income/(Loss) from discontinued operations was a loss of $43,000for the current year quarter compared to income of $2.2 million in the prioryear quarter.  The change was primarilydue to the non-recurring $3.0 million income from the patentinfringement settlement with Mylan Laboratoriesreceived in the third quarter of the prior year offset by the results of theGenomics Division, which incurred $766,000 less research and developmentspending in the third quarter of 2005 than the prior year quarter.

 

Resultsof Operations — Nine Months Ended September 28, 2005 Compared to Nine MonthsEnded September 29, 2004

 

*Research and Development Expense.*  Research anddevelopment expense from continuing operations for the first nine months of2005 was $8.7 million, adecrease of $1.1 million from the first nine months of 2004.  The decrease was due to a reduction inoutside manufacturing costs associated with preparing active pharmaceuticalingredient and drug product material for the clinical trials of TPI 287 ($1.3million) and decreased consulting and outside service costs ($823,000) offsetby increased compensation related expenses ($689,000) and increased legal costs($201,000).

 

*General and Administrative Expense.*  General andadministrative expense for the nine months ended September 28, 2005 was $4.6million, a decrease of $1.6 million from the 2004 period.  This decrease was primarily due to reducedcompensation related expense ($709,000), lower outside legal ($274,000), lowerconsulting, accounting and other outside service costs ($264,000), and lowerinsurance and other occupancy expense ($256,000).

 

14

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*Interest and Other Income.*  Interest and other income for the first ninemonths of 2005 of $656,000 represents an increase of $155,000 compared to theprior year period.  This increase wasattributable to other income related to a Canadian tax refund ($114,000) whichwas related to prior year’s income taxes for our Canadian subsidiary, partiallyoffset by lower interest income due to lower cash balances, as well as arealized gain on the sale of investments recorded in the second quarter of2005.

 

*Interest and Other Expense.*  Interest and other expense for the first ninemonths of 2005 of $447,000 was $54,000 more than the prior year period due to apartial repayment of our obligations to TL Ventures in February 2005 inconnection with the restructuring of our notes owed to them.

 

*Impairment Charges.*  Impairment charges for the first nine monthsof 2005 of $1.1 million were $862,000 more than the prior year period due tocharges of $963,000 and $104,000 in the current year on the value of ourinvestment in ChromaDex and the value of our land, respectively.  This amount compared to the impairment chargeof $205,000 for the assets held for sale of the gene isolation businessrecorded in prior year period.

 

*Discontinued Operations. *Income/(Loss) from discontinuedoperations was a loss of $347,000 for the first nine months of 2005, a decreaseof $424,000 from the losses incurred in the prior year period.  This decrease was primarily the result ofdecreased research and development expenses associated with the closure of theGenomics Division.  Research anddevelopment expense included in discontinued operations for the first ninemonths of 2005 was $392,000, a decrease of $3.7 million from the first ninemonths of 2004.  The decrease wasprimarily the result of the closure of the Genomics Division.  There was no general and administrative expenseincluded in discontinued operations for the first nine months of 2005 and2004.  Included in discontinuedoperations in the first nine months of 2005 was a gain of approximately $41,000resulting from the sale of assets related to the Genomics Division.

 

**Liquidity and Capital Resources**

 

Ourworking capital requirements for research and development have been, and willcontinue to be, significant.  As ofSeptember 28, 2005 we had a working capital balance of $14.6 million comparedto a working capital balance of $23.5 million at December 29, 2004.  Through September 28, 2005, we have fundedour capital requirements primarily with the net proceeds of public offerings ofcommon stock of approximately $21.1 million, with private placements of equitysecurities of approximately $67.5 million, with the exercise of warrants andoptions of approximately $8.0 million and with net indebtedness ofapproximately $4.7 million.  We also havefunded our capital requirements from the gross proceeds of the sale of ourpaclitaxel business (approximately $71.7 million) to Mayne Pharma (USA) Inc. (f/k/aFaulding Pharmaceutical, Inc.) (“Mayne Pharma”), a subsidiary of MayneGroup Limited, on December 12, 2003 and its operations prior to that date.

 

InFebruary 2002, we sold privately $8.0 million of common stock issued at $9per share and $8.0 million principal of five-year 4% convertible subordinateddebentures convertible into common stock at $15 per share to TL Ventures V,L.P. and one of its affiliated funds.  Noplacement agent was involved in the transaction.  The net proceeds were $15.6 million.  As part of this transaction, we recorded adiscount attributable to the conversion feature of the convertible debenturesin the amount of $3.1 million, which was amortized over the term of thedebentures.  In connection with theFebruary 18, 2005 settlement of litigation with TL Ventures over whetherthe debentures were subject to redemption upon completion of the sale of ourpaclitaxel business to Mayne Pharma, we paid approximately $3,184,000 in cashand issued promissory notes in the amount of $4,670,000 in exchange for thedelivery of the debentures by TL Ventures to the Company for cancellation.  The notes do not bear interest and arepayable in monthly installments of $50,000 beginning in February 2005, $110,000in 2006 and $150,000 in 2007 with a $1,000,000 payment due on January 31,2008.  Accrued interest of approximately$134,000 was included in the cash payment made as part of the settlement.  We recorded the obligation resulting from thesettlement on our balance sheet as of December 29, 2004.  We imputed an interest rate of 18% on thenotes.  No gain or loss was recognized inconnection with the settlement.

 

In March 2004, we sold 2,000,000 sharesof our common stock at $2.60 per share under a shelf registrationstatement.  The net proceeds from thetransaction were $4.9 million after payment of advisory fees and legal fees inconnection with the transaction.  Whileadditional shares of our common stock are registered for sale under the shelfregistration statement, we will not be able to sell shares thereunder unlessand until the aggregate market value of common equity held by non-affiliates ofthe Company is $75 million or more.  Asof October 27, 2005, such aggregate market value approximated $10.9 million.  As a result of our ineligibility to issuesecurities under a shelf registration statement, any issuance of securities islikely to be effected through a private placement of such securities followedby our registering the resale of securities by the purchaser.

 

Cash and cash equivalents decreased $666,000 to $1.0 million atSeptember 28, 2005 from $1.7 million at December 29, 2004.  Cash, cash equivalents, short-term andlong-term investments decreased $18.2 million to $17.6 million at September 28,2005 from $35.7 million at December 29, 2004.  The decrease was primarily due to payments of$3.2 million to TL Ventures and $14.5 million net cash used by operatingactivities.

 

15

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Webelieve existing capital will be adequate to fund our operations and capitalexpenditures for at least the next 12 months. However, pharmaceutical development is a costly, risky and timeintensive activity.  To bring our variousprograms to completion will require us to raise additional capital in the nearfuture, and we are actively pursuing efforts to do so.  Management intends to raise additionalcapital as soon as practicable to fund future operations and to provideadditional work in capital.  There is noassurance that such financing can or will be obtained on acceptable terms or inamounts sufficient to meet our requirements. Raising additional capital at current market prices for our common stockwill result in substantial dilution to existing stockholders and may requirestockholder approval and could involve a possible change of control of theCompany.  We cannot assure you that wewill be able to obtain additional capital on terms that will be acceptable tous or on any terms.  In addition, we mayseek to in-license or purchase new products or technologies.  The cost and related capital expenditures ofacquiring and developing such resources may be significant, and we may not beable to obtain capital for the development of these products ortechnologies.  See the risks discussedunder “Special Note Regarding Forward-Looking Statements” below.

 

OnFebruary 25, 2005, the Company received notice from the Nasdaq StockMarket, Inc. (“Nasdaq”) that its minimum bid price had fallen below $1.00for 30 consecutive business days and that its common stock is, therefore, subjectto delisting from the Nasdaq SmallCap Market.  Accordingly, the Company had untilAugust 24, 2005 (180 calendar days from February 25, 2005) to regaincompliance.  At August 24, 2005, since wehad not met this criteria but did meet the Nasdaq SmallCap Market initiallisting criteria (other than the minimum bid price requirement), we received asecond and final grace period ending February 21, 2006.  The Company can regain compliance with theminimum bid price rule if the bid price of its common stock closes at$1.00 or higher for a minimum of 10 consecutive business days during thissecond and final grace period, although Nasdaq may, at its discretion, requireus to maintain a bid price of at least $1.00 per share for a period in excessof ten consecutive business days (but generally no more than 20 consecutivebusiness days) before determining that we have demonstrated the ability tomaintain long-term compliance.  Our common stockcould also be delisted from the Nasdaq SmallCap Market if we fail to satisfythe requirement to maintain minimum stockholder equity of at least $2.5 millionas a result of continuing losses.  If theCompany fails to meet all applicable Nasdaq SmallCap Market requirements byFebruary 21, 2006 and Nasdaq determines to delist its common stock, thedelisting could adversely affect the market liquidity of its common stock andthe market price of its common stock could decrease.  Such delisting could then adversely affectthe Company’s ability to obtain financing for the continuation of itsoperations and/or result in the loss of confidence by investors, suppliers andemployees.

 

TheCompany received stockholder approval at its 2005 Annual Meeting granting theBoard of Directors the ability to effect a reverse stock split as one way toaddress the Nasdaq listing issues relating to minimum bid price.  The Board is not required to implement thereverse stock split and intends to do so only if it determines that a reversestock split would be in the best interest of the Company.

 

###### **Critical Accounting Policies**

###### ** **

The Company’s critical accounting policiesare presented in its Annual Report on Form 10-K for the year endedDecember 29, 2004.  There were nochanges to these critical accounting policies during the quarter ended September28, 2005.

 

In accordance with Statement of FinancialAccounting Standards No. 144 (“SFAS 144”), *Accounting for theImpairment of Long-Lived Assets*, we review the carrying amount oflong-lived assets when facts and circumstances suggest they may beimpaired.  If this review indicateslong-lived assets will not be recoverable as determined based on theundiscounted cash flow estimated to be generated by these assets, we reduce thecarrying amount of these long-lived assets to estimated fair value ordiscounted cash flow, as appropriate.  Aspart of our preparation of these financial statements, we recognized animpairment charge on our investment in ChromaDex, Inc.  of $963,000 in the third quarter.  This impairment charge was the onlyimpairment of long-lived assets recorded in the third quarter.

 

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# **Recent AccountingPronouncements**

# ** **

In December 2004,the Financial Accounting Standards Board (“FASB”) reissued Statement ofFinancial Accounting Standard (“SFAS”) No. 123, *Accountingfor Stock-Based Compensation* as SFAS No. 123(R), *Share Based Compensation*. This statement replaces SFAS No. 123, amends SFAS No. 95, *Statement of Cash Flows*, and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, *Accounting for StockIssued to Employees*.  SFAS No.123(R) requires companies to apply a fair-value based measurement method inaccounting for share-based payment transactions with employees and to recordcompensation expense for all share-based awards granted, and to awardsmodified, repurchased or cancelled after the required effective date.  Compensation expense for outstanding awardsfor which the requisite service had not been rendered as of the effective datewill be recognized over the remaining service period using the compensationcost calculated for pro forma disclosure purposes under SFAS No. 123, adjustedfor expected forfeitures.  Additionally,SFAS No. 123(R) will require entities to record compensation expense for employeestock purchase plans that may not have previously been considered compensatoryunder the existing rules.  SFAS No.123(R) will be effective for the first annual period beginning after June 15,2005, which is the Company’s fiscal year beginning January 1, 2006.  The Company anticipates adopting theprovisions of SFAS No. 123(R) using a modified prospective application.  This statement is expected to have asignificant impact on the Company’s results of operations as the Company willbe required to record compensation expense in the consolidated statement ofoperations rather than disclose the impact within its notes to the consolidatedfinancial statements.

 

On June 9, 2005, the FASB issued SFASNo. 154, *Accounting Changes and Error Corrections*.SFAS No. 154 replaces APB Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *Reporting AccountingChanges in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a change in accountingprinciple.  SFAS No. 154 applies to allvoluntary changes in accounting principle.  It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions.  SFAS No. 154 must be adopted for accountingchanges and corrections of errors made in fiscal years beginning afterDecember 15, 2005.  Early adoptionis permitted for accounting changes and corrections of errors made in fiscalyears beginning after the date SFAS No. 154 is issued.  The Company does not expect the adoption ofSFAS No. 154 to have a material impact on its financial results.

 

**Special Note RegardingForward-Looking Statements**

 

The statements in this report that are nothistorical facts are forward-looking statements that represent management’sbeliefs and assumptions as of the date of this report, based on currentlyavailable information.  Forward-lookingstatements can be identified by the use of words such as “believe”, “intend”, “estimate”,“may”, “will”, “should”, “anticipated”, “expected,” “trusts” or comparableterminology or by discussions of strategy. Such forward-looking statements may include, among others:

 

•      statements concerning thesuccess of TPI 287 in clinical trials and our ability to pursue additionalclinical trials relating to TPI 287, and the timing of any such furtherclinical development;

 

•      statements concerning ourplans, objectives and future economic prospects, such as matters relative todeveloping new products;

 

•      the availability of patentand other protection for our intellectual property;

 

•      the completion ofpreclinical studies, clinical trials and regulatory filings;

 

•      the prospects for, andtiming of, regulatory and institutional review board approvals;

 

•      the need and plans for, andavailability of, additional capital;

 

•      the amount and timing ofcapital expenditures;

 

•      the ability to outsourceactivities;

 

•      the future acquisition oftechnology, products or business entities;

 

•      prospects for futureoperations; and

 

•      other statements ofexpectations, beliefs, future plans and strategies, anticipated events ortrends and similar expressions concerning matters that are not historicalfacts.

 

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Although we believe that the expectationsreflected in such forward-looking statements are reasonable, we cannot assureyou that these expectations will prove to be correct.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors, which may cause our actualresults, performance or achievements, or industry results, to be materiallydifferent from any future results, performance or achievements expressed orimplied by such forward-looking statements.  Factors that could cause or contribute to suchdifferences include, but are not limited to, those mentioned in the discussionbelow and those described in the “Risk Factors” discussion of our AnnualReport on Form 10-K for the year ended December 29, 2004 filed withthe Securities and Exchange Commission (“SEC”). As a result, you should not place undue reliance on theseforward-looking statements, which apply only as of the date of this report.

 

*RisksRelated to Financing Our Operations*

 

•      We have already reduced our operationssubstantially.  If we fail to obtain thecapital necessary to fund our operations soon, we will be forced to furtherreduce or discontinue our operations.

 

•      Any significant financing activity we undertake will result insubstantial dilution to existing holders of common stock and possibly a changeof control of the Company because the trading price of our common stock andaggregate market capitalization of our common stock is low relative to ourrequirements for additional capital.

 

•      We have a history of net losses. We expect to continue to incur net losses, and we may never achieveprofitability.

 

•      Any significant financing activity we undertake is likely to result in a “changeof ownership” as described in Section 382 of the Internal Revenue Code,which would have the effect of severely limiting the Company’s ability toutilize its net operating loss and tax credit carryforwards.  As of December 29, 2004, the Company hadapproximately $84.8 million in net operating loss carryforwards and $2.6million tax credit carryforwards that would be so limited if a change ofownership were to occur.

 

*RisksRelated to Research and Development*

 

•      Ourproduct candidates and technologies are in an early state of development andthere is a high risk that they may never be commercialized either because ofthe costs of continuing development or because our research and developmentfails to produce any products of value. The results of clinical testing may show that our product candidates areunsafe and/or ineffective and therefore are not suitable as human therapeutics.

 

•      Our research and development efforts over a broad range of new potentialproducts and technologies may materially adversely affect our financialposition.

 

•      Our potential products and technologies must undergo rigorous clinicaltesting and regulatory approvals, which may substantially delay or prevent usfrom marketing any products.

 

•      Our oncologyand Huntington’s Disease treatment technologies are still new and indevelopment; very little data exists relative to the amount of data necessaryto have the products approved in the United States and new information mayarise which may cause us delays in designing our protocols, submittingapplications that satisfy all necessary regulatory review requirements, andultimately initiating and completing the clinical trials of our products.  There are no generally recognized and wellestablished animal models or other preclinical protocols relating to Huntington’sDisease, which makes assessment of the potential effectiveness of ourtechnology difficult.

 

•      We may berequired to obtain rights to proprietary technologies to further develop ourbusiness, which may not be available or may be costly.

 

•      Adverse eventsin the field of oncology may negatively impact regulatory approval or publicperception of our potential products and technologies resulting in decreaseddemand.

 

•      Our ability tomaintain our licenses for intellectual property is dependent upon our ultimatesuccess in our development programs.

 

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•      We may beunable to attract and retain the qualified employees we need to be successful.

 

•      Testing of ourpotential products and technologies relies heavily on the voluntaryparticipation of both study centers and patients in our clinical trials, whichare not within our control.  Difficultiesin obtaining cooperation with clinical study centers, or difficulty in accruingvolunteers to participate in our clinical trials, would substantially delay usfrom completing development of our products. Clinical trials of other companies with competing products could makepatient recruitment more difficult for our trials.

 

•      If we acquire any other products orbusiness operations, we will incur a variety of costs, and we may never realizethe anticipated benefits of the acquisition.

 

•      We may not besuccessful in obtaining required foreign regulatory approvals, which wouldprevent us from marketing our products internationally.

 

•      We rely onthird-parties to perform certain services for us and any interruption ortermination of these arrangements would adversely affect our business.

 

•      Our use ofhazardous materials exposes us to the risk of material environmentalliabilities, and we may incur substantial additional cost to comply withenvironmental laws in connection with the operation of our research andmanufacturing facilities.

 

*RisksRelated to the Pharmaceutical Business We May Develop in the Future*

 

•      Acceptance ofour potential products in the marketplace is uncertain, and failure to achievemarket acceptance will limit our ability to generate revenue and becomeprofitable.

 

•      We expect that we will face significant competition, which may limit ourability to become profitable.

 

•       Technological change andapprovals of competitive products may make any products and technologies wedevelop less attractive or obsolete.

 

•      If we areunable or fail to adequately protect our proprietary technologies, thirdparties may be able to use our technology, which could impair our ability tocommercialize our potential products, and to compete in the marketplace.

 

•      Litigation or third-party claims of intellectual property infringementwould require us to spend substantial time and money and adversely affect ourability to develop and commercialize future products.

 

•      We have no experience in manufacturing our potential therapeuticproducts, and currently no manufacturing facilities, which raises anuncertainty about our ability to manufacture our potential therapeutic productscost-effectively.

 

•      We have no experience in marketing or selling our potential therapeuticproducts and technologies, which raises an uncertainty about our ability tocommercialize our potential therapeutic products cost-effectively.

 

•      We may be required to rely on strategic partners for the development,marketing and manufacturing of future products and technologies which may delayor impair our ability to generate significant revenue and may otherwiseadversely affect our profitability.

 

•      In the event we receive regulatoryapproval for our product candidates, we will be subject to ongoing regulatory obligations.

 

•      Legislative and regulatory proposals toreduce the cost of health care may adversely affect our business.

 

•      If productliability lawsuits are successfully brought against us, we may incursubstantial liabilities and may be required to limit commercialization of ourproduct candidates.

 

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•      We may beunable to effectively price our products or obtain adequate reimbursement forsales of our products, which would prevent our products from becomingprofitable.

 

 

*RisksRelated to Our Status as a Public Company*

 

•      Our stock price is volatile, and your investment in our stock coulddecline in value.

 

•      Future sales and issuances of common stock may dilute our stockholders orcause our stock price to decline.

 

•      We received notice from the Nasdaq Stock Market, Inc. onFebruary 25, 2005 that the minimum bid price of our common stock hadfallen below $1.00 for 30 consecutive days and that our common stock will bedelisted if the minimum bid price does not exceed $1.00 per share during theperiods permitted by their rules to regain compliance.  Our common stock could also be delisted fromthe Nasdaq SmallCap Market if we fail to satisfy the requirements to maintainminimum stockholder equity of at least $2.5 million as a result of continuinglosses.  If we do not regain compliancewith the minimum bid price requirement and maintain compliance with all otherlisting requirements and Nasdaq delists our common stock, the delisting couldadversely affect the market liquidity of our common stock and the market priceof our common stock could decrease.

 

 

*OtherRisks Related to Our Business*

 

•      The loss of our Chairman and Chief Executive Officer, Leonard P. Shaykin,or other key executives, could severely harm our business.

 

•      We may beunable to renew or extend the leases on our leased facilities.

 

These and other factors related to theCompany’s business are described in more detail under the caption “Risk Factors”or “Special Note Regarding Forward-Looking Statements” in the Company’sdocuments filed from time to time with the SEC. Should one or more of these risks materialize (or the consequences ofsuch a development worsen), or should the underlying assumptions proveincorrect, actual results could differ materially from those forecasted orexpected.  We undertake no obligation toupdate any of the forward-looking statements after the date of this QuarterlyReport on Form 10-Q to conform such statements to actual results, exceptto the extent required by law.

 

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**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk**

 

We currently invest our excess cash balancesin money market accounts, and short-term and long-term investments that aresubject to interest rate risk.  The amount of interest income we earn onthese funds will change as interest rates in general change.  Ourinvestments are subject to a loss of principal if market interest ratesincrease and they are sold prior to maturity. However, due to the short-term nature of the majority of ourinvestments, the high credit quality of our portfolio and our ability to holdour investments until maturity, an immediate 1% change in interest rates wouldnot have a material impact on our financial position, results of operations orcash flows.

 

###### **Item4.  Controls and Procedures**

###### ** **

The Company maintains a system of disclosure controls andprocedures.  The term “disclosure controls and procedures,” as defined by regulations of the SEC, means controls andother procedures that are designed to ensure that information required to bedisclosed in the reports that the Company files or submits to the SEC under theSecurities Exchange Act of 1934, as amended (“the Act”), is recorded,processed, summarized andreported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controlsand procedures designed to ensure that information required to be disclosed bythe Company in the reports that it files or submits to the SEC under the Act isaccumulated and communicated to the Company’smanagement, including its Principal Executive Officer and its PrincipalFinancial Officer, as appropriate to allow timely decisions to be maderegarding required disclosure.  TheCompany carried out an evaluation, under the supervision and with theparticipation of the Company’smanagement, including the Company’sChief Executive Officer and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’sdisclosure controls and procedures as of September 28, 2005.  Based upon that evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company required to be included in theCompany’s periodic SEC filings.

 

Any system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met.  In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of futureevents.  Because of these and otherinherent limitations of control systems, there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote.

 

There have been no changes in our internalcontrols over financial reporting during the fiscal quarter ended September 28,2005 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**Part II - Other Information**

** **

**Item1.  Legal Proceedings**

 

See the Company’sQuarterly Report on Form 10-Q for the quarter ended March 30, 2005 for adiscussion of the settlement of our litigation with TL Ventures in February2005.

 

**Item 2.  UnregisteredSales of Equity Securities and Use of Proceeds**

 

Not applicable.

 

##### **Item 3.  Defaults upon Senior Securities**

##### ** **

Not applicable.

 

**Item 4.  Submission ofMatters to a Vote of Security Holders**

 

Not applicable.

 

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**Item5.  Other Information**

 

In conjunction with the preparation of itsinterim financial statements for the quarter ending September 28, 2005, theCompany recognized an impairment charge of $963,000 on the value of itsinvestment in ChromaDex to revalue it at $451,000 based on newly availableaudited financial information on ChromaDex’s results.

 

The Company enteredinto an employment agreement with Martin Batt on October 27, 2005.  Under the agreement,  Mr. Batt will be employed as the Company’sSenior Vice President and Chief Operating Officer and will performexecutive and administrative services for a base annual salary of $270,000, andthe Company may not terminate or alter Mr. Batt’s employment status withoutCause in such a way that he is nolonger eligible to receive Company benefits prior to April 15, 2006.  If Mr. Batt is terminated without Cause orresigns for good reason, upon compliance with certain conditions, the Companyis obligated to make the following payments to Mr. Batt 195 days after suchtermination (or such longer period as may be required by law): (i) 100%of Mr. Batt’s then effective base salary; (ii) a lump sum amount in cash equalto any accrued but unpaid salary through the date of termination and unpaidsalary with respect to any vacation days accrued but not taken as oftermination; and (iii) reimbursement of Mr. Batt’s COBRA payments.

 

The Company entered into an engagementagreement with Ferghana Securities Inc. (“FSI”) on October 27, 2005.  Under the agreement, FSI is engaged to assistthe Company with an equity financing. The agreement has a one year term unless sooner terminated or unless thefinancing is completed prior to that time. FSI is to be paid a retainer fee of $10,000 per month, a reimbursementof its expenses, a success fee equal to 2% of the net placement proceeds forinvestors introduced to the Company by other persons, a success fee equal to 3%of net placement proceeds for investors introduced to the Company by FSI,depending on the amount of gross placement proceeds, up to 500,000 warrants, aninvestment banking fee of $400,000 and an abandonment fee of $400,000 if theCompany abandons the financing process as a result of a merger, acquisition orother transaction during the term of the agreement.  The agreement also provides FSI withcustomary indemnification rights.  Halfof the total retainer fees paid may be offset against certain of the other feesowed pursuant to the agreement.

 

 

**Item 6. Exhibits**

 
| **Exhibit  Number** | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                    |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of Chief  Executive Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934, as amended)                                                                                              |
| 31.2                |       | Certification of Chief  Financial Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934, as amended)                                                                                              |
| 32.1#               |       | Certification of Chief  Executive Officer (pursuant to Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of  Title 18 of the United States Code (18 U.S.C. Section 1350)) |
| 32.2#               |       | Certification of Chief  Financial Officer (pursuant to Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of  Title 18 of the United States Code (18 U.S.C. Section 1350)) |

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#              This certification “accompanies” the Form 10-Qto which it relates, is not deemed filed with the SEC and is not to beincorporated by reference into any filing of the Company under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended(whether made before or after the date of the Form 10-Q), irrespective ofany general incorporation language contained in such filing.

 

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# **Signatures**

# ** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|             | TAPESTRY PHARMACEUTICALS,  INC.           |
|------------------|-------------------------------------------|
|             |                                      |
| November 2, 2005 | By:                                       | /s/ Leonard P. Shaykin |   |
| ** **       | **Leonard  P. Shaykin**                   |
| ** **       | **Chairman  of the Board of Directors,**  |
| ** **       | **Chief  Executive Officer**              |
| ** **       | ** **                                |
|             |                                      |
| November 2, 2005 | By:                                       | /s/ Gordon Link |   |
| ** **       | **Gordon  Link**                          |
| ** **       | **Senior  Vice President,**               |
| ** **       | **Chief  Financial Officer**              |
| ** **       | **(Principal  Financial Officer)**        |
| ** **       | ** **                                |
|             |                                      |
| November 2, 2005 | By:                                       | /s/ Bruce W. Fiedler |   |
| ** **       | **Bruce W.  Fiedler**                     |
| ** **       | **Vice  President, Corporate Controller** |
| ** **       | **(Principal  Accounting Officer)**       |

 

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**Indexof Exhibits**

 
| **Exhibit  Number** | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                    |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of Chief  Executive Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934, as amended)                                                                                              |
| 31.2                |       | Certification of Chief  Financial Officer (pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934, as amended)                                                                                              |
| 32.1#               |       | Certification of Chief  Executive Officer (pursuant to Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of  Title 18 of the United States Code (18 U.S.C. Section 1350)) |
| 32.2#               |       | Certification of Chief  Financial Officer (pursuant to Rule 13a-14(b) of the Securities  Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of  Title 18 of the United States Code (18 U.S.C. Section 1350)) |

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#                                         This certification “accompanies” the Form 10-Qto which it relates, is not deemed filed with the SEC and is not to beincorporated by reference into any filing of the Company under the SecuritiesAct of 1933, as amended, or the Securities Exchange Act of 1934, as amended(whether made before or after the date of the Form 10-Q), irrespective ofany general incorporation language contained in such filing.

 

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