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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, 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 29, 2004        
|OR        
|o          | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM                        TO

Commission File Number 0-24320

TAPESTRY PHARMACEUTICALS, INC.(Exact name of Registrant as specified in its charter)

Delaware

84-1187753(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)


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

(303) 516-8500(Registrant's telephone number, including area code)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section13or 15(d)of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

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

As of October 29, 2004, the registrant had 33,335,401 shares of common stock, $0.0075 par value, outstanding.

---





Tapestry Pharmaceuticals, Inc. and Subsidiaries  Table of Contents



|Part I     |  | Financial Information
|---------- |  | ---------------------
|           |  | Item 1               
|           |  | Item 2               
|           |  | Item 3               
|           |  | Item 4               
|Part II    |  | Other Information    
|           |  | Item 1               
|           |  | Item 2               
|           |  | Item 3               
|           |  | Item 4               
|           |  | Item 5               
|           |  | Item 6               
|Signatures

Exhibits

|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.
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 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.
|Exhibit 32.1 |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).        
|Exhibit 32.2 |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).        

2

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Part I  FINANCIAL INFORMATION

Item 1. Financial Statements

Tapestry Pharmaceuticals, Inc. and Subsidiaries        Consolidated Condensed Balance Sheets        (In thousands, except per share data)

|                                           |                                                                                                                                                                 | September 29,
2004 |        | December 31,
2003 |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------ | ----------------- | -
|
|ASSETS                                     |                                                                                                                                                                
|Current assets:                            |                                                                                                                                                                 |                    |        |                   |  
|                                           | Cash and cash equivalents                                                                                                                                       |                    | $      | 2,296             |  
|                                           | Short-term investments                                                                                                                                          |                    |        | 30,450            |  
|                                           | Accounts receivable, net                                                                                                                                        |                    |        |                  |  
|                                           | Prepaid expense and other current assets                                                                                                                        |                    |        | 967               |  
|                                           | Assets held for sale                                                                                                                                            |                    |        |                  |  
|                                           |                                                                                                                                                                 |                    |        |                   |  
|Total current assets                       |                                                                                                                                                                 |                    | 33,713 |                   |  
|Property, plant and equipment, net         |                                                                                                                                                                 |                    | 1,005  |                   |  
|Long-term investments                      |                                                                                                                                                                 |                    | 8,890  |                   |  
|Investment in ChromaDex, Inc.              |                                                                                                                                                                 |                    | 1,414  |                   |  
|Other assets                               |                                                                                                                                                                 |                    | 1,941  |                   |  
|                                           |                                                                                                                                                                 |                    |        |                   |  
|Total assets                               |                                                                                                                                                                 | $                  | 46,963 |                   | $
|                                           |                                                                                                                                                                 |                    |        |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                
|Current liabilities:                       |                                                                                                                                                                 |                    |        |                   |  
|                                           | Accounts payable and accrued liabilities                                                                                                                        |                    | $      | 2,867             |  
|                                           | Accrued payroll and payroll taxes                                                                                                                               |                    |        | 2,001             |  
|                                           | Notes payablecurrent portion                                                                                                                                   |                    |        | 46                |  
|                                           | Deferred income                                                                                                                                                 |                    |        | 130               |  
|                                           |                                                                                                                                                                 |                    |        |                   |  
|Total current liabilities                  |                                                                                                                                                                 |                    | 5,044  |                   |  
|Notes payablelong term                    |                                                                                                                                                                 |                    | 16     |                   |  
|Convertible debentures                     |                                                                                                                                                                 |                    | 6,167  |                   |  
|Stockholders' equity:                      |                                                                                                                                                                 |                    |        |                   |  
|                                           | Preferred stock, $.001 par value; 2,000,000 shares authorized; none issued                                                                                      |                    |        |                  |  
|                                           | Common stock, $.0075 par value; 64,000,000 shares authorized; 33,335,401 and 30,953,952 shares issued at September 29, 2004 and December 31, 2003, respectively |                    |        | 250               |  
|                                           | Additional paid-in capital                                                                                                                                      |                    |        | 117,233           |  
|                                           | Accumulated deficit                                                                                                                                             |                    |        | (81,690           | )
|                                           | Accumulated other comprehensive loss (Note 4)                                                                                                                   |                    |        | (57               | )
|                                           | Treasury stock, 54,306 shares at cost at December 31, 2003                                                                                                      |                    |        |                  |  
|                                           |                                                                                                                                                                 |                    |        |                   |  
|Total stockholders' equity                 |                                                                                                                                                                 |                    | 35,736 |                   |  
|                                           |                                                                                                                                                                 |                    |        |                   |  
|Total liabilities and stockholders' equity |                                                                                                                                                                 | $                  | 46,963 |                   | $
|                                           |                                                                                                                                                                 |                    |        |                   |  

See
accompanying notes to Consolidated Condensed Financial Statements.

3

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Tapestry Pharmaceuticals, Inc. and Subsidiaries        Consolidated Condensed Statements of Operations        (In thousands, except per share data)        (Unaudited)

|                                                                                |                                            | Quarter Ended |        | Nine Months Ended |  
|------------------------------------------------------------------------------- | ------------------------------------------ | ------------- | ------ | ----------------- | -
|
|Operating expenses:                                                             |                                            |               |        |                   |  
|                                                                                | Research and development                   |               | $      | 5,718             |  
|                                                                                | General and administrative                 |               |        | 2,019             |  
|                                                                                |                                            |               |        |                   |  
|Operating loss                                                                  |                                            |               | 7,737  |                   |  
|                                                                                |                                            |               |        |                   |  
|Other income (expense):                                                         |                                            |               |        |                   |  
|                                                                                | Interest income                            |               |        | 206               |  
|                                                                                | Interest expense                           |               |        | (242              | )
|                                                                                |                                            |               |        |                   |  
|Net loss from continuing operations                                             |                                            |               | (7,773 | )                 |  
|Discontinued operations:                                                        |                                            |               |        |                   |  
|                                                                                | Income (loss) from discontinued operations |               |        | 2,995             |  
|                                                                                |                                            |               |        |                   |  
|Net loss                                                                        |                                            | $             | (4,778 | )                 | $
|                                                                                |                                            |               |        |                   |  
|Basic and diluted loss per share from continuing operations                     |                                            | $             | (0.23  | )                 | $
|                                                                                |                                            |               |        |                   |  
|Basic and diluted income (loss) per share from discontinued operations          |                                            | $             | 0.09   |                   | $
|                                                                                |                                            |               |        |                   |  
|Basic and diluted loss per share                                                |                                            | $             | (0.14  | )                 | $
|                                                                                |                                            |               |        |                   |  
|Basic and diluted weighted average shares outstanding                           |                                            |               | 33,309 |                   |  
|                                                                                |                                            |               |        |                   |  
|Diluted weighted average shares outstanding relating to discontinued operations |                                            |               | 33,445 |                   |  
|                                                                                |                                            |               |        |                   |  

See
accompanying 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                        |        
|--------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------- | -------
|
|Operating activities:                                                       |                                                                  |                                          |        
|Net loss                                                                    |                                                                  | $                                        | (16,140
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                  |                                          |        
|                                                                            | Depreciation and amortization                                    |                                          |        
|                                                                            | Accretion of debt issue cost                                     |                                          |        
|                                                                            | Amortization of debt discount                                    |                                          |        
|                                                                            | Amortization of license fee income                               |                                          |        
|                                                                            | Amortization of investment premium                               |                                          |        
|                                                                            | Interest paid with common stock                                  |                                          |        
|                                                                            | Compensation paid with common stock and options                  |                                          |        
|                                                                            | Retirement contributions paid with common stock                  |                                          |        
|                                                                            | Asset write down                                                 |                                          |        
|                                                                            | Impairment loss on assets held for sale                          |                                          |        
|                                                                            | Changes in operating assets and liabilities:                     |                                          |        
|                                                                            |                                                                  | Accounts receivable                      |        
|                                                                            |                                                                  | Inventory                                |        
|                                                                            |                                                                  | Prepaid expense and other assets         |        
|                                                                            |                                                                  | Accounts payable and accrued liabilities |        
|                                                                            |                                                                  | Accrued payroll and payroll taxes        |        
|                                                                            |                                                                  | Deferred income                          |        
|                                                                            |                                                                  |                                          |        
|Net cash (used in) provided by operating activities                         |                                                                  |                                          | (13,589
|Investing activities:                                                       |                                                                  |                                          |        
|                                                                            | Additions to property and equipment                              |                                          |        
|                                                                            | Purchases of investments                                         |                                          |        
|                                                                            | Proceeds from sale of investments                                |                                          |        
|                                                                            | Proceeds from sale of property, plant and equipment              |                                          |        
|                                                                            | Acquisition of patents                                           |                                          |        
|                                                                            | Investment in ChromaDex, Inc.                                    |                                          |        
|                                                                            |                                                                  |                                          |        
|Net cash provided by (used in) investing activities                         |                                                                  |                                          | 8,791  
|Financing activities:                                                       |                                                                  |                                          |        
|                                                                            | Proceeds from notes payable                                      |                                          |        
|                                                                            | Payments of notes payable                                        |                                          |        
|                                                                            | Proceeds from the sale of common stock, net of issuance cost     |                                          |        
|                                                                            | Proceeds from the exercise of common stock options               |                                          |        
|                                                                            |                                                                  |                                          |        
|Net cash provided by financing activities                                   |                                                                  |                                          | 4,813  
|                                                                            |                                                                  |                                          |        
|Net increase in cash and cash equivalents                                   |                                                                  |                                          | 15     
|Cash and cash equivalents at beginning of period                            |                                                                  |                                          | 2,281  
|                                                                            |                                                                  |                                          |        
|Cash and cash equivalents at end of period                                  |                                                                  | $                                        | 2,296  
|                                                                            |                                                                  |                                          |        
|Supplemental disclosure of cash flow information:                           |                                                                  |                                          |        
|Interest paid in cash                                                       |                                                                  | $                                        | 167    
|Non-cash investing and financing activities:                                |                                                                  |                                          |        
|                                                                            | Issuance of common stock for payment of interest                 |                                          |        
|                                                                            | Issuance of common stock to prepay retirement plan contributions |                                          |        
|                                                                            | Transfer of fixed assets for investment in ChromaDex, Inc.       |                                          |        
|                                                                            | Issuance of restricted common stock to prepay retention bonus    |                                          |        
|                                                                            | Depletion of plantation costs to inventory                       |                                          |        

See accompanying notes to Consolidated Condensed Financial Statements.

5

---





Tapestry Pharmaceuticals, Inc.        Notes to Consolidated Condensed Financial Statements        September 29, 2004        (Unaudited)

Note 1. Basis of Presentation

The accompanying financial statements are unaudited. However, in the opinion of management, the financial statements reflect all adjustments, consisting of only
normal recurring adjustments, necessary for fair presentation. Interim results of operations may not be indicative of results for the full year. These financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2003.

Note 2. Reclassifications

Certain data in the consolidated condensed financial statements of the prior year have been reclassified to conform to the current year presentation.

Note 3. Discontinued Operations

Sale of Paclitaxel Business

On December 12, 2003, the Company sold its worldwide generic injectable paclitaxel business to Mayne Pharma (USA) Inc. (f/k/a/ Faulding
Pharmaceutical Co.) ("Mayne Pharma"), a subsidiary of Mayne Group Limited, for cash in the amount of $71.7 million minus an inventory adjustment of $4.6 million to reflect the Company's
actual inventory as of the closing. The sale resulted in a gain of $54.6 million before taxes, and $54.1 million after taxes. Proceeds from the sale are being used to fund the
development and commercialization of therapeutic products and for general corporate purposes. In addition, approximately $21.9 million of the proceeds of the purchase price was paid to Abbott
Laboratories ("Abbott") to retire all outstanding debt, interest and payables the Company owed to Abbott. The assets sold to Mayne Pharma included paclitaxel manufacturing assets, yew plantations,
domestic and international issued and pending paclitaxel patents, a worldwide registration dossier, worldwide development and supply agreements, inventories and settlement of accounts receivable. The
Company retained all of its intellectual property not used in connection with the business sold. This transaction with Mayne Pharma provided that the Company was entitled to a portion of the cash
proceeds received in connection with a patent infringement lawsuit against Mylan Laboratories, Inc. ("Mylan Laboratories") (Note 9). This lawsuit was settled in July 2004 and the
Company received $3.0 million as its share of the proceeds.

The
paclitaxel business was reported as a discontinued operation in 2003; accordingly, results from the prior year have been reclassified to reflect this. Summary results of operations
of the paclitaxel business for the quarter and nine months ended were (in thousands):

Quarter Ended

Nine Months EndedSeptember 29,
2004

October 1,
2003

September 29,
2004

October 1,
2003Product sales

$


$
7,265

$


$
21,711Net income (loss)

$
2,995

$
(1,017
)
$
3,256

$
4,978


Paclitaxel
income in 2004 consisted primarily of the $3.0 million patent infringement settlement with Mylan Laboratories and a $250,000 business interruption insurance claim filed
and collected in

6

---



2004
for losses sustained in the third quarter of 2003, resulting from a hurricane that disrupted operations of a contract manufacturer employed by Tapestry.

Gene Isolation and Service Business

In December 2003, the Company made the decision to sell its gene isolation and service business and, therefore, accounted for it as a discontinued
operation. Net operating loss related to this business totaled $0 and $123,000 during the third quarters of 2004 and 2003, respectively. For the first nine months, the net operating loss
totaled $221,000 and $388,000 for 2004 and 2003, respectively. In the first quarter of 2004, the Company recorded an impairment loss of $205,000 for all assets that had previously been identified as
held for sale.

Assets
held for sale at December 31, 2003 that related to the discontinued operations of the gene isolation and service business were as follows (in thousands):

Property, plant and equipment, net

$
122Other assets


83Assets held for sale

$
205


Note 4. Investments

Short-term investments consisted of investment grade commercial paper due within one year. Long-term investments consisted of investment
grade commercial paper with maturities beyond one year. All investments are classified as available-for-sale and are recorded at market value. Unrealized losses are reflected
in comprehensive net loss.

Comprehensive
loss for the Company consists of net loss and unrealized holding gains and losses on available-for-sale investments as presented below (in
thousands):

Quarter Ended

Nine Months EndedSeptember 29,
2004

October 1,
2003

September 29,
2004

October 1,
2003Net loss, as reported

$
(4,778
)
$
(6,063
)
$
(16,140
)
$
(10,943
)Unrealized gain (loss) on available-for-sale securities


28





(57
)

Comprehensive net loss

$
(4,750
)
$
(6,063
)
$
(16,197
)
$
(10,943
)


Note 5. Property, Plant and Equipment

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

September 29,
2004

December 31,
2003Furniture, fixtures and office equipment

$
702

$
528Laboratory equipment


1,092


754Leasehold improvements


45


38Construction in progress


15


3911,854


1,711Less accumulated depreciation and amortization


(849
)

(555
)Property, plant and equipment, net

$
1,005

$
1,156


7

---



Note 6. Investment in ChromaDex, Inc.

In April 2003, the Company sold its technical and analytical services group to privately held ChromaDex, Inc. in exchange for approximately 15%, on
a fully diluted basis, of the then outstanding common stock of ChromaDex, Inc. The Company valued this investment at approximately $1.4 million based upon the fair market value of the
net assets sold to ChromaDex. ChromaDex is a supplier of phytochemical reference standards for the nutraceutical, dietary supplement and functional food industries.

Note 7. Net Income (Loss) Per Share

Basic earnings per share is measured as the income or loss available to common stockholders divided by the weighted average outstanding common shares for the
period. Diluted earnings per share is similar to basic earnings per share but presents the dilutive effect on a per share basis of potential common shares (e.g. stock options, warrants and convertible
securities) as if they had been converted at the beginning of the periods presented. Potential common shares that have an antidilutive effect are excluded from diluted earnings per share. Net loss per
common share is computed using the weighted average number of shares of common stock outstanding. The following is a reconciliation of the shares (denominator) of the basic and diluted per share
computations (in thousands):

Quarter Ended

Nine Months EndedSeptember 29,
2004

October 1,
2003

September 29,
2004

October 1,
2003Basic weighted average common shares outstanding

33,309

30,759

32,537

30,397Effect of dilutive securities:Employee stock options

136

258

667

54Diluted weighted average common shares outstanding for income from discontinued operations

33,445

31,017

33,204

30,451


Note 8. Stock Options

Tapestry accounts for its stock options to employees and directors in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for
Stock Issued to Employees, and related interpretations. Pursuant to APB No. 25, compensation expense to employees is recorded only if the fair value of the underlying stock exceeds the exercise
price on the date of grant. Stock options granted to consultants are accounted for under the fair value method, in accordance with Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation.

Pro
forma information regarding net income and earnings per share is required by SFAS 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 had accounted for employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. Tapestry estimated the fair value for these options at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for the quarters ended September 29, 2004 and October 1, 2003, respectively: risk-free interest rates of 3.81% and 1.98% to 2.65%; no
expected dividend; volatility factors of 1.237 and 1.228; and generally an estimated expected life range of four to six years. For the nine months ended September 29, 2004 and
October 1, 2003, respectively, Tapestry estimated the fair market value of these options with the following assumptions: risk-free interest rates of 2.51% to 3.81% and 1.98% to
3.22%; no expected dividend;

8

---



volatility
factors of 1.028 to 1.237 and 1.187 to 1.228; and generally an estimated expected life range of four to six years.

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

Quarter Ended

Nine Months EndedSeptember 29,
2004

October 1,
2003

September 29,
2004

October 1,
2003Net loss as reported

$
(4,778
)
$
(6,063
)
$
(16,140
)
$
(10,943
)Deduct: Total stock based employee compensation expense determined under fair value based method for all awards


(638
)

(935
)

(2,454
)

(2,857
)Pro forma net loss

$
(5,416
)
$
(6,998
)
$
(18,594
)
$
(13,800
)Basic and diluted loss per shareas reported

$
(0.14
)
$
(0.20
)
$
(0.50
)
$
(0.36
)Pro forma basic and diluted loss per share

$
(0.16
)
$
(0.23
)
$
(0.57
)
$
(0.45
)


Note 9. Mylan Litigation Settlement

On July 6, 2004, the Company announced Mayne Pharma reached an agreement to settle the patent infringement lawsuit against Mylan Laboratories regarding
stabilized formulations of paclitaxel. Pursuant to the terms of the agreement, the Company received a $3.0 million cash payment as its share of the proceeds from this settlement, which was
recorded in discontinued operations in the third quarter of 2004 (Note 3).

Note 10. Recent Accounting Pronouncements

We have evaluated all recent accounting pronouncements and believe that such accounting pronouncements do not have a material effect on our consolidated financial
statements.

9

---





Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information that management believes is relevant to an assessment and understanding of the results of operations of
Tapestry Pharmaceuticals, Inc. You should read this discussion in conjunction with the Financial Statements and Notes included elsewhere in this report and with Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended December 31, 2003 contained in our 2003 Annual Report on Form 10-K, as amended. Certain
statements set forth below constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, referred to as the "Reform Act." See "Special
Note Regarding Forward-Looking Statements."

General

Tapestry Pharmaceuticals, Inc. ("we," "Tapestry" or "the Company") is a pharmaceutical company focused on the development of proprietary therapies for the
treatment of cancer and hereditary disease. We believe that our compounds function by novel biological and/or chemical mechanisms and, therefore, if successful in clinical trials, may add to the
amelioration of their specific disease targets.

We
are also actively engaged in evaluating the in-licensing or purchasing of new therapeutic agents and/or related technologies. Our evaluation of new products and
technologies may involve the examination of individual molecules, classes of compounds, or platform technologies, in cancer as well as other therapeutic areas. Acquisitions of new products or
technologies may involve the purchase or licensing of such products or technologies, or the acquisition of, or merger with, other companies.

We
incur substantial research and development expense related to the development of our proprietary anti-cancer agents, and the development of our proprietary genomic
technologies. We incurred significant losses, including losses from continuing operations of $7.8 million and $19.2 million for the three and nine month periods, respectively, ended
September 29, 2004. Our accumulated deficit was $81.7 million as of September 29, 2004. We anticipate that losses will continue until such time, if ever, as we are able to
generate sufficient revenue to support our development operations, including the research and development activity discussed below.

Our
ability to raise capital to support our operations currently depends upon the successful development and commercialization of products based on our proprietary oncology and genomic
technologies. Our oncology program consists of developing both targeted as well as non-targeted compounds for the treatment of cancer. Our lead program in hereditary disease is for the
treatment of Huntington's Disease. All of our products and technologies are in the early stages of development and we cannot assure you that our efforts will be successful.

Research and Development

Our current business is focused on research and development of proprietary therapies for the treatment of cancer and hereditary disease. In 2003, we were also
engaged in research and development related to our paclitaxel business, which is aggregated in discontinued operations. The following table lists our research and development expense by division (in
thousands):

Quarter Ended

Nine Months EndedSeptember 29,
2004

October 1,
2003

September 29,
2004

October 1,
2003Oncology

$
4,585

$
1,014

$
8,981

$
3,562Genomics


1,133


1,019


3,796


3,257Discontinued operations





220





924$
5,718

$
2,253

$
12,777

$
7,743


10

---



The
following chart identifies our four therapeutic products that are in the most advanced stages of development. All of these products are in preclinical research. We are focusing our
efforts and resources on the development of these products.

Product

Potential Indication(s)TPI 287

Prostate Cancer, Non-Small Cell Lung Cancer, Pancreatic Cancer, Ovarian CancerTPI 273

Multiple Myeloma, Pancreatic Cancer, Prostate Cancer, Squamous Cell CarcinomasTPI 284

Squamous Cell Carcinomas of the head, neck and lungOligo Therapy

Huntington's Disease


The
chart above does not reflect ongoing research programs for which a development lead has not been advanced into preclinical development. It also excludes the Sickle Cell hereditary
disease program and the Bombesin targeted oncology program. These programs have been removed from development status until either additional ongoing research warrants their return to development
status or a final decision has been made to cancel research in these programs.



11

---





Certain Risks and Limitations.The clinical development of these drugs has many risks of failure. Drugs must be proven safe
and effective before they can be approved for human use. The advancement of all of these drugs into human clinical trials is dependent on the positive outcome of pending preclinical studies, decisions
by the FDA, institutional review boards, and other regulatory factors. Patient recruitment for clinical trials drugs can be difficult, and clinical trials may be delayed or prolonged due to inability
to recruit a sufficient number of patients. In addition, the manufacture of these drug
candidates is a complex process. Manufacturing these drugs for use in clinical trials, according to FDA guidelines, presents a number of significant risks and challenges. The manufacture of TPI 287,
in particular, is a very complex and difficult process. If we are unable to manufacture adequate supplies of any of our compounds for our clinical trials, our timelines for development could be
delayed significantly. With regard to the oligonucleotide therapy, the search for an appropriate intercranial delivery mechanism may present a significant obstacle to human therapy, even if the
oligonucleotide itself proves to be active. Given the uncertainty of drug development, it is impossible to say how long the clinical development of any of these compounds will take.

We
cannot be sure that we will begin clinical testing for these programs at the times stated above. We also cannot estimate the cost of the effort necessary to complete these programs or
when, if ever, we will receive material revenues from these programs. Successfully completing these programs and obtaining an approved product for sale in the United States and offshore will be
dependent upon our raising additional capital. We cannot be certain that we will be able to obtain capital on acceptable

12

---



terms.
We have included a number of the risks and uncertainties associated with completing our product development plans in the Special Note Regarding Forward-Looking Statements, below.

We
continuously reassess all of our research and development efforts, including those for the therapeutic products described above. At any time, we may expand, delay, terminate or
dispose of all or any portion of our research and development program and therapeutic products and may acquire rights to new product candidates.

Quarter Ended September 29, 2004 Compared to Quarter Ended October 1, 2003

Research and Development Expense.Research and development expense for the third quarter of 2004 was $5.7 million, an
increase of $3.5 million from the prior year quarter. Research and development expense relating to the paclitaxel business was $200,000 in 2003, and is included in discontinued operations.
Oncology research and development expense increased $3.6 million to $4.6 million in the third quarter of 2004, and genomics research and development expense increased $100,000 to
$1.1 million in the third quarter of 2004. Increased oncology and genomics expense was primarily due to our preclinical development activities consisting of higher contract manufacturing
expense ($2.1 million), consulting and outside services expense ($800,000) and compensation and fringe benefits expense ($800,000).

General and Administrative Expense.General and administrative expense for the third quarter of 2004 was $2.0 million,
a decrease of $1.3 million from the prior year quarter. Approximately $600,000 of our general and administrative expense in 2003 was incurred in connection with our paclitaxel business and is
included in discontinued operations. The $1.3 million decrease was primarily due to lower compensation and fringe benefits expense due to fewer employees ($400,000), lower depreciation expense
resulting from the disposition of fixed assets ($200,000), lower insurance expense ($200,000) primarily resulting from lower rates and the disposition of fixed assets, lower legal expense ($200,000),
and lower maintenance expense ($200,000) due to costs incurred in 2003 with the relocation of our headquarters facility.

Interest Income.Interest income for the second quarter of 2004 increased by $200,000 compared to the prior year quarter. The
increase was attributable to higher average balances of interest-bearing investments.

Interest Expense.Prior year interest on debt owed to Abbott Laboratories of $300,000 is included in discontinued operations.

Discontinued Operations.Income from discontinued operations for the third quarter of 2004 was $3.0 million, an
increase of $4.1 million from the prior year quarter. Income of $3.0 million in the third quarter of 2004 was our share of the cash proceeds of the Mayne Pharma patent infringement
lawsuit against Mylan Laboratories. As a result of the sale of our paclitaxel business in December 2003, we anticipate having no material sales revenue in 2004.

Nine Months Ended September 29, 2004 Compared to Nine Months Ended October 1, 2003

Research and Development Expense.Research and development expense for the nine months ended September 29, 2004
was $12.8 million, an increase of $5.0 million from the 2003 period. Research and development expense relating to the paclitaxel business was $900,000 in 2003, and is included in
discontinued operations. Oncology research and development expense increased $5.4 million to $9.0 million in the 2004 period, and genomics research and development expense increased
$500,000 to $3.8 million in the 2004 period. Increased oncology and genomics expense was primarily due to our preclinical development activities consisting of higher contract manufacturing
expense ($3.0 million), consulting and outside services expense ($1.4 million) and compensation and fringe benefits expense ($1.1 million), partially offset by lower supplies
expense ($500,000).

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General and Administrative Expense.General and administrative expense for the nine months ended September 29,
2004 was $6.2 million, a decrease of $2.9 million from the 2003 period. Approximately $1.0 million of our general and administrative expense in 2003 was incurred in connection
with our paclitaxel business and is included in discontinued operations. The $2.9 million decrease was primarily due to lower compensation and fringe benefits expense due to fewer employees
($1.0 million), lower depreciation expense resulting from the disposition of fixed assets ($600,000), lower consulting and outside services expense ($400,000), lower rent and facility costs
($400,000), lower insurance expense due to lower rates and the disposition of fixed assets ($300,000), and lower maintenance expense ($300,000) primarily due to costs incurred in 2003 with the
relocation of our headquarters facility.

Interest Income.Interest income for the nine months ended September 29, 2004 increased by $400,000 compared to
the 2003 period. The increase was attributable to higher average balances of interest-bearing investments.

Interest Expense.Prior year interest expense on debt owed to Abbott Laboratories of $1.1 million is included in
discontinued operations.

Discontinued Operations.Income from discontinued operations was $3.0 million for the nine months ended
September 29, 2004, a decrease of $1.6 million from the 2003 period. As a result of the sale of our paclitaxel business in December 2003, we anticipate having no material sales
revenue in 2004. The income recognized in 2004 primarily resulted from our share of the cash proceeds of the Mayne Pharma patent infringement lawsuit against Mylan Laboratories totaling
$3.0 million.

Liquidity and Capital Resources

Our requirements for research and development and other expenditures have been, and will continue to be, significant. As of September 29, 2004, we had a
working capital balance of $28.7 million compared to a working capital balance of $47.1 million at December 31, 2003. Our cash, cash equivalents, short-term and
long-term investments totaled $41.6 million and $50.8 million at September 29, 2004 and December 31, 2003, respectively. From inception, we have funded our
capital requirements primarily with the net proceeds of public offerings of common stock of $21.1 million of private placements of equity and convertible securities of $67.5 million of
the exercise of warrants and options of $8.0 million, of debt of $8.1 million, and with the sale of the paclitaxel business resulting in gross proceeds of $71.7 million.

In
August 2003, we filed an equity shelf registration statement with the U.S. Securities and Exchange Commission ("SEC") covering the issuance of up to 6.5 million shares
of our common stock and 1.0 million shares of our preferred stock. In March 2004, we issued 2.0 million shares of our common stock under this registration statement, leaving
4.5 million shares of common stock remaining available to be issued. This registration statement is intended to give us the flexibility to take advantage of
financing opportunities from time to time when market conditions are favorable. We may sell the stock covered by this registration statement at prices and in a manner we determine from time to time.

TL
Ventures Funds, one of our principal institutional investors, advised us that it believes that completion of the sale of our paclitaxel business to Mayne Pharma entitled it to have
its $8.0 million of Company 4% convertible subordinated debentures redeemed. We dispute this position. A legal proceeding to resolve the matter is now pending in Delaware.

We
believe existing resources will be adequate to fund our operations and capital expenditures for at least the next 12 months. However, pharmaceutical development is a costly,
risky and time intensive activity. To bring our various programs to completion will require us to raise additional capital in the future. We cannot assure you that we will be able to obtain additional
capital on terms that will be acceptable to us. In addition, we may seek to in-license or purchase new products or technologies. The cost and related capital expenditures of acquiring and
developing such resources may be significant, and

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we
may not be able to obtain capital for the development of these products or technologies on terms acceptable to us.

Working Capital and Cash Flow:Cash and cash equivalents were $2.3 million at both September 29, 2004 and
December 31, 2003. This was primarily due to $13.6 million of net cash used in operating activities, which includes the receipt of $3.0 million from the settlement of the Mylan
litigation, offset by the net proceeds from the sale of common stock totaling $4.8 million and the net proceeds from the sale of short-term and long-term investments
totaling $8.9 million. With the sale of the paclitaxel business in December 2003, we no longer generate cash from operating activities.

In
connection with the sale of the paclitaxel business, all related inventories were sold with the business. The majority of our accounts receivable were settled with the sale of the
paclitaxel business, as were certain liabilities. We anticipate that the level of our accounts receivable and inventories will remain negligible, as we do not anticipate any material sales revenue
during 2004.

Critical Accounting Policies

The Company's critical accounting policies are presented in its Annual Report on Form 10-K, as amended, for the year ended December 31,
2003. There were no changes to these critical accounting policies during the nine months ended September 29, 2004.

Special Note Regarding Forward-Looking Statements

The statements in this report that are not historical facts are forward-looking statements that represent management's beliefs and assumptions as of the date of
this report, based on currently available information. Forward-looking statements can be identified by the use of words such as "believe," "intend," "estimate," "may," "will," "should," "anticipated,"
"expected," "trusts" or comparable terminology or by discussions of strategy. Such forward-looking statements may include, among others:



Although
we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. Such
forward-looking

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statements
involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements, or industry results, to be materially different from any
future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those identified above under "Research and
DevelopmentCertain Risks and Limitations" and the following:

Risks Related to Research and Development



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Risks Related to the Pharmaceutical Business We May Develop in the Future



Risks Related to Financing Our Operations



Risks Related to Our Status as a Public Company



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Other Risks Related to Our Business



These
and other factors related to the Company's business are described in more detail under the caption "Risk Factors" or "Special Note Regarding Forward-Looking Statements" in
the Company's documents filed from time to time with the Securities and Exchange Commission. Should one or more of these risks materialize (or the consequences of such a development worsen), or should
the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. We undertake no obligation to update any of the forward-looking statements after
the date of this Quarterly Report on Form 10-Q to conform such statements to actual results.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We currently invest our excess cash balances in money market accounts, and short-term and long-term investments that are subject to
interest rate risk. The amount of interest income we earn on these funds will decline with a decline in interest rates. Our investments are subject to a loss of principal with an increase in interest
rates if sold prior to their maturity. However, due to the short-term nature of the majority of our investments, the high credit quality of our portfolio and our ability to hold our
investments until maturity, an immediate change in interest rates would not have a material impact on our financial position, results of operations or cash flows.

Item 4. Controls and Procedures

The Company maintains a system of disclosure controls and procedures. The term "disclosure controls and procedures," as defined by regulations of the SEC, means
controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of
1934, as amended ("the Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and
communicated to the Company's management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions to be made regarding required disclosure. The
Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls and procedures as of September 29, 2004. Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in
the Company's periodic SEC filings.

Any
system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of
any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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Part IIOther Information

Item 1. Legal Proceedings

On July 6, 2004, we announced Mayne Pharma reached an agreement to settle the patent infringement lawsuit against Mylan Laboratories regarding stabilized
formulations of paclitaxel. Pursuant to the terms of the agreement, we received a $3.0 million cash payment as our share of the proceeds from this settlement, which we recorded in discontinued
operations in the third quarter of 2004.

See
our Form 10-Q for the quarter ended June 30, 2004 for disclosure of a development affecting our legal proceeding with two TL Ventures funds.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company transferred 18,359 shares of common stock to its Employee Stock Ownership Plan in August 2004. As a transfer by the Company to a
noncontributory benefit plan, no sale of securities was involved.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

At Tapestry's annual meeting of stockholders on July 6, 2004, the matters listed below were submitted to a vote of Tapestry's stockholders with the
following results:

Number of SharesNomineeFor

WithheldPatricia A. Pilia, Ph.D.

28,039,622

752,960Edward Erickson

27,829,859

962,723Richard N. Perle

27,505,376

1,287,206


Number of SharesFor

8,006,644Against

2,212,930Abstain

55,239


Number of SharesFor

8,135,862Against

2,102,489Abstain

36,462


A
fourth proposal, to ratify the selection by the Board of Directors of Ernst & Young LLP as our independent auditors for the year ending December 31, 2003, was included in
our proxy statement for the annual meeting but was not voted upon. Ernst & Young LLP resigned as our independent auditors between the mailing of the proxy statement and the date the annual
meeting was held. Subsequently, we engaged Grant Thornton LLP as our independent auditors.

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Item 5. Other Information

Not applicable.

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 Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).        
|32.2*#         |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).        

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Signatures

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

|                 |  | TAPESTRY PHARMACEUTICALS, INC.
|---------------- |  | ------------------------------
|November 4, 2004 |  | By:                           
|November 4, 2004 |  | By:                           
|November 4, 2004 |  | By:                           

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