**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**FORTHE QUARTERLY PERIOD ENDED JUNE 27, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**FORTHE TRANSITION PERIODFROM               TO**

**CommissionFile Number 0-24320**

**TAPESTRY PHARMACEUTICALS, INC.**

(Exact name of Registrantas 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 principalexecutive office, including zip code)

**(303) 516-8500**

(Registrant’s telephonenumber, including area code)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x  No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

| Large accelerated filer o | Accelerated Filer  o | Non-accelerated  filer x |
|---------------------------|----------------------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act). Yes o  No x

As of August 3, 2007, the registrant had16,586,159 shares of common stock, $0.0075 par value, outstanding.

 

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**TapestryPharmaceuticals, Inc. and SubsidiariesTable of Contents**

| **Part I**  | **Financial Information** |                                                                                             |   |   |
|------------------|---------------------------|--------------------------------------------------------------------------------------------------|--------|--------|
|             | Item 1                    | Unaudited Financial Statements                                                                   |   | 3      |   |
|             | Item 2                    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   | 16     |   |
|             | Item 3                    | Quantitative and Qualitative  Disclosures about Market Risk                                      |   | 24     |   |
|             | Item 4                    | Controls and Procedures                                                                          |   | 24     |   |
| **Part II** | **Other Information**     |                                                                                             |   |   |
|             | Item 1                    | Legal Proceedings                                                                                |   | 26     |   |
|             | Item 1A                   | Risk Factors                                                                                     |   | 26     |   |
|             | Item 2                    | Unregistered Sales of Equity  Securities and Use of Proceeds                                     |   | 48     |   |
|             | Item 3                    | Defaults upon Senior  Securities                                                                 |   | 48     |   |
|             | Item 4                    | Submission of Matters to a  Vote of Security Holders                                             |   | 48     |   |
|             | Item 5                    | Other Information                                                                                |   | 48     |   |
|             | Item 6                    | Exhibits                                                                                         |   | 48     |   |
| **Signatures**   |                      | 49                                                                                               |   |

 

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**Part I—FinancialInformation**

**Item 1.**                        FinancialStatements

**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Balance Sheets(In thousands, except share data)(Unaudited)**

| ** **                                                                                                                                                                                   | ** ** | **June 27,** | ** ** | **December 27,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                                                                   |       |              |       |                  |       |   |   |
| Current assets:                                                                                                                                                                              |       |              |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                                    |       | $                 | 443        |                  |       | $ | 180 |   |   |
| Short-term investments                                                                                                                                                                       |       | 13,985            |       |                  | 22,277     |   |   |
| Prepaid expense and other current assets                                                                                                                                                     |       | 489               |       |                  | 335        |   |   |
| Total current  assets                                                                                                                                                                        |       | 14,917            |       |                  | 22,792     |   |   |
| Property, plant  and equipment, net                                                                                                                                                          |       | 679               |       |                  | 681        |   |   |
| Investment in ChromaDex, Inc.                                                                                                                                                           |       | 459               |       |                  | 459        |   |   |
| Other assets                                                                                                                                                                                 |       | 1,012             |       |                  | 674        |   |   |
| Total assets                                                                                                                                                                                 |       | $                 | 17,067     |                  |       | $ | 24,606 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                | ** ** | ** **        | ** ** |                  |       |   |   |
| Current  liabilities:                                                                                                                                                                        |       |              |       |                  |       |   |   |
| Accounts payable and accrued liabilities                                                                                                                                                     |       | $                 | 2,034      |                  |       | $ | 904 |   |   |
| Accrued payroll and payroll taxes                                                                                                                                                            |       | 1,387             |       |                  | 1,566      |   |   |
| Notes payable—current portion, net                                                                                                                                                      |       | 129               |       |                  | 115        |   |   |
| Total current  liabilities                                                                                                                                                                   |       | 3,550             |       |                  | 2,585      |   |   |
| Notes payable—long term, net                                                                                                                                                            |       | 53                |       |                  | 112        |   |   |
| 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; 16,586,159 and 16,374,395 shares issued and outstanding at  June 27, 2007 and December 27, 2006, respectively |       | 124               |       |                  | 123        |   |   |
| Additional paid in capital                                                                                                                                                                   |       | 147,835           |       |                  | 145,700    |   |   |
| Accumulated deficit                                                                                                                                                                          |       | (134,495          | )          |                  | (123,914   | ) |   |
| Total  stockholders’ equity                                                                                                                                                             |       | 13,464            |       |                  | 21,909     |   |   |
| Total liabilities and  stockholders’ equity                                                                                                                                             |       | $                 | 17,067     |                  |       | $ | 24,606 |   |   |

 

See accompanying notes to Consolidated Financial Statements.

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**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements of Operations(In thousands, except share and per share data)(Unaudited)**

| ** **                                                     | ** ** | **Three-Months Ended** | ** ** | **Six-Months Ended** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                                     | ** ** | **June 27,**           | ** ** | **June 28,**         | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                                                     | ** ** | **2007**                    | ** ** | **2006**                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating expenses:                                            |       |                        |       |                      |       |   |   |   |   |
| Research and development                                       |       | $                           | 3,994      |                      | $          | 2,391 |   | $ | 6,887 |   | $ | 5,205 |   |
| General and administrative                                     |       | 2,398                       |       | 2,038                     |       | 4,175 |   | 3,495 |   |
| Operating loss                                                 |       | 6,392                       |       | 4,429                     |       | 11,062 |   | 8,700 |   |
| Other income  (expense):                                       |       |                        |       |                      |       |   |   |   |   |
| Interest and other income                                      |       | 222                         |       | 394                       |       | 493 |   | 536 |   |
| Interest and other expense                                     |       | (5                          | )          | (128                      | )          | (12 | ) | (302 | ) |
| Loss from  continuing operations                               |       | (6,175                      | )          | (4,163                    | )          | (10,581 | ) | (8,466 | ) |
| Loss from discontinued operations                              |       | —                      |       | —                    |       | — |   | (88 | ) |
| Net loss                                                       |       | $                           | (6,175     | )                         | $          | (4,163 | ) | $ | (10,581 | ) | $ | (8,554 | ) |
| Basic and diluted loss per share from continuing  operations   |       | $                           | (0.37      | )                         | $          | (0.28 | ) | $ | (0.64 | ) | $ | (0.91 | ) |
| Basic and diluted  loss per share from discontinued operations |       | $                           | —     |                      | $          | — |   | $ | — |   | $ | (0.01 | ) |
| Basic and diluted  loss per share                              |       | $                           | (0.37      | )                         | $          | (0.28 | ) | $ | (0.64 | ) | $ | (0.92 | ) |
| Basic and diluted  weighted average shares outstanding         |       | 16,510                      |       | 15,052                    |       | 16,442 |   | 9,268 |   |

 

See accompanying notes to Consolidated Financial Statements.

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**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements of Cash Flows(In thousands)(Unaudited)**

| ** **                                                                   | ** ** | **Six-Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                   | ** ** | **June 27,**         | ** ** | **June 28,** | ** ** |
| ** **                                                                   | ** ** | **2007**                  | ** ** | **2006** | ** ** |
| Operating activities:                                                        |       |                      |       |   |   |
| Net loss                                                                     |       | $                         | (10,581    | ) | $ | (8,554 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                      |       |   |   |
| Depreciation and amortization                                                |       | 115                       |       | 113 |   |
| Amortization of debt discount                                                |       | 9                         |       | 262 |   |
| Amortization of investment discount                                          |       | (52                       | )          | (106 | ) |
| Compensation paid with common stock                                          |       | 1,722                     |       | 1,924 |   |
| Retirement contributions paid with common stock                              |       | 201                       |       | 194 |   |
| Loss on sale of investments                                                  |       | —                    |       | 38 |   |
| Loss on disposal of assets                                                   |       | —                    |       | 1 |   |
| Changes in  operating assets and liabilities:                                |       |                      |       |   |   |
| Prepaid expense and other assets                                             |       | (292                      | )          | 442 |   |
| Accounts payable and accrued liabilities                                     |       | 1,143                     |       | (193 | ) |
| Accrued payroll and payroll taxes                                            |       | (179                      | )          | 255 |   |
| Net cash used in  operating activities                                       |       | (7,914                    | )          | (5,624 | ) |
| Investing  acitivities:                                                      |       |                      |       |   |   |
| Additions to property, plant and equipment                                   |       | (113                      | )          | (18 | ) |
| Proceeds from sale of investments                                            |       | 22,000                    |       | 28,250 |   |
| Purchases of investments                                                     |       | (13,656                   | )          | (46,127 | ) |
| Net cash provided  by (used in) investing activities                         |       | 8,231                     |       | (17,895 | ) |
| Financing  activities:                                                       |       |                      |       |   |   |
| Proceeds from the sale of common stock, net of  issuance costs               |       | —                    |       | 23,793 |   |
| Repayment of debt                                                            |       | (54                       | )          | (668 | ) |
| Net cash (used  in) provided by financing activities                         |       | (54                       | )          | 23,125 |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 263                       |       | (394 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 180                       |       | 534 |   |
| Cash and cash  equivalents at end of period                                  |       | $                         | 443        |   | $ | 140 |   |
| Non-cash  investing and financing activities:                                |       |                      |       |   |   |
| Issuance of  common stock to prepay retirement plan contributions            |       | $                         | 201        |   | $ | 194 |   |

 

See accompanying notes to Consolidated Financial Statements.

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**Tapestry Pharmaceuticals, Inc. and SubsidiariesNotes to Consolidated Financial StatementsJune 27, 2007(Unaudited)**

**Note 1. Basis ofPresentation and Summary of Significant Accounting Policies**

In the opinion of management, the accompanyingunaudited consolidated balance sheets, statements of operations and statementsof cash flows contain all adjustments, consisting of only normal, recurringadjustments, necessary to present fairly the financial position of TapestryPharmaceuticals, Inc. and its wholly owned subsidiaries (“we,” “us” or the“Company”) at June 27, 2007 and December 27, 2006, the results of itsoperations for the three and six-months ended June 27, 2007 and June 28,2006, and cash flows for the six-months ended June 27, 2007 and June 28,2006.

The unaudited consolidated financial statementspresented herein have been prepared in accordance with the instructions to Form 10-Qand do not include all the information and note disclosures required byaccounting principles generally accepted in the United States. The 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 27,2006, filed with the Securities and Exchange Commission (the “SEC”) on March 7,2007 as well as an amendment thereto on Form 10-K/A filed with theSEC on April 26, 2007.

*LIQUIDITY—**The*Company has norevenue and has incurred losses of approximately $6.2 million and $10.6 millionfor the three and six-months ended June 27, 2007, respectively and a lossof approximately $16.7 million for the year ended December 27, 2006. TheCompany has an accumulated deficit of $134.5 million as of June 27, 2007. As of June 27, 2007,the Company had a working capital balance of $11.4 million compared to aworking capital balance of $20.2 million at December 27, 2006. As of June 27,2007, the Company had cash and cash equivalents and short-term investmentstotaling $14.4 million. Through June 27, 2007, the Company has fundedits capital requirements primarily with the net proceeds of public offerings ofcommon stock and private placements of equity securities, with proceeds fromthe exercise of warrants and options and with debt. The Company has also fundedits capital requirements with the gross proceeds of approximately $71.7 millionrelated to the sale of its paclitaxel business to Mayne Pharma (USA)Inc. on December 12, 2003.

The Company’s capital requirements have been and willcontinue to be significant. The Company expects research and developmentexpenses to increase in connection with its ongoing activities, particularly asit continues the development of TPI 287. If the Company in-licenses or acquiresadditional product candidates, its research and clinical development expenseswill increase further. In addition, subject to obtaining regulatory approval ofTPI 287 or any other product candidate, the Company expects to incursignificant commercialization expenses for product sales, marketing, securingcommercial quantities of product from third-party manufacturers anddistribution. The Company will need substantial additional funding and may beunable to raise capital when needed or on attractive terms, which wouldforce the Company to delay, reduce or eliminate research and developmentprograms or commercialization efforts.

The Company believes thatthe existing cash and cash equivalents and short-term investments are notsufficient to enable the Company to fund its operating expenses and capitalexpenditures for the next twelve months. Therefore, the Company will berequired to raise additional capital through public or private equity offeringsand debt financings, corporate collaborations, licensing arrangements or othermeans. Should the Company be unable to raise the needed capital, it may berequired to slowdown, curtail 

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or ceaseoperations. The accompanying consolidated financial statements do not includeany adjustments that might be necessary if the Company is unable to continue asa going concern.

*ESTIMATES AND ASSUMPTIONS—**The***preparation of the Company’s consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires the Company’s management to make estimates andassumptions that affect the reported amounts of assets and liabilities,disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period. Significant estimates are used when determining useful livesfor depreciation and amortization, assessing the need for impairment charges,accounting for income taxes, estimating the value of employee stock options,and various others items. The Company evaluates these estimates and assumptionson an ongoing basis and bases its estimates on historical experience, currentconditions and various other assumptions that are believed to be reasonableunder the circumstances. The results of these estimates form the basis formaking judgments about the carrying values of assets and liabilities as well asidentifying and assessing the accounting treatment with respect to commitmentsand contingencies. Actual results may differ materially fromthese estimates.

*SHARE BASED COMPENSATION—**As*of June 27,2007, the Company had five equity incentive plans (the “Plans”): the 1994Long-Term Performance Incentive Plan, the 1998 Stock Incentive Plan, the 2004Equity Incentive Plan, the 2004 Non-Employee Director’s Stock Option Plan andthe 2006 Equity Incentive Plan, which was approved by the Company’sstockholders on April 4, 2006. As a result of the approval of the 2006Equity Incentive Plan, all prior plans were suspended and no additional grantsshall be made under these plans.

The Company follows thefair value method of accounting for share-based compensation arrangements inaccordance with Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004),*Share-Based Payment*(“SFAS 123(R)”). TheCompany adopted SFAS 123(R) using the modified prospective transitionmethod, which required the application of the accounting standard as of December 29,2005, the first day of the Company’s 2006 fiscal year. Under the modifiedprospective method of transition, compensation expense is recognized beginningwith the effective date of adoption of SFAS 123(R) for all share-basedpayments (i) granted after the effective date of adoption and (ii) grantedprior to the effective date of adoption and that remain unvested on the date ofadoption.

Under SFAS 123(R), theestimated fair value of share-based-compensation, including stock optionsgranted under the Plans, is recognized as compensation expense on astraight-line basis over the expected term of the grant.

The Company recordedshare-based compensation expense of $893,000 ($0.05 per share) and $1.3 million($0.09 per share) for the three-months ended June 27, 2007 and June 28,2006, respectively. The Company recorded share-based compensation expense of$1.7 million ($0.10 per share) and $1.9 million ($0.21 per share) for thesix-months ended June 27, 2007 and June 28, 2006, respectively. Thesenon-cash charges had no impact on the Company’s reported cash flows.

Amountsrecognized in the financial statements related to share-based compensation, bycategory, were as follows (in thousands):

| ** **                 | ** ** | **Three-Months Ended,** | ** ** | **Six-Months Ended,** | ** ** |
|----------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **June 27,**            | ** ** | **June 28,**          | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                 | ** ** | **2007**                     | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and  development  |       |                         | $          | 367                        |       |   |   | $ | 564 |   |   |   | $ | 698 |   |   |   | $ | 825 |   |   |
| General and  adminstrative |       |                         | 526        |                       |       |   | 755 |   |   |   | 1,024 |   |   |   | 1,013 |   |   |
| Discontinued  operations   |       |                         | —     |                       |       |   | — |   |   |   | — |   |   |   | 86 |   |   |
|                       |       |                         | $          | 893                        |       |   |   | $ | 1,319 |   |   |   | $ | 1,722 |   |   |   | $ | 1,924 |   |   |

 

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Forpurposes of the disclosure in the foregoing table and for purposes ofdetermining estimated fair value under SFAS 123(R), the Company has computedthe estimated fair values of all share-based compensation using theBlack-Scholes option pricing model and has applied the assumptions set forth inthe following table. The Company calculated the estimated life of each stockoption granted in fiscal 2007 and 2006 based on the average life of the optionestimated by reference to the historical average lives of options issued by theCompany since its initial public offering in 1994. The risk free rate of returnand the historical volatility were also based on the average life of the optionestimated by reference to the historical average lives of options issued by theCompany since inception. As SFAS 123(R) requires that share-basedcompensation expense be based on awards that are ultimately expected to vest,share-based compensation has been reduced for estimated forfeitures. Whenestimating forfeitures, the Company takes into consideration both voluntary andinvoluntary terminations, as well as trends of actual forfeitures.

| ** **       | ** ** | ** **             | ** ** | ** **   | ** ** | ** **     | ** ** | **Weighted-**         | ** ** |
|------------------|------------|------------------------|------------|--------------|------------|----------------|------------|-----------------------|------------|
| ** **       | ** ** | ** **             | ** ** | ** **   | ** ** | ** **     | ** ** | **Average**           | ** ** |
| ** **       | ** ** | **Risk-Free**          | ** ** | **Dividend** | ** ** | **Volatility** | ** ** | **Option**            | ** ** |
| ** **       | ** ** | **Interest Rate** | ** ** | **Yield**    | ** ** | **Factor**     | ** ** | **Life (Years)** | ** ** |
| Fiscal Year 2007 |       | 4.48%-4.61%            |       |         | 0          | %              |       | 93.09%-113.64%        |       |   | 3.35-5.78 |   |   |
| Fiscal Year 2006 |       | 4.66%-5.18%            |       |         | 0          | %              |       | 108.82%-121.86%       |       |   | 3.35-5.78 |   |   |

 

The Black-Scholes option-pricing model requires theinput of subjective assumptions. Stock options have characteristicssignificantly different from those of traded options, and changes in thesubjective input assumptions can materially affect the fair value estimate.Management will continue to assess the assumptions and methodologies used tocalculate estimated fair value of share-based compensation. Circumstances maychange and additional data may become available over time, thereby resulting inchanges to these assumptions and methodologies. These changes could materiallyimpact the Company’s fair value determination.

A summary of optionactivity under the Plans as of June 27, 2007 and changes during thesix-months then ended is presented below:

**Summary Details for Plan Share Options**

| ** **                                   | ** ** | **Six-Months Ended,**  | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **June 27, 2007** | ** ** |
| ** **                                   | ** ** | ** **                  | ** ** | ** ** | ** ** | **Weighted-** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Number of  Options** | ** ** | ** Weighted-   Average  Exercise  Price** | ** ** | **Average  Remaining  Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                                   | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | **(In Thousands)** | ** ** |
| Outstanding  Balance, December 27, 2006 |       | 5,805,293                   |       |   | $ | 3.83 |   |   |   | 8.86 |   |   |   | $ | — |   |   |
| Granted                                      |       | 905,456                     |       |   | $ | 2.06 |   |   |   | NA |   |   |   | 14 |   |   |
| Forfeited                                    |       | (110,872                    | )          |   | $ | 4.00 |   |   |   | NA |   |   |   | — |   |   |
| Outstanding  Balance, June 27, 2007     |       | 6,599,877                   |       |   | $ | 3.58 |   |   |   | 8.52 |   |   |   | $ | 14 |   |   |
| Exercisable  shares as of June 27, 2007 |       | 686,900                     |       |   | $ | 6.86 |   |   |   | 4.31 |   |   |   | $ | — |   |   |

 

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A summary of the status ofthe Company’s unvested shares as of June 27, 2007, and changes during thethree and six-months then ended is presented below:

**Unvested Shares Issued Under the Plan**

| ** **                  | ** ** | **Three-Months Ended,  June 27, 2007** | ** ** | **Six-Months Ended,  June 27, 2007** | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | ** **                                            | ** ** | **Weighted-**                                       | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                  | ** ** | ** **                                            | ** ** | **Average**                                         | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                  | ** ** | **Unvested**                                          | ** ** | **Grant-Date**                                      | ** ** | **Unvested** | ** ** | **Grant-Date** | ** ** |
| ** **                  | ** ** | **Shares**                                            | ** ** | **Fair Value**                                 | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Beginning  unvested balance |       | 6,004,980                                             |       |                                                | $          | 2.60 |   |   | 5,207,628 |   |   | $ | 2.79 |   |   |
| Granted                     |       | 99,650                                                |       |                                                | $          | 1.16 |   |   | 905,456 |   |   | $ | 1.49 |   |   |
| Vested                      |       | (84,891                                               | )          |                                                | $          | 3.15 |   |   | (89,345 | ) |   | $ | 3.38 |   |   |
| Forfeited                   |       | (106,762                                              | )          |                                                | $          | 3.32 |   |   | (110,762 | ) |   | $ | 3.30 |   |   |
| Ending unvested balance     |       | 5,912,977                                             |       |                                                | $          | 2.58 |   |   | 5,912,977 |   |   | $ | 2.58 |   |   |

 

As of June 27, 2007,there was $11.4 million of total unrecognized compensation expense related tounvested share-based compensation arrangements granted under the Plans. Totalunrecognized compensation expense will be recognized over a weighted-averageperiod of approximately 4 years.

*DERIVATIVE INSTRUMENTS—**Companies***are required to recognize all of their derivativeinstruments as either assets or liabilities on the balance sheet at fair value.The accounting for changes in the fair value (i.e. gains or losses) of aderivative instrument depends on whether it has been designated and qualifiesas part of a hedging relationship and further, on the type of hedgingrelationship. For derivative instruments not designated as hedging instruments,the gain or loss is recognized in current earnings during the period of change.As described in “Note 6. Stockholders’ Equity,” the Company currently has onederivative instrument that is assessed on a quarterly basis, and any changes infair value will be recognized in current earnings in the period of change.

*RECENT ACCOUNTINGPRONOUNCEMENTS—**On*December 28, 2006, theCompany adopted the provisions of FASB Interpretation No. 48, *“Accounting for Uncertainty in Income Taxes—an Interpretation of FASBStatement No. 109”* (“FIN 48”). FIN 48 clarifies the accountingfor uncertainty of income taxes by prescribing a minimum recognition thresholdfor a tax position taken or expected to be taken in a tax return that isrequired to be met before being recognized in the financial statements. FIN 48also provides guidance on derecognition, measurement, classification, interestand penalties, accounting in interim periods, disclosure and transition. As ofthe date of adoption, the Company did not identify any unrecognized taxbenefits and there was no cumulative effect on retained earnings of adopting FIN48. The Company recognizes interest and penalties related to its taxcontingencies as income tax expense.

In September 2006,the FASB issued SFAS No. 157, *“Fair Value Measurements.”*This standard defines fair value, establishes a framework for measuring fairvalue in accounting principles generally accepted in the United States ofAmerica, and expands disclosure about fair value measurements. Thispronouncement applies to other accounting standards that require or permit fairvalue measurements. Accordingly, this statement does not require any new fairvalue measurement. This statement is effective for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. TheCompany will be required to adopt SFAS No. 157 in the first quarterof fiscal year 2008. Management has not yet determined the impact of adoptingthis statement.

In June, 2007 the FASBissued EITF 07-3, “Accounting for Nonrefundable Advance Payments for Goods orServices to Be Used in Future Research and Development Activities”. EITF 07-3clarifies the accounting for non-refundable advance payments made for futureresearch and development activities. This issue is effective for fiscal yearsbeginning after December 15, 2007, including interim periods within those fiscalyears. The cumulative effect of applying EITF 07-3 will be reported as a changein accounting 

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principlethrough an adjustment to retained earnings as of the beginning of the period inwhich it is adopted. Management has not yet determined the impact of adoptingthis statement.

**Note 2.**Reverse Stock Split and NasdaqListing

On February 25, 2005,the Company received notice from The Nasdaq Stock Market, Inc. that itscommon stock had not met the $1.00 per share minimum bid price requirement for30 consecutive business days and that, if the Company was unable to demonstratecompliance with this requirement during the applicable grace periods, itscommon stock would be delisted after that time. On February 6, 2006, theCompany effected a one for ten reverse stock split to regain compliance withthis listing requirement. Since the reverse stock split was effected, theclosing bid price of its common stock has remained above $1.00 in compliancewith the minimum bid price requirement. Unless otherwise noted, all informationin these unaudited consolidated financial statements reflects this reversestock split.

**Note 3. Discontinued Operations**

In 2004 and prior years,the Company discontinued research on its various genomics programs, other thanthe Huntington’s Disease program. It ceased the Huntington’s Disease program in2006.

Net losses related to theGenomics Division that are included in discontinued operations totaled $0 forthe three and six-months ended June 27, 2007. The Company had a loss of $0and $88,000 related to the Genomics division for the three and six-months endedJune 28, 2006. No material revenue has been recognized in this division.There were no assets held for sale at June 27, 2007 and December 27,2006 that relate to the discontinued operations of the genomics business.

**Note 4. Investments**

Short-term investmentsconsist of investment grade government agency, auction rate securities,commercial paper and corporate debt securities due within one year. The Company’sinvestments in auction rate securities are recorded at cost, which approximatesfair market value. In accordance with ARB 43, “*Restatementand Revision of Accounting Research Bulletins*,” despite thelong-term nature of their stated contractual maturities, the Company has theability and intent to liquidate investments in auction rate securities withinsix months and therefore has classified these investments as short-term. Allinvestments are classified as available-for-sale and are recorded at marketvalue. Unrealized gains and losses are treated as a separate component ofstockholders’ equity until the security is sold or until a decline in fairvalue is determined to be other than temporary.

As of June 27,2007 and December 27, 2006, the amortized cost basis, unrealized holdinggains and losses and fair value by major security type classified asavailable-for-sale are as follows (in thousands):

| ** **                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
|----------------------------|------------|---------------|------------|----------------|------------|------------|------------|
| **Security Type**     | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **June 27, 2007**     |       |          |       |           |       |       |       |   |   |   |   |
| Auction rate securities    |       |          | $          | 7,500          |       |       |       | $ | — |   |   | $ | 7,500 |   |
| Commercial Paper           |       |          | 1,385      |           |       |       | —     |   |   | 1,385 |   |
| Corporate debt  securities |       |          | 3,700      |           |       |       | —     |   |   | 3,700 |   |
| Government agencies        |       |          | 1,400      |           |       |       | —     |   |   | 1,400 |   |
| Total investments          |       |          | $          | 13,985         |       |       |       | $ | — |   |   | $ | 13,985 |   |
| **December 27, 2006** |       |          |       |           |       |       |       |   |   |   |   |
| Auction rate securities    |       |          | $          | 9,000          |       |       |       | $ | — |   |   | $ | 9,000 |   |
| Commercial Paper           |       |          | 1,977      |           |       |       | —     |   |   | 1,977 |   |
| Corporate debt  securities |       |          | 5,100      |           |       |       | —     |   |   | 5,100 |   |
| Government agencies        |       |          | 6,200      |           |       |       | —     |   |   | 6,200 |   |
| Total investments          |       |          | $          | 22,277         |       |       |       | $ | — |   |   | $ | 22,277 |   |
|                            |            |               |            |                |            |            |            |  |  |  |  |  |  |  |  |  |

 

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

| ** **                                        | ** ** | **Three-Months Ended,** | ** ** | **Six-Months Ended,** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                        | ** ** | **June 27,**            | ** ** | **June 28,**          | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                                        | ** ** | **2007**                     | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net loss, as  reported                            |       | $                            | (6,175     | )                          | $          | (4,163 | ) | $ | (10,581 | ) | $ | (8,554 | ) |
| Unrealized loss  on available-for-sale securities |       | —                       |       | (8                         | )          | — |   | (34 | ) |
| Comprehensive net loss                            |       | $                            | (6,175     | )                          | $          | (4,171 | ) | $ | (10,581 | ) | $ | (8,588 | ) |

 

**Note 5. Debt,Current and Long-Term**

On November 17,2006, the Company repurchased two non-interest bearing promissory notes issuedby it to TL Ventures V L.P. and TL Ventures V Interfund L.P. in February 2005.These promissory notes had an outstanding principal amount of$3.0 million, and the Company repurchased the notes for an aggregatepayment of $2.7 million in cash. The repurchase of these notes did nothave a material impact on the Company’s financial results.

The Company leases equipment under a capital lease. Thecapital lease does not bear interest and is payable in monthly installments of$11,000 in 2007 and 2008. The Company recorded a discount on the capital leaseattributable to the fair value of interest in the amount of $23,000 and thediscount is allocated between the current and long-term portions of the lease.An interest rate of 11.5% was used to impute the discount.

**Note 6. Stockholders’Equity**

**Restricted Stock**

In September 2005, the Company initiated aretention incentive program for non-executive employees that consisted of agrant of approximately 43,814 restricted shares of the Company’s common stockunder its equity incentive plans to vest at future dates, as well as a cashcomponent related to the individual tax effects of the program. The stockcomponent of the program includes 18,463 shares that vested onSeptember 6, 2006 and 19,143 additional shares that will vest onSeptember 6, 2007, contingent upon participants being employed by theCompany on that date. To date, under the program, 7,160 shares have beensurrendered due to termination of employment with the Company. The total valueof the Company’s common stock subject to the program, net of shares surrendereddue to terminations, is $132,000 based on the value of the underlying commonstock at the date of grant. During the three-months ended June 27, 2007and June 28, 2006 and six-months ended June 27, 2007 andJune 28, 2006, $9,000, $24,000, $18,000 and $48,000, respectively, ofexpense related to the program was recognized. The remaining expense associatedwith the program of $6,000 will be recognized over the remaining vestingperiod.

In June 2007, theCompany granted 44,700 restricted shares of the Company’s common stock tonon-executive employees under its equity incentive plans to vest at futuredates, as well as a cash component related to the individual tax effects of theprogram. The stock component of the grant includes 22,350 shares that veston June 26, 2008 and 22,350 shares that vest on June 26, 2009,contingent upon participants being employed with the Company on those dates.The total value of the Company’s common stock subject to this program is$83,000 based on the value of the underlying common stock at the date of grant.

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**Private Placement**

On April 6,2006, the Company sold an aggregate of 12,750,000 shares of common stock andwarrants to purchase up to 12,750,000 shares of common stock in a privateplacement (the “Private Placement”) for a total of $25.5 million(excluding any proceeds that might be received upon exercise of the warrants).The Company received approximately $23.8 million net of the placementagent fees and other expenses in the Private Placement. The purchase price was$2.00 per share of common stock, and each warrant to purchase common stock hasan exercise price of $2.40 per share. The Company may call up to 20% ofthe outstanding warrants at a redemption price of $.0075 per share of commonstock underlying the warrants during any three month period if certainconditions are satisfied, including the trading price of its common stockexceeding $4.80 for 20 consecutive trading days, upon 30 days prior notice.During the notice period, the holders of the warrant would be entitled toexercise the warrants or any portion of them. Up to half of the warrants may beexercised on a cashless or net exercise basis. There can be no assurance,however, that the Company will receive funds from the exercise of warrants.

In addition, the Company issued warrants to purchase 50,000shares of common stock to a financial advisor and issued warrants to purchase100,000 shares of common stock to an outside consultant as a finders’ fee onsubstantially similar terms as the warrants issued in the Private Placement.The value of these warrants of $472,000 was determined using the Black-Scholesmodel and is considered a non-cash private placement expense.

Pursuant to the terms of a registration rightsagreement entered into by the Company at the closing of the Private Placement,the Company filed with the SEC a registration statement on Form S-3covering the resale of the common stock sold to investors in the PrivatePlacement. The registration rights agreement provides, among other things, thatthe Company will use commercially reasonable efforts to effect the registrationof the securities within 90 days of closing, and to continuously maintaineffectiveness. If sales cannot be made under the registration statement (otherthan for certain periods when the Company is permitted under the agreement tosuspend use of the registration statement when it has delayed disclosure ofmaterial nonpublic information) then the Company is obligated to pay eachinvestor liquidated damages, in cash, equal to 1.5% per 30 day period (or prorata for a portion thereof) of the amount invested by such investor. The SECdeclared the Company’s Form S-3 effective on May 18, 2006,which was within 90 days of closing.

The Company views the registration rights agreementcontaining the liquidated damages provision as a separate freestanding contractas discussed in Emerging Issues Task Force (“EITF”) Issue No. 05-4, “*The Effect of a Liquidated Damages Clause on aFreestanding Financial Instrument Subject to EITF Issue No. 00-19,Accounting for Derivative Financial Instruments Indexed to, and PotentiallySettled in, a Company’s Own Stock*,*”*and that the registration rights agreement has nominal value. Under thisapproach, the registration rights agreement is accounted for separately fromthe financial instrument in accordance with SFAS No. 133 *“Accounting for Derivative Instruments and Hedging Activities.”*Accordingly, the classification of the warrants has been determined under EITF00-19, *“Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock,”*and the warrants have been accounted for as permanentequity.

The Company has valued theliquidated damages provision of the registration rights agreement at nominalvalue. In determining this as the fair value, the Company considered thefollowing factors. The agreement provides that there was a 90-day periodto have the registration statement declared effective before liquidated damagesapply. The Company believed at the closing of the Private Placement it wasprobable the registration statement would be declared effective within the 90-dayperiod. The registration statement was declared effective in less than 90 daysand in the same fiscal quarter as the closing of the Private Placement, andtherefore the Company was aware that there was no value to the liquidateddamages provision for the initial 90 day period. The liquidated damagesprovision would only have value in 

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thefuture if sales may not be made thereunder for periods other than as permittedthereunder. The Company believes the events that would lead to sales beingunable to be made under the registration statement for periods other than aspermitted are unlikely to occur. In future periods, should the Company concludethat it is probable, as defined in SFAS No. 5, *“Accountingfor Contingencies,”* that a liability for liquidated damages willoccur, the Company will record the estimated cash value of the liquidateddamages liability at that time.

**Note 7.** Equity IncentivePlans

As of June 27, 2007, the Company had five equityincentive plans; the 1994 Long-Term Performance Incentive Plan, the 1998 StockIncentive Plan, the 2004 Equity Incentive Plan, the 2004 Non-EmployeeDirector’s Stock Option Plan and the 2006 Equity Incentive Plan, which wasapproved by shareholders on April 4, 2006. As a result of the approval ofthe 2006 Equity Incentive Plan, all prior plans were suspended and noadditional grants shall be made under these plans.

As of June 27, 2007,the total number of shares of the Company’s common stock authorized forissuance related to grants under all of the Plans was 7,540,235, of which6,599,877 remain outstanding and 716,963 shares remain reserved for futuregrants.

*2006 EquityIncentive Plan*

During 2006, the Company’sBoard of Directors adopted and its stockholders approved the Company’s 2006Equity Incentive Plan, which initially reserved 6,577,106 shares of commonstock for issuance thereunder. Immediately following any issuance of commonstock by the Company during the three year period ending April 4, 2009,other than issuances of common stock upon exercise of the warrants issued tothe investors in the Private Placement, the number of shares available forissuance under the 2006 Equity Incentive Plan will be increased to 20% of thenumber of fully diluted shares of the Company’s common stock immediately aftersuch issuance, including all shares of common stock issuable upon exercise ofthen outstanding options or warrants, and options forfeited in other plans,less the number of shares of common stock subject to existing options under thePlans, up to a maximum of 8,177,106 shares. As a result of common stockissuances during 2006 and 2007, the number of shares available under the 2006Equity Incentive Plan increased to 6,676,419.

*Repricing of StockOptions*

On February 8, 2006,the Board of Directors of the Company approved, subject to stockholderapproval, the modification of certain outstanding options to purchase shares ofcommon stock under the Company’s existing equity incentive plans, includingcertain stock options granted to the Company’s directors and executiveofficers. The Company received stockholder approval of these modifications on April 4,2006 and the exercise price of each such modified option was reduced to $4.02per share as of such date. As of the date of the action by the Company’s Boardof Directors, stock options for approximately 696,253 shares were outstandingunder all of the Plans, of which options to purchase approximately 626,568shares of common stock, having exercise prices ranging from $4.20 to $112.50,were modified. As a result of the modification of vested stock options, inaccordance with SFAS 123(R), the Company recorded a $381,000 one-time non-cashfixed period charge in the second quarter of 2006.

**Note 8. IncomeTaxes**

As of December 27,2006, the Company had available net operating loss (“NOLs”) and research anddevelopment credit carryforwards of $113.7 million and $4.2 million,respectively, to offset future taxable income. The Internal Revenue Codecontains provisions that may limit the use of NOLs and tax credits availablefor use in any given year upon the occurrence of certain events, includingsignificant changes in 

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ownershipinterest. A change in ownership of a company within a three-year period resultsin an annual limitation on the company’s ability to utilize its NOLs and taxcredit carryforwards from tax periods prior to the ownership change. As aresult of the Private Placement, which is considered to be a change inownership for tax purposes, the Company’s NOL and tax credit carryforwards asof December 27, 2006 are subject to significant limitations. The Company believes that it will not beable to use a significant portion of its NOL and tax credits to offset itsincome in the future.

**Note 9. Net Income(Loss) Per Share**

Basic earnings (loss) pershare is measured as net income or loss divided by the weighted averageoutstanding common shares for the period. Diluted earnings per share is similarto basic earnings per share but presents the dilutive effect on a per sharebasis of potential common shares (e.g. stock options, warrants and convertiblesecurities) as if they had been converted at the beginning of the periodspresented. Potential common shares that could potentially dilute basic earningsper share that were not included in the computation of diluted earnings pershare because to do so would be antidilutive, amounted to 19,499,877 shares and17,142,106 shares at June 27, 2007 and June 28, 2006, respectively.

**Note 10.** Settlement Agreement

On March 22, 2006 theCompany and Dr. Patricia Pilia entered into a Settlement Agreement (the “SettlementAgreement”) in connection with Dr. Pilia’s termination of employment bythe Company without cause on February 23, 2006. Dr. Pilia was amember of the Company’s Board of Directors and previously served as ExecutiveVice President and Secretary of the Company and was party to an employmentagreement with the Company. In connection with the Settlement Agreement, theCompany recorded an obligation of $646,000 for termination benefits at March 29,2006 that was paid in the third quarter of 2006.

**Note 11.** Employment Agreement

On March 28, 2007, the Company entered into anamended employment agreement with its Chief Operating Officer (“COO”) thatamended certain provisions of the employment agreement, including thedefinition for termination for good reason, which allows for the COO toterminate his employment at any time on or after December 31, 2008. Thistermination would entitle the COO to the receipt of the full severance benefitsunder the employment agreement, including accelerating the vesting of certainoutstanding stock options.

As a result, the Companywill recognize the termination benefit of the COO as an expense in the amountof $270,000, ratably over the period March 28, 2007 through December 31,2008. The acceleration of vesting of certain outstanding stock options, whichmodified the vesting terms of certain outstanding stock options, did not have amaterial impact on the Company’s financial statements as of June 27, 2007.

**Note 12. OperatingLeases**

In February 2007, the Company leased 2,300 squarefeet of office space in Roseland, New Jersey to support our clinicaldevelopment activities. The lease runs through December 31, 2008 andrequires monthly rental payments of $4,500.

In March 2007, the Company entered into a fiveyear lease covering approximately 29,000 square feet of office and laboratoryspace in Boulder, Colorado. The Company plans to consolidate both itsColorado-based administrative and research and development facilities into thisspace. The Company plans to take possession of this space in November 2007to make the necessary renovations. The Company made a $375,000 deposit relatedto this facility and is included in other assets. This deposit will decrease by$60,000 per year, capped after four years to a minimum balance of $135,000until termination.

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As of June 27,2007, future minimum lease payments under noncancelable operating leaseagreements are as follows (in thousands):

| Remaining in 2007 |   | $   | 115    |   |
|-------------------|--------|-----|--------|--------|
| 2008              |   | 492 |   |
| 2009              |   | 442 |   |
| 2010              |   | 433 |   |
| 2011              |   | 425 |   |
| 2012              |   | 440 |   |
|              |   | $   | 2,347  |   |

 

**Note 13. RegistrationStatement**

On April 23, 2007, the Company filed aregistration statement on Form S-1 with the Securities and ExchangeCommission for a proposed public offering of up to $40.0 million of its commonstock.

On June 12, 2007, the Company withdrew theregistration statement on Form S-1 due to market conditions. As a resultof this withdrawal, the Company expensed the costs incurred in the amount of$452,000 in the second quarter of 2007.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financialcondition and results of operations contains information that managementbelieves is relevant to an assessment and understanding of our results ofoperations. You should read this discussion in conjunction with the FinancialStatements and Notes included elsewhere in this report and withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations for the year ended December 27, 2006 contained in our 2006Annual Report on Form 10-K, filed with the Securities and ExchangeCommission (the “SEC”) on March 7, 2007 as well as an amendment thereto onForm 10-K/A filed with the SEC on April 26, 2007. Certain statements set forthbelow constitute “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. See “Special Note Regarding Forward-LookingStatements” and “Risk Factors” appearing elsewhere in this Report. Referencesto “Tapestry,” the “Company,” “we,” “us” and “our” refer to TapestryPharmaceuticals, Inc. and its subsidiaries.

**General**

We are a biopharmaceutical company focused on thedevelopment of proprietary therapies for the treatment of cancer. Our corecapabilities are deriving and developing drug candidates from natural products.We are currently devoting substantially all of our efforts to the developmentof TPI 287, a proprietary next generation taxane for the treatment ofmultiple cancer indications. We hold all worldwide commercial rights for TPI287. Taxanes comprise a class of drugs derived from natural products that areused in the treatment of various forms of cancer.

We completed dosing in a Phase 1 clinical trialof TPI 287 and expect to complete dosing in another Phase 1 clinicaltrial during the second half of 2007. In addition, we recently commencedenrollment in a Phase 2 clinical trial of TPI 287 in patients with an advancedform of prostate cancer called hormone refractory prostate cancer, or HRPC. Thisis our first of several planned Phase 2 clinical trials of TPI 287 in multiplecancer indications. In our clinical trials to date, we have evaluated intravenous,or IV, formulations of TPI 287. We plan to use an IV formulation inour currently planned Phase 2 clinical trials. We also are developing anoral formulation of TPI 287 and plan to initiate a Phase 1b/2pharmacokinetic clinical trial of TPI 287 before the end of 2007. In thisclinical trial, we plan to orally administer an IV formulation ofTPI 287 to evaluate the drug’s activity and oral bioavailability inhumans.

We intend to expand our product pipeline throughstrategically in-licensing or acquiring product candidates that complement ourbusiness. This may involve the examination of individual molecules, classes ofcompounds or technologies in cancer as well as other therapeutic areas. Ouracquisitions of new product candidates or technologies may also involve theacquisition of, or merger with, other companies.

We have incurred significant operating losses sinceour inception in 1991. Our net loss was $6.2 million and $10.6 million forthe three and six-months ended June 27, 2007, respectively and$16.7 million for the year ended December 27, 2006. We had anaccumulated deficit of $134.5 million as of June 27, 2007. We expect toincur significant and increasing operating losses for at least the next severalyears, until such time, if ever, as we are able to generate sufficient sales tosupport our development operations, including the research and developmentactivity discussed above.

To become profitable, wemust succeed in developing and eventually commercializing drugs withsignificant market potential. This will require us to be successful in a rangeof challenging activities, including discovering, in-licensing or acquiringproduct candidates, successfully completing preclinical testing and clinicaltrials of our product candidates, obtaining regulatory approval for theseproduct candidates and manufacturing, marketing and selling those products forwhich we obtain regulatory approval. We are only in the preliminary stages ofdevelopment of TPI 287, our only current product 

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candidate.We may never succeed in these activities and may never generate revenues thatare significant enough to achieve profitability.

**RegistrationStatement**

On April 23, 2007, wefiled a registration statement on Form S-1 with the Securities andExchange Commission (the “SEC”) for a proposed public offering of up to $40.0million of our common stock. On June 12, 2007, we withdrew theregistration statement on Form S-1 with the SEC. As a result of thewithdrawal, we expensed costs incurred in the amount of $452,000 in the secondquarter 2007.

**Private Placement**

On April 5, 2006 we sold an aggregate of12,750,000 shares of our common stock and warrants to purchase up to 12,750,000shares of our common stock in a private placement for a total of$25.5 million, not including any proceeds that might be received uponexercise of the warrants. We received approximately $23.8 million net ofthe placement agent fees and other expenses in this private placement. Thewarrants currently have an exercise price of $2.40 per share. Under the termsof these warrants, the exercise price may be reduced if we issue shares ofcommon stock or certain options or rights to acquire common stock for noconsideration or for consideration per share less than the exercise price ofthe warrants in effect immediately prior to the time of such issue or sale. Thewarrants specify a formula for a weighted average adjustment in the exerciseprice that takes into account the number of shares of common stock outstanding,the number of shares issued below the exercise price and the aggregateconsideration received upon such issuance.

We may call up to 20% of the outstanding warrants at aredemption price of $0.0075 per share of common stock underlying the warrantsduring any three month period if certain conditions are satisfied, includingthe trading price of our common stock exceeding $4.80 for 20 consecutivetrading days, upon 30 days prior notice. During the notice period, theholders would be entitled to exercise the warrant or any portion of it. Up tohalf of these warrants may be exercised on a cashless or net exercise basis.There can be no assurance, however, that we will receive any funds from theexercise of warrants.

In addition, we issued warrants to purchase 50,000 sharesof common stock to a financial advisor and issued warrants to purchase 100,000shares of common stock to an outside consultant as a finders’ fee onsubstantially similar terms as the warrants issued in this private placement.

In connection with the private placement, we enteredinto a registration rights agreement in which we agreed to make the requisitefilings with the Securities and Exchange Commission to achieve andsubstantially maintain the effectiveness of a registration statement coveringshares sold in the private placement, as well as shares underlying warrantsissued in this private placement. If we fail to maintain effectiveness of thatregistration statement through as late as April 6, 2013, subject to ourright to suspend use of the registration statement in certain circumstances, wewill have to pay liquidated damages to investors in an amount equal to 1.5% ofthe amount invested by them for each 30 day period during which theregistration statement should have been effective.

We are required to use thenet proceeds from this private placement to fund the development of TPI 287in accordance with a budget for calendar years 2006 and 2007 that was adoptedby our board of directors before the closing of the private placement. Anychange to this budget will require the approval of a majority of theindependent members of our board of directors.

**Research andDevelopment**

Ourcurrent business is focused on research and development of proprietarytherapies for the treatment of cancer. We were previously engaged indevelopment activities related to our paclitaxel 

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business, which we sold to Mayne Pharma (USA) Inc. in2003, genomic technologies, which we discontinued in 2004, and Huntington’sDisease, which we ceased in 2006. Costs relating to genomic technologies,excluding our Huntington’s Disease program, and the paclitaxel business areaggregated in discontinued operations. We have incurred the following expensesrelated to research and development projects: 

| ** **                 | ** ** | **Three Months Ended,** | ** ** | **Six Months Ended,** | ** ** |
|----------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **June 27,**                 | ** ** | **June 28,**               | ** ** | **June 27,** | ** ** | **June 28,** | ** ** |
| ** **                 | ** ** | **2007**                          | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Oncology                   |       |                              | $          | 3,994                           |       |   |   | $ | 2,396 |   |   |   | $ | 6,887 |   |   |   | $ | 5,295 |   |   |
| Huntington’s  Disease |       |                              | —     |                            |       |   | (5 | ) |   |   | — |   |   |   | (90 | ) |   |
| Discontinued  operations   |       |                              | —     |                            |       |   | — |   |   |   | — |   |   |   | 88 |   |   |
|                       |       |                              | $          | 3,994                           |       |   |   | $ | 2,391 |   |   |   | $ | 6,887 |   |   |   | $ | 5,293 |   |   |

 

We expect research and development, which includes thecost of our clinical development of TPI 287, to continue to be the mostsignificant expense of our business for the foreseeable future. Our researchand development activity is subject to change as we develop a betterunderstanding of our projects and their prospects.

We completed dosing in a Phase 1 clinical trialof TPI 287 and expect to complete dosing in another Phase 1 clinicaltrial during the second half of 2007. In addition, we recently commencedenrollment in a Phase 2 clinical trial of TPI 287 in patients with an advancedform of prostate cancer called hormone refractory prostate cancer, or HRPC. Thisis our first of several planned Phase 2 clinical trials of TPI 287 in multiplecancer indications. In our clinical trials to date, we have evaluatedintravenous, or IV, formulations of TPI 287. We plan to use anIV formulation in our currently planned Phase 2 clinical trials. Wealso are developing an oral formulation of TPI 287 and plan to initiate aPhase 1b/2 pharmacokinetic clinical trial of TPI 287 in the summer of2007. In this clinical trial, we plan to orally administer anIV formulation of TPI 287 to evaluate the drug’s activity and oralbioavailability in humans.

Thefollowing table summarizes key information about our additional ongoing andplanned clinical development efforts relating to TPI 287:

| INDICATION                                          | ** ** | **STATUS**                                                              | ** ** | **TIMING**                                     |
|-----------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------------|
| **IV Administration**                               |       |                                                                    |       |                                           |
| Hormone refractory prostate cancer                  |       | Phase 2 clinical trial  in  process                                     |       | Go/No Go by first half  2008                   |
| Glioblastoma  multiforme                            |       | Phase 2 clinical  trial planned                                         |       | Expected to begin  in second  half of 2007     |
| Primary CNS tumors (Combination  with temozolomide) |       | Phase 2 clinical  trial planned                                         |       | Expected to begin  in the first  half of 2008  |
| Pancreatic  cancer                                  |       | Phase 2 clinical  trial planned                                         |       | Expected to begin  in the  second half of 2007 |
| Exploratory Phase 2 (Multiple tumor  types)         |       | Phase 2 clinical  trial in  development                                 |       | Expected to begin  in the first  half of 2008  |
| **Oral Administration**                             |       |                                                                    |       |                                           |
| Multiple cancers                                    |       | Phase 1 pharmacokinetic  clinical trial of oral  administration planned |       | Expected to begin in the  second half of 2007  |

 

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We cannot be sure that wewill be able to achieve our goals relating to these programs. We also cannotestimate the cost necessary to complete these programs, the timing of materialnet cash inflows from these programs, or whether we will ever recognize revenuesfrom these programs. Continued development of these programs is dependent uponraising additional capital. We cannot be certain that we will be able to obtaincapital on acceptable terms, or at all.

**Results of Operations**

***Three-MonthsEnded June 27, 2007 Compared to the Three-Months Ended June 28, 2006***

*Research and Development Expense.  **Research and development expense from continuing operations for thesecond quarter of 2007 was $4.0 million, as compared to $2.4 million in thesecond quarter of 2006, an increase of $1.6 million. Oncology related researchand development expenditures increased by $1.6 million to $4.0 million inthe second quarter of 2007. In 2006, we ceased our Huntington’s Diseaseresearch. As a result, there were no expenses in the second quarter of 2007 forHuntington’s Disease, as compared to a credit of $5,000 in 2006. We do notexpect to incur expenses related to this program in the future.*

The increasein oncology related expenses was primarily due to an increase in legal fees of$631,000, an increase in compensation expense of $356,000, an increase inoutside consulting fees of $232,000 and an increase in supplies expense of$169,000. We expect our oncology related expenses to continue to increase infuture quarters in connection with our ongoing and planned Phase 1 and Phase 2clinical trials of TPI 287.

Theincrease in legal expense is primarily the result of outside legal feesincurred as a result of litigation with another pharmaceutical company. Theincrease in compensation expense in the second quarter of 2007 was primarilyrelated to an increase in headcount during the first and second quarter of2007, including our President and Chief Medical Officer positions.

*General and Administrative Expense.**  *General and administrativeexpense from continuing operations for the second quarter of 2007 was $2.4million, an increase of $360,000 from the second quarter of 2006. This increasewas primarily due an increase in legal expense of $435,000 and an increase inconsulting fees of $89,000, which were partially offset by a decrease innon-cash compensation of $230,000.

Theincrease in legal expense was primarily related to the write-off of capitalizedlegal fees related to a registration statement that was withdrawn from the SECin the second quarter of 2007. The decrease in non-cash compensation in 2007 isprimarily the result of the expense associated with the repricing of stockoptions in the second quarter of 2006 and no such repricing expense in 2007.

*Interest and Other Income.**  *Interest and other income of$222,000 for the second quarter of 2007 decreased by $172,000 from $394,000 forthe second quarter of 2006. This decrease was primarily attributable to lowerinvestment balances in the second quarter of 2007 compared to the secondquarter of 2006.

*Interest and Other Expense.**  *Interest and other expenseof $5,000 for the second quarter of 2007 decreased by $123,000 from $128,000for the second quarter of 2006. This decrease was attributable to our repurchaseof two non-interest bearing promissory notes payable to TL Ventures V L.P. andTL Ventures V Interfund L.P. in November 2006.

***Six-MonthsEnded June 27, 2007 Compared to the Six-Months Ended June 28, 2006***

*Research and Development Expense.**  **Research and development expense from continuing operations for thesix-months ended June 27, 2007 was $6.9 million, as compared to $5.2million for the six-months ended June 28, 2006, an increase of $1.7million. Oncology related research and development expenditures*

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*increased by $1.6million to $6.9 million for the six-months ended June 27, 2007. In 2006,we ceased our Huntington’s Disease research. As a result, there were noexpenses in the six-months ended June 27, 2007 for Huntington’s Disease,as compared to a credit of $90,000 in 2006, which was a result of a reversal oflaboratory fees owed to a research university. We do not expect to incurexpenses related to this program in the future.*

Theincrease in oncology related expenses was primarily due to an increase in legalexpense of $1.0 million , an increase in outside consulting fees of$277,000, an increase in supplies expense of $215,000, an increase in outsideclinical trial costs of $181,000, and an increase in recruiting costs of$116,000 offset by a decrease in outside manufacturing costs of $190,000. Weexpect our oncology related expenses to increase in future quarters inconnection with our ongoing and planned Phase 1 and Phase 2 clinical trials ofTPI 287.

Theincrease in legal expense is primarily the result of outside legal feesincurred as a result of litigation with another pharmaceutical company.

*General and Administrative Expense.**  *Generaland administrative expense from continuing operations for the six-months ended June 27,2007 was $4.2 million, an increase of $680,000 from the six-months ended June 28,2006. This increase was primarily due an increase in legal expense of $448,000,an increase in consulting fees of $141,000 and an increase in compensationcosts of $127,000.

Theincrease in legal expense was primarily related to the write-off of capitalizedlegal fees related to a registration statement that was withdrawn from the SECin the second quarter of 2007.

*Interest and Other Income.**  *Interestand other income of $493,000 for the six-months ended June 27, 2007decreased by $43,000 from $536,000 for the six-months ended June 28, 2006.This decrease was primarily attributable to lower investment balances in thesix-months ended June 27, 2007 compared to the six-months ended June 28,2006.

*Interest and Other Expense.**  *Interestand other expense of $12,000 for the six-months ended June 27, 2007decreased by $290,000 from $302,000 for the six-months ended June 28,2006. This decrease was attributable to our repurchase of twonon-interest bearing promissory notes payable to TL Ventures V L.P. and TLVentures V Interfund L.P. in November 2006.

*Discontinued Operations.**  *Therewas no loss from discontinued operations recognized in the six-months ended June 27,2007 as compared to $88,000 for the six-months ended June 28, 2006. Thisdecrease is a result of there being no activity in the discontinued Genomicsbusiness in the six-months ended June 27, 2007. The expense in thesix-months ended June 28, 2006 represented non-cash equity compensationexpense in the amount of $86,000 as a result of the implementation of SFAS 123(R) in2006.

*Share Based Compensation.*   We follow thefair value method of accounting for share-based compensation arrangements inaccordance with Financial Accounting Standards Board (“FASB”), Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123(R)”). Weadopted SFAS 123(R) effective December 29, 2005 using the modifiedprospective method of transition. For the three-months ended June 27, 2007and June 28, 2006, we recorded share-based compensation expense of$893,000 ($.05 per share) and $1.3 million ($0.09 per share), respectively. Forthe six-months ended June 27, 2007 and June 28, 2006, we recordedshare-based compensation expense of $1.7 million ($.10 per share) and $1.9million ($0.21 per share), respectively. Share-based compensation expense isallocated among research and development expenses and general andadministrative expenses based on the function of the related employee. Thesenon-cash charges had no impact on our cash flows for the periods presented. Formore information about SFAS 123(R), see “Note 1. Basis of Presentation andSummary of Significant Accounting Policies—Share-Based Compensation” in theUnaudited Notes to Consolidated Financial Statements included in this Form 10-Q.

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*Callisto Litigation.**  *We agreed to employ Donald H. Picker, Ph.D., as ourpresident in December 2006. Prior to joining our company, Dr. Pickerhad served as Executive Vice President of Research and Development of CallistoPharmaceuticals, Inc. In December 2006, Callisto filed a complaint inthe Supreme Court of New York, County of New York, relating to our employmentof Dr. Picker. The suit names Tapestry and two of our officers, LeonardShaykin and Kai Larson, as defendants. In its complaint, Callisto allegesbreaches of a confidentiality agreement between Callisto and Tapestry andinterference with Dr. Picker’s contractual relationship with Callisto.Callisto seeks unspecified actual and punitive damages. We believe these claimsare without merit and we are vigorously defending against them. We haveincurred legal fees of $556,000 and $833,000 for the three and six-months endedJune 27, 2007, respectively.

**Liquidity and Capital Resources**

Our capital requirements for operations have been, andwill continue to be, significant. As of June 27, 2007, we had a workingcapital balance of $11.4 million, as compared to a working capital balance of$20.2 million as of December 27, 2006. To date, we have financed ouroperations primarily with the net proceeds of public offerings of common stockand private placements of equity securities, with proceeds from the exercise ofwarrants and options and with debt. We also have funded our capitalrequirements with the gross proceeds of approximately $71.7 millionrelated to the sale of our paclitaxel business to Mayne Pharma (USA) Inc. in2003.

We expect our capital needs to increase in 2007 ascompared to 2006 due, in part, to increases in expenses related to our clinicaltrials and to the capital requirements associated with our new laboratory andadministrative facility.

*ReverseStock Split and NASDAQ Listing.**  *Our common stock is listed on theNASDAQ Capital Market. In order to maintain that listing, we must satisfyminimum financial and other requirements. On February 25, 2005, wereceived notice from the NASDAQ Stock Market, Inc. that our common stockhad not met the $1.00 per share minimum bid price requirement for 30consecutive business days and that, if we were unable to demonstrate compliancewith this requirement during the applicable grace periods, our common stockwould be delisted after that time. On February 6, 2006, we effected a one forten reverse stock split of our common stock to regain compliance with thislisting requirement. Since this time, the closing bid price of our common stockhas remained above $1.00 in compliance with the minimum bid price requirement.

*NotesPayable.**  *OnNovember 17, 2006, we repurchased two non-interest bearing promissorynotes issued by us to TL Ventures V L.P. and TL Ventures V Interfund L.P. in February 2005.These promissory notes had an outstanding principal balance of$3.0 million, and we repurchased them for an aggregate payment of$2.7 million in cash. The repurchase of these notes did not have amaterial impact on our financial results.

*PrivatePlacement.**  *OnApril 5, 2006, we sold an aggregate of 12,750,000 shares of our commonstock and warrants to purchase up to 12,750,000 shares of our common stock in aprivate placement for a total of $25.5 million, not including any proceedsthat might be received upon exercise of the warrants. We received approximately$23.8 million net of the placement agent fees and other expenses in thisprivate placement. The warrants currently have an exercise price of $2.40 pershare. We may call up to 20% of the outstanding warrants at a redemption priceof $0.0075 per share of common stock underlying the warrants during anythree-month period if certain conditions are satisfied, including the tradingprice of our common stock exceeding $4.80 for 20 consecutive trading days, upon30 days prior notice. During the notice period, the holders would beentitled to exercise the warrants or any portion of them. Up to half of thewarrants may be exercised on a cashless or net exercise basis. There can be noassurance, however, that we will receive any funds from the exercise ofwarrants.

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*GoingConcern.**  *Wehave no revenue and we have incurred significant operating losses since ourinception. Our net loss was $6.2 million for the three-months ended June 27,2007 and $10.6 million for six-months ended June 27, 2007, and $16.7million for the year ended December 27, 2006. We had an accumulateddeficit of $134.5 million as of June 27, 2007. As of June 27,2007, we had cash and cash equivalents and short-term investments totalingapproximately $14.4 million. Our capital requirements for research anddevelopment, including the cost of clinical trials, have been and will continueto be significant.

We expectresearch and development expenses to increase in connection with our ongoingactivities, particularly as we continue the development of TPI 287. If wein-license or acquire additional product candidates, our research anddevelopment expenses will increase further. In addition, subject to obtainingregulatory approval of TPI 287 or any other product candidate, we expect toincur significant commercialization expenses for product sales, marketing,securing commercial quantities of product from third-party manufacturers anddistribution. We will need substantial additional funding and may be unable toraise capital when needed or on attractive terms, which would force usto delay, reduce or eliminate research and development programs orcommercialization efforts.

We believe that the existing cash and cash equivalentsand short-term investments are not sufficient to enable us to fund ouroperating expenses and capital expenditures for the next twelve months withouta significant curtailment of operations. Therefore, we will be required toraise additional capital through public or private equity offerings and debtfinancings, corporate collaborations or licensing arrangements. Should we beunable to raise the needed capital, we may be required to slowdown, curtail orcease operations. The accompanying consolidated financial statements do notinclude any adjustments that might be necessary if we are unable to continue asa going concern. See “Risk Factors—Risks Related to Our Business.”

*Working Capital and CashFlow.**  *Cashand cash equivalents and short-term investments decreased $8.1 million to $14.4million at June 27, 2007 from $22.5 million at December 27,2006. This decrease was primarily due to cash used in operating activities of$7.9 million. Our cash used in operating activities was primarily used toadvance our product development efforts and for general corporate purposes. Themajority of our future cash expenditures are expected to continue to be used toadvance our product development programs including clinical trials of TPI 287,for capital expenditures necessary to prepare our new laboratory andadministrative facility and for working capital and other general corporatepurposes.

**Future ContractualObligations**

Thetable below summarizes our future contractual obligations as of June 27,2007 (in thousands):

| ** **       | ** ** | **Total** | ** ** | **Remaining  in 2007** | ** ** | **1-3 years** | ** ** | ** 4-5 years ** | ** ** | **After  5 years** | ** ** |
|------------------|------------|-----------|------------|-----------------------------|------------|--------------------|------------|--------------------------------|------------|-------------------------|------------|
| Operating leases |       | $         | 2,347      |                        |       | $                  | 115        |                           |       |                    | $          | 1,368 |   |   |   | $ | 864 |   |   |   | $ | — |   |   |
| Capital lease    |       | 185       |       |                        | 65         |               |       |                           | 120        |                    |       |   | — |   |   |   | — |   |   |
| Total            |       | $         | 2,532      |                        |       | $                  | 180        |                           |       |                    | $          | 1,488 |   |   |   | $ | 864 |   |   |   | $ | — |   |   |

 

In February 2007, we leased 2,300 square feet ofoffice space in Roseland, New Jersey to support our clinical developmentactivities. The lease runs through December 31, 2008 and requires monthlyrental payments of $4,500.

In March 2007, we entered into a five year leasecovering approximately 29,000 square feet of office and laboratory space inBoulder, Colorado. We plan to consolidate both our Colorado-basedadministrative and research and development facilities into this space. We planto take possession of this space in November 2007 to make the necessaryrenovations.

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We have employmentagreements with a number of key employees. These employment agreements containprovisions regarding the termination of employment including termination ofemployment associated with a change in control. These termination benefitsrange from 100% to 300% of the employee’s base salary for the 12-monthperiod immediately preceding the termination date, payment of any accrued butunpaid salary, bonus and vacation and payment of up to 100% of the prior yearbonus or 75% of base salary for the 12-month period immediately precedingthe termination date.

**Impact of RecentAccounting Pronouncements**

On December 28, 2006, we adopted the provisionsof FASB Interpretation No. 48, *“Accounting forUncertainty in Income Taxes—an Interpretation of FASB Statement No. 109”*(“FIN 48”). FIN 48 clarifies the accounting for uncertainty of income taxes byprescribing a minimum recognition threshold for a tax position taken orexpected to be taken in a tax return that is required to be met before beingrecognized in the financial statements. FIN 48 also provides guidance onderecognition, measurement, classification, interest and penalties, accountingin interim periods, disclosure and transition. As of the date of adoption, wedid not identify any unrecognized tax benefits and there was no cumulativeeffect on retained earnings of adopting FIN 48. We recognize interest andpenalties related to our tax contingencies as income tax expense.

In September 2006, the FASB issued SFAS No. 157,“*Fair Value Measurements.*” Thisstandard defines fair value, establishes a framework for measuring fair valuein accounting principles generally accepted in the United States and expandsdisclosure about fair value measurements. This pronouncement applies to otheraccounting standards that require or permit fair value measurements.Accordingly, this statement does not require any new fair value measurement.This statement is effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. We will be required toadopt SFAS No. 157 in the first quarter of fiscal year 2008.Management has not yet determined the impact of adopting this statement.

In June, 2007 the FASBissued EITF 07-3, “Accounting for Nonrefundable Advance Payments forGoods or Services to Be Used in Future Research and Development Activities”. EITF07-3 clarifies the accounting for non-refundable advance payments madefor future research and development activities. This issue is effective forfiscal years beginning after December 15, 2007, including interim periodswithin those fiscal years. The cumulative effect of applying EITF 07-3will be reported as a change in accounting principal through an adjustment toretaining earnings as of the beginning of the period in which it is adopted. Managementhas not yet determined the impact of adopting this statement.

**SpecialNote Regarding Forward-Looking Statements**

Some of thestatements under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” “Risk Factors,” and elsewhere in this reportconstitute forward-looking statements. In some cases, you can identifyforward-looking statements by the following words: “may,” “will,” “could,” “would,”“should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”“project,” “potential,” “continue,” “ongoing” or the negative of these terms orother comparable terminology, although not all forward-looking statementscontain these words. These statements involve known and unknown risks,uncertainties and other factors that may cause our actual results, levels ofactivity, performance or achievements to be materially different from theinformation expressed or implied by these forward-looking statements. While webelieve that we have a reasonable basis for each forward-lookingstatement contained in this report, we caution you that these statements arebased on a combination of facts and factors currently known by us and ourprojections of the future, about which we cannot be certain. Many important factorsaffect our ability to achieve our objectives, including:

·       thesuccess and timing of our preclinical studies and clinical trials;

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·       ourability to obtain and maintain regulatory approval for TPI 287 and otherproduct candidates;

·       ourplans to develop and commercialize TPI 287 and other product candidates;

·       theloss of key scientific or management personnel;

·       thesize and growth potential of the potential markets for TPI 287 and otherproduct candidates and our ability to serve those markets;

·       regulatorydevelopments in the United States and foreign countries;

·       therate and degree of market acceptance of any future products;

·       theaccuracy of our estimates regarding expenses, future revenues, capitalrequirements and needs for additional financing and our ability to obtainadditional financing;

·       ourability to attract collaborators with development, regulatory andcommercialization expertise;

·       ourability to obtain and maintain intellectual property protection for our productcandidates and our delivery technologies;

·       thesuccessful development of our marketing capabilities;

·       thesuccess of competing drugs that are or become available; and

·       theperformance of third party manufacturers which provide a supply of thecomponents included in our products and any future products.

In addition, you should refer to the “Risk Factors”section of this report for a discussion of other important factors that maycause our actual results to differ materially from those expressed or impliedby our forward-looking statements. As a result of these factors, we cannotassure you that the forward-looking statements in this report will prove to beaccurate. Furthermore, if our forward-looking statements prove to beinaccurate, the inaccuracy may be material. In light of the significantuncertainties in these forward-looking statements, you should not regardthese statements as a representation or warranty by us or any other person thatwe will achieve our objectives and plans in any specified time frame, or atall.

We qualify all theforward-looking statements contained in this report by the foregoing cautionarystatements. We may not update these forward-looking statements even though oursituation may change in the future.

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

We currently invest ourexcess cash balances in money market accounts and short-term investments thatare subject to interest rate risk. The amount of interest income we earn onthese funds will change as interest rates in general change. Our investmentsare subject to a loss of principal if market interest rates increase and theinvestments are sold prior to maturity. However, due to the short-term natureof the majority of our investments, the high credit quality of our portfolio andour ability to hold our investments until maturity, an immediate 1% change ininterest rates would not have a material impact on our financial position,results of operations or cash flows.

**Item 4.**                        Controlsand Procedures

The Company maintains a system of disclosure controls andprocedures. The term “disclosure controls and procedures,” as defined byregulations of the SEC, means controls and other procedures that are designedto ensure that information required to be disclosed in the reports that the Companyfiles or submits to the SEC under the Securities Exchange Act of 1934, asamended (the “Act”), is recorded, processed, summarized and reported, withinthe time periods specified in the SEC’s rules and forms. 

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Disclosure controls and proceduresinclude, without limitation, controls and procedures designed to ensure thatinformation required to be disclosed by the Company in the reports that itfiles or submits to the SEC under the Act is accumulated and communicated tothe Company’s management, including its Principal Executive Officer and itsPrincipal Financial Officer, as appropriate to allow timely decisions to bemade 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, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures as of June 27, 2007. Based upon that evaluation,the Company’s Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective in timelyalerting them to material information relating to the Company required to beincluded in the Company’s periodic SEC filings.

**Changes in InternalControl**

There were no changes in the Company’s internalcontrol over financial reporting during the quarter ended June 27, 2007that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

Any systemof controls, however well designed and operated, can provide only reasonable,and not absolute, assurance that the objectives of the system are met. Inaddition, the design of any control system is based in part upon certainassumptions about the likelihood of future events. 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.

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**Part II—OtherInformation**

**Item 1.**                        LegalProceedings

There have been no material developments in legalproceedings affecting the Company during the quarter.

**Item 1A.**                RiskFactors

*Investing in our common stock involves a high degreeof risk. You should carefully consider the risks described below, together withall of the other information included in this report, before deciding whetherto invest in our common stock. The occurrence of any of the following riskscould harm our business, financial condition or results of operations. In suchcase, the trading price of our common stock could decline and you may lose allor part of your investment.*

**Risks Related toOur Business**

***We will need substantial additional funding and may beunable to raise capital when needed, which would force us to discontinue,shutdown or cease operations.***

We expect our research and development expenses toincrease in connection with our ongoing activities, particularly as we continuethe clinical development of TPI 287. If we in-license or acquireadditional product candidates, our research and development expenses willincrease further. In addition, subject to obtaining regulatory approval ofTPI 287 or any other product candidate, we expect to incur significantcommercialization expenses for product sales, marketing, securing commercialquantities of product from our manufacturers and distribution. We will needsubstantial additional funding and may be unable to raise capital when neededor on attractive terms, which would force us to delay, reduce or eliminate ourresearch and development programs or commercialization efforts.

We believe that our existing cash and cash equivalentsand short-term investments, is not sufficient to enable us to fund ouroperating expenses and capital expenditures for the next twelve months. Therefore,we will be required to raise additional capital through public or privateequity offerings and debt financings, corporate collaboration and licensingarrangements. If we raise additional funds by issuing equity securities, ourstockholders will experience dilution. Debt financing, if available, mayinvolve agreements that include covenants restricting our ability to takespecific actions, such as incurring additional debt, making capitalexpenditures or declaring dividends. Any debt financing or additional equitythat we raise may contain terms, such as liquidation and other preferences,that are not favorable to us or our stockholders. If we raise additional fundsthrough collaboration and licensing arrangements with third parties, it may benecessary to relinquish valuable rights to our technologies, future revenuestreams, research programs or product candidates or to grant licenses on termsthat may not be favorable to us.

Our future capitalrequirements will depend on many factors, including:

·       theprogress and results of our clinical trials of TPI 287;

·       thenumber and development requirements of other product candidates that we pursue,including the scope, progress, results and costs of preclinical development,laboratory testing and clinical trials of any other product candidate;

·       thecosts, timing and outcome of regulatory review;

·       thecosts of commercialization activities, including product marketing, sales anddistribution;

·       thecosts of preparing, filing and prosecuting patent applications and maintaining,enforcing and defending intellectual property-related claims;

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·       theextent to which we acquire or invest in new businesses, products andtechnologies;

·       ourability to establish and maintain collaborations; and

·       changesin facility or staffing requirements.

Should we be unable toraise the needed capital, we may be required to discontinue, shutdown or ceaseoperations.

***We are currently devoting substantially all of ourefforts to the development of one product candidate, TPI 287, which is inan early stage of clinical development. If we are unable to successfullydevelop and commercialize TPI 287, or experience significant delays indoing so, our business, financial condition and results of operations will bematerially harmed.***

We are currently devoting substantially all of ourefforts to the development of TPI 287. Our ability to generate productrevenues, which we do not expect for at least the next several years, if ever,depends on the successful development and eventual commercialization ofTPI 287. However, TPI 287 is in an early stage of clinicaldevelopment. We recently completed dosing in a Phase 1 clinical trial ofTPI 287 and expect to complete dosing in another Phase 1 clinicaltrial during the second half of 2007. In addition, we recently commencedenrollment in a Phase 2 clinical trial of TPI 287 in patients with anadvanced form of prostate cancer called hormone refractory prostate cancer, orHRPC. We also expect to initiate a Phase 1b/2 pharmacokinetic clinicaltrial of TPI 287 in the summer of 2007 to evaluate the drug’s activity andoral bioavailability in humans. The success of TPI 287 will depend onseveral factors, including the following:

·       successfulcompletion of clinical trials;

·       receivingand maintaining regulatory approval from the U.S. Food and Drug Administration,or FDA, and similar regulatory authorities outside the United States;

·       establishingand maintaining commercial manufacturing arrangements with third party manufacturers;

·       launchingcommercial sales of TPI 287, whether alone or in collaboration withothers;

·       acceptanceof the product by patients, the medical community and third party payors;

·       competitionfrom other therapies; and

·       acontinued acceptable safety profile of TPI 287 following approval.

Because of our focus onone product candidate, if TPI 287 does not prove successful in clinicaltrials or is not commercialized because we have insufficient resources forcontinued development or for any other reason, we may be required to suspend ordiscontinue our operations and you could lose your entire investment.

***We have incurred significant losses since ourinception. We expect to incur losses for the foreseeable future and may neverachieve or maintain profitability.***

We have incurredsignificant operating losses since our inception in 1991. Our net loss fromcontinuing operations was $6.2 million and $10.6 million for the three andsix-months ended June 27, 2007, $16.6 million in 2006, $17.2 million in2005 and $21.6 million in 2004. We have an accumulated deficit of$134.5 million as of June 27, 2007. To date, we have financed ouroperations primarily with the net proceeds of public offerings of common stockand private placements of equity securities, with proceeds from the exercise ofwarrants and options and with debt. We also have funded our capitalrequirements with the proceeds of the sale of our paclitaxel business to MaynePharma (USA) Inc. in December 2003. 

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Sincewe sold our paclitaxel business to Mayne Pharma, we have devoted substantiallyall of our efforts to research and development activities, including clinicaltrials. We have not completed development of any drugs. We expect to continueto incur significant and increasing operating losses for at least the nextseveral years. We anticipate that our expenses will increase substantially aswe:

·       continuethe clinical development of TPI 287;

·       subjectto the successful completion of clinical trials, seek regulatory approvals forTPI 287 and potentially other product candidates;

·       establisha sales and marketing infrastructure to commercialize products for which we mayobtain regulatory approval; and

·       addoperational, financial and management information systems and personnel,including personnel to support our product development efforts.

To become and remainprofitable, we must succeed in developing and eventually commercializing drugswith significant market potential. This will require us to be successful in arange of challenging activities, including discovering, in-licensing oracquiring product candidates, successfully completing preclinical testing andclinical trials of our product candidates, obtaining regulatory approval forthese product candidates and manufacturing, marketing and selling those productsfor which we may obtain regulatory approval. We are only in the preliminarystages of development of TPI 287, our only current product candidate. Wemay never succeed in these activities and may never generate revenues that aresignificant enough to achieve profitability. Even if we do achieveprofitability, we may not be able to sustain or increase profitability on aquarterly or annual basis. Our failure to become and remain profitable woulddepress the market price of our common stock and could impair our ability toraise capital, expand our business, diversify our product offerings or continueour operations. A decline in the market price of our common stock could alsocause you to lose all or a part of your investment.

***Our short history as a drug development company maymake it difficult to evaluate the success of our business to date and to assessour future viability.***

We are an early stage drug development company. Sincewe sold our paclitaxel business to Mayne Pharma in 2003, our operations havebeen limited to undertaking preclinical studies and limited clinical trials ofour product candidates. Since we began devoting substantially all of ourefforts to the development of TPI 287, we have not demonstrated ourability to successfully complete large-scale clinical trials, obtain regulatoryapprovals, manufacture a commercial scale product or arrange for a third partyto do so on our behalf, or conduct sales and marketing activities necessary forsuccessful product commercialization. Consequently, any predictions about ourfuture success or viability may not be as accurate as they could be if we had alonger history as a drug development company.

In addition, as a newbusiness, we may encounter unforeseen expenses, difficulties, complications, delaysand other known and unknown factors. We will need to transition from having adevelopment focus to becoming capable of supporting commercial activities. Wemay not be successful in such a transition.

***If we are not successful in establishing and maintainingdevelopment and commercialization collaborations for our product candidates, wemay have to reduce or delay our product development and commercializationefforts and increase our expenditures.***

For each of our product candidates, we plan toevaluate the merits of retaining commercialization rights for ourselves orselectively entering into strategic alliances with leading pharmaceutical andbiotechnology companies to assist us in advancing our development programs.Other than arrangements with academic scientists and institutions that haveprovided us basic scientific research capabilities, we have not entered intoany such arrangements to date.

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If we enter into any of these strategic alliances,they may provide us with access to the therapeutic area expertise and thedevelopment and commercialization resources of our collaborators, as well asaugment our financial resources.

We may not be able to negotiate collaboration or otheralternative arrangements with these other companies for the development or commercializationof our product candidates on acceptable terms, or at all. We face, and willcontinue to face, significant competition in seeking appropriate collaborators.Moreover, collaboration arrangements are complex and time consuming tonegotiate, document and implement. We may not be successful in our efforts, ifany, to establish and implement collaborations or other alternativearrangements. The terms of any collaborations or other arrangements that weestablish may not be favorable to us. If we are not able to establishcollaboration arrangements, we may have to reduce or delay further developmentof some of our programs, increase our planned expenditures and undertakedevelopment and commercialization activities at our own expense.

Any collaborationthat we enter into may not be successful. The success of our collaborationarrangements will depend heavily on the efforts and activities of ourcollaborators. It is likely that our collaborators will have significantdiscretion in determining the efforts and resources that they will apply tothese collaborations. For example, it is possible that:

·       collaboratorsmay not pursue further development and commercialization of compounds resultingfrom collaborations or may elect not to renew research and developmentprograms;

·       collaboratorsmay delay clinical trials, underfund a clinical trial program, stop a clinicaltrial or abandon a product candidate, repeat or conduct new clinical trials orrequire the development of a new formulation of a product candidate forclinical testing;

·       acollaborator with marketing and distribution rights to one or more of ourproducts may not commit enough resources to the marketing and distribution ofour products, limiting our potential revenues from the commercialization ofthese products; and

·       disputesmay arise delaying or terminating the research, development orcommercialization of our product candidates, or result in significant legalproceedings.

We also expect tobe subject to additional risks in future collaboration agreements we may enterinto, including the following:

·       collaborationagreements are likely to be for fixed terms and subject to termination by ourcollaborators in the event of a material breach or lack of scientific progressby us;

·       ourcollaborators are likely to have the first right to maintain or defend ourintellectual property rights and, although we would likely have the right toassume the maintenance and defense of our intellectual property rights if ourcollaborators do not, our ability to do so may be compromised by ourcollaborators’ acts or omissions;

·       ourcollaborators may use our intellectual property rights in such a way as tocause litigation that could jeopardize or invalidate our intellectual propertyrights or expose us to potential liability; and

·       ourcollaborators may disclose our trade secrets to third parties without ourauthorization.

Collaborations withpharmaceutical companies and other third parties often are terminated orallowed to expire by the other party. Such terminations or expirations wouldadversely affect us financially and could harm our business reputation.

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***The results of preclinical studies and early stageclinical trials do not ensure success in later stage clinical trials, theresults of clinical trials of a product candidate for particular indicationsare not necessarily indicative of the results of clinical trials of the productcandidate in other indications and interim results from a clinical trial arenot necessarily indicative of the successful outcome of that trial.***

We do not currently have any products that havereceived regulatory approval, and our product development efforts are at anearly stage. The outcome of preclinical studies and early clinical trials maynot accurately predict the success of later clinical trials, and interimresults of a clinical trial do not necessarily predict final results. Forexample, the results that we observed in our preclinical studies ofTPI 287 may not be indicative of successful results in our ongoing and plannedPhase 1 and Phase 2 clinical trials of TPI 287 in multiplecancer indications. Many drug candidates have failed to show efficacy or safetyin humans even after promising preclinical study results.

Even if our early phaseclinical trials are successful, we will need to conduct additional clinicaltrials in a larger number of patients taking the drug for longer periods beforewe are able to seek approvals from the FDA and similar regulatory authoritiesoutside the United States to market and sell a product candidate. Similarly,even if clinical trials of a product candidate are successful in oneindication, clinical trials of that product candidate for other indications maybe unsuccessful. For example, we plan to conduct clinical trials ofTPI 287 for tumors of the central nervous system, prostate and pancreaticcancer. As such, the results from these Phase 2 clinical trials of TPI 287may not necessarily be indicative of the results we may obtain in futureclinical trials of TPI 287 in other cancer indications. Furthermore, evenif clinical trials of one formulation of a drug are successful, clinical trialsfor other formulations may be unsuccessful. For example, the results from ourplanned Phase 2 clinical trials of an IV formulation of TPI 287 maynot accurately predict the results we obtain in future clinical trials of anoral formulation of TPI 287. If we are not successful in commercializingTPI 287 in any of the cancers that we are investigating or as an oralformulation, or are significantly delayed in doing so, our business will bematerially harmed and our stock price may decline.

***If our preclinical studies do not produce positiveresults or if our clinical trials do not demonstrate safety and efficacy inhumans, we may experience delays, incur additional costs and ultimately beunable to commercialize our product candidates.***

Before obtainingregulatory approval for the sale of our product candidates, we must conduct, atour own expense, extensive preclinical tests to demonstrate the safety of ourproduct candidates in animals and clinical trials to demonstrate the safety andefficacy of our product candidates in humans. Preclinical and clinical testingis expensive, difficult to design and implement, can take many years tocomplete and is uncertain as to outcome. A failure of one or more of ourclinical trials can occur at any stage of testing. We may experience numerousunforeseen events during, or as a result of, preclinical testing and theclinical trial process that could delay or prevent our ability to receiveregulatory approval or commercialize our product candidates, including:

·       regulatorsor institutional review boards may not authorize us to commence or continue aclinical trial or conduct a clinical trial at a prospective trial site;

·       ourpreclinical tests or clinical trials may produce negative or inconclusiveresults, and we may decide, or regulators may require us, to conduct additionalpreclinical testing or clinical trials, or we may abandon projects that weexpect to be promising;

·       thenumber of patients required for our clinical trials may be larger than weanticipate, enrollment in our clinical trials may be slower than we anticipate,or participants may drop out of our clinical trials at a higher rate than weanticipate;

·       weor our third party contractors may fail to comply with regulatory requirements;

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·       ourthird party contractors may fail to meet their contractual obligations to us ina timely manner or at all;

·       wemight have to suspend or terminate our clinical trials if the participants arebeing exposed to unacceptable health risks;

·       regulatorsor institutional review boards may require that we hold, suspend or terminateclinical research for various reasons, including safety risks or noncompliancewith regulatory requirements;

·       thecost of our clinical trials may be greater than we anticipate;

·       thesupply or quality of our product candidates, components of our productcandidates or other materials necessary to conduct our clinical trials may beinsufficient or inadequate because we do not currently have any agreements withthird party manufacturers for the long-term commercial supply of any of ourproduct candidates; and

·       ourproduct candidates may not show the desired level of efficacy, may includeundesirable side effects or may have other unexpected characteristics.

If we are requiredto conduct additional clinical trials or other testing of our productcandidates beyond those that we currently contemplate, if we are unable tosuccessfully complete our clinical trials or other testing, if the results ofthese trials or tests are not positive or are only modestly positive or ifthere are safety concerns, we may:

·       bedelayed in obtaining marketing approval for our product candidates;

·       notbe able to obtain marketing approval;

·       obtainapproval for indications that are not as broad as intended; or

·       havethe product removed from the market after obtaining marketing approval.

Our product developmentcosts also will increase if we experience delays in testing or approvals. We donot know whether any preclinical studies or clinical trials will begin asplanned, will need to be restructured or will be completed on schedule, if atall. Significant preclinical or clinical trial delays also could shorten thepatent protection period during which we may have the exclusive right tocommercialize our product candidates or allow our competitors to bring productsto market before we do and impair our ability to commercialize our products orproduct candidates.

***If we observe serious adverse events or identifyinappropriate side effects during the development of our product candidates, wemay need to abandon or delay our development of the applicable productcandidate.***

Our product candidates mayproduce serious unforeseen adverse events, have undesirable side effects orhave other characteristics that are unexpected. As a result, we might need tointerrupt, delay or halt clinical trials of our product candidates. We maysuspend or terminate clinical trials at any time. Regulators or institutionalreview boards may require that we hold, suspend or terminate clinical trialsfor various reasons, including a finding that participants are being exposed tounacceptable health risks. In addition, if other pharmaceutical companiesannounce that they have observed frequent unforeseen adverse events or safetyissues in their trials involving products or product candidates similar to, orcompetitive with, our product candidates, we could encounter delays in thetiming of our clinical trials or difficulties in obtaining the approval of ourproduct candidates. The public perception of our product candidates might alsobe adversely affected, which could adversely affect our business, financialcondition and results of operations, even if the concern relates to anothercompany’s product or product candidate.

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***The commercial success of TPI 287 or any otherproduct candidates that we may develop will depend upon the degree of marketacceptance by physicians, patients, healthcare payors and others in the medicalcommunity.***

Any products thatwe bring to the market, including TPI 287 if it receives marketingapproval, may not gain market acceptance by physicians, patients, healthcarepayors and others in the medical community. If these products do not achieve anadequate level of acceptance, we may not generate significant product revenues andwe may not become profitable. The degree of market acceptance of our productcandidates, if approved for commercial sale, will depend on a number offactors, including:

·       theprevalence and severity of any side effects;

·       theefficacy and potential advantages over alternative treatments;

·       theability to offer our product candidates for sale at competitive prices;

·       relativeconvenience and ease of administration;

·       thewillingness of the target patient population to try new therapies and ofphysicians to prescribe these therapies;

·       thestrength of marketing and distribution support; and

·       sufficientthird party coverage or reimbursement.

***If we are unable to establish sales and marketingcapabilities or enter into agreements with third parties to market and sell ourproduct candidates, we may be unable to generate product revenues.***

We do not have a sales or marketing organization andhave no experience in the sale, marketing or distribution of pharmaceuticalproducts. To achieve commercial success for any approved product, we musteither develop a sales and marketing organization or outsource these functionsto third parties. We plan to retain United States marketing and sales rights orco-promotion rights for our product candidates for which we receive regulatoryapproval in markets in which we believe it is possible to gain access through afocused, specialized sales force. For markets in which we believe a large salesforce is required to gain access, and for markets outside the United States, weplan to commercialize products for which we obtain regulatory approval througha variety of collaboration and distribution arrangements with otherpharmaceutical and biotechnology companies.

There are risks involvedwith establishing our own sales and marketing capabilities, as well as inentering into arrangements with third parties to perform these services. Forexample, developing a sales force is expensive and time consuming and coulddelay any product launch. If the commercial launch of a product candidate forwhich we recruit a sales force and establish marketing capabilities is delayedor prohibited as a result of FDA requirements or other reasons, we would incurrelated expenses too early relative to the product launch. This may be costly,and our investment would be lost if we cannot retain our sales and marketingpersonnel. In addition, even if we establish our own sales force and marketingcapabilities, our sales force and marketing teams may not be successful incommercializing our products.

***We face substantial competition, which may result inothers discovering, developing or commercializing products before or moresuccessfully than we do.***

The development and commercialization of new drugs ishighly competitive. We face competition with respect to TPI 287 and anyproducts we may seek to develop or commercialize in the future from majorpharmaceutical companies, specialty pharmaceutical companies and biotechnologycompanies worldwide.

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If TPI 287 isapproved for the cancer indications that we are currently investigating, itwill compete principally with the following:

·       Bristol-MyersSquibb’s Taxol®, Sanofi-Aventis’ Taxotere®, Abraxis BioScience’s Abraxane® andgeneric forms of paclitaxel in the treatment of prostate cancer;

·       Schering-Plough’sTemodar® (temozolomide) and Bristol-Myers Squibb’s BiCNU® (carmustine) in thetreatment of CNS tumors; and

·       EliLilly’s Gemzar® (gemcitabine), Hoffmann-La Roche’s Xeloda® (5-fluorouracil)and OSI Pharmaceuticals’ Tarceva® (erlotinib) in the treatment of pancreatic cancer.

Potential competitors also include academicinstitutions, government agencies and other private and public researchorganizations that conduct research, seek patent protection and establishcollaborative arrangements for research, product development, manufacturing andcommercialization.

Our commercial opportunity could be reduced oreliminated if our competitors develop and commercialize products that are saferor more effective, have fewer side effects, are more convenient or are lessexpensive than any products that we may develop. Our competitors may alsoobtain FDA or other regulatory approval for their products more rapidly than wemay obtain approval for ours. In addition, our ability to compete may benegatively affected because in some cases insurers or third party payors seekto encourage the use of generic products. This may make branded products lessattractive to buyers due to higher costs.

We believe that many competitors are attempting todevelop therapeutics for many of our target indications, including academicinstitutions, government agencies, public and private research organizations,large pharmaceutical companies and smaller more focused companies. We are awareof numerous product candidates in clinical development for each of the cancerindications that we are investigating.

Many of ourcompetitors may have significantly greater financial resources and expertisethan we do in the following:

·       researchand development;

·       preclinicaltesting and conducting clinical trials;

·       obtainingregulatory approvals;

·       manufacturing;and

·       marketingand distribution.

Smaller and other earlystage development companies may also prove to be significant competitors,particularly through collaborative arrangements with large pharmaceuticalcompanies or other organizations. In addition, other companies and institutionscompete with us in recruiting and retaining highly qualified scientific andmanagement personnel and in establishing clinical trial sites and patientregistration for clinical trials, as well as in acquiring technologiescomplementary to or necessary for our programs or advantageous to our business.

***If we are unable to obtain adequate reimbursement fromgovernments or third party payors for any products that we may develop or if weare unable to obtain acceptable prices for those products, our revenues andprospects for profitability will suffer.***

Our revenues andprofits will depend heavily upon the availability of adequate reimbursement forthe use of our approved product candidates from governmental and other thirdparty payors, both in the 

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UnitedStates and in other markets. Reimbursement by a third party payor may dependupon a number of factors, including the third party payor’s determination thatuse of a product is:

·       acovered benefit under its health plan;

·       safe,effective and medically necessary;

·       appropriatefor the specific patient;

·       cost-effective;and

·       neitherexperimental nor investigational.

Obtaining reimbursement approval for a product fromeach government or other third party payor is a time consuming and costlyprocess that could require us to provide supporting scientific, clinical andcost-effectiveness data for the use of our products to each payor. We may notbe able to provide data sufficient to gain acceptance with respect toreimbursement. Even when a payor determines that a product is eligible forreimbursement, the payor may impose coverage limitations that preclude paymentfor some uses that are approved by the FDA or comparable authorities. Inaddition, there is a risk that full reimbursement may not be available for highpriced products. Moreover, eligibility for coverage does not imply that anyproduct will be reimbursed in all cases or at a rate that allows us to make aprofit or even cover our costs. Interim payments for new products, ifapplicable, may also not be sufficient to cover our costs and may not be madepermanent. A primary trend in the United States healthcare industry andelsewhere is toward cost containment.

We expect recent changesin the Medicare program and increasing emphasis on managed care to continue toput pressure on pharmaceutical product pricing. In 2003, the U.S. governmentenacted legislation providing a partial prescription drug benefit for Medicarerecipients, which became effective at the beginning of 2006. However, to obtainpayments under this program, we will be required to sell products to Medicarerecipients through drug procurement organizations operating pursuant to thislegislation. These organizations will negotiate prices for our products, whichare likely to be lower than those we might otherwise obtain. Federal, state andlocal governments in the United States continue to consider legislation tolimit the growth of healthcare costs, including the cost of prescription drugs.Future legislation could limit payments for the product candidates that we aredeveloping.

***Recent proposed legislation may permit re-importationof drugs from foreign countries into the United States, including foreigncountries where the drugs are sold at lower prices than in the United States,which could force us to lower the prices at which we sell our products andimpair our ability to derive revenues from these products.***

Legislation has beenintroduced in the U.S. Congress that, if enacted, would permit more widespreadre-importation of drugs from foreign countries into the United States. Thiscould include re-importation from foreign countries where the drugs are sold atlower prices than in the United States. Such legislation, or similar regulatorychanges, could lead to a decrease in the price we receive for any approvedproducts, which, in turn, could impair our ability to generate revenues.Alternatively, in response to legislation such as this, we might elect not toseek approval for or market our products in foreign jurisdictions in order tominimize the risk of re-importation, which could also reduce the revenue wegenerate from our product sales.

***Governments outside the United States tend to imposestrict price controls, which may adversely affect our revenues, if any.***

In some countries, particularly the countries of theEuropean Union, the pricing of prescription pharmaceuticals is subject togovernmental control. In these countries, pricing negotiations withgovernmental authorities can take considerable time after the receipt ofmarketing approval for a product.

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To obtain reimbursement orpricing approval in some countries, we may be required to conduct a clinicaltrial that compares the cost-effectiveness of our product candidate to otheravailable therapies. If reimbursement of our products is unavailable or limitedin scope or amount, or if pricing is set at unsatisfactory levels, our businesscould be adversely affected.

**Risks Related toOur Dependence on Third Parties**

***Use of third parties to manufacture our productcandidates may increase the risk that we will not have sufficient quantities ofour product candidates or be able to obtain such quantities at an acceptablecost, and clinical development and commercialization of our product candidatescould be delayed, prevented or impaired.***

We do not currently own or operate manufacturingfacilities for the production of clinical or commercial quantities of ourproduct candidates. We have limited personnel with experience in drugmanufacturing and we lack the resources and the capabilities to manufacture anyof our product candidates on a clinical or commercial scale.

We currently rely, and expect to continue to rely, onthird parties for the manufacture of our product candidates and any productsthat we may develop, other than small amounts of compounds that we synthesizefor preclinical testing. To date, we have obtained our supply of the bulk drugsubstance for TPI 287 from one third-party manufacturer. We have engaged asecond manufacturer to provide the fill and finish services for an IVformulation of TPI 287 that we are using in our ongoing clinical trials.We do not have any agreements with third party manufacturers for the long termcommercial supply of any of our product candidates. We obtain our supplies ofTPI 287 from these third party manufacturers pursuant to short termagreements that include specific supply timelines and volume expectations. Ifany of these manufacturers should become unavailable to us for any reason, wemay be delayed in identifying and qualifying such replacements.

Reliance on third partymanufacturers entails risks to which we would not be subject if we manufacturedproduct candidates or products ourselves, including:

·       relianceon the third party for regulatory compliance and quality control and assurance;

·       thepossible breach of the manufacturing agreement by the third party because offactors beyond our control; and

·       thepossible termination or nonrenewal of the agreement by the third party, basedon its own business priorities, at a time that is costly or inconvenient forus.

Our manufacturers may not be able to comply withcurrent good manufacturing practice, or cGMP, regulations or other regulatoryrequirements or similar regulatory requirements outside the United States. Weand our manufacturers are subject to unannounced inspections by the FDA, stateregulators and similar regulators outside the United States. Our failure, orthe failure of our third party manufacturers, to comply with applicableregulations could result in sanctions being imposed on us, including fines,injunctions, civil penalties, failure of regulatory authorities to grantmarketing approval of our product candidates, delays, suspension or withdrawalof approvals, license revocation, seizures or recalls of product candidates orproducts, operating restrictions and criminal prosecutions, any of which couldsignificantly and adversely affect supplies of our product candidates.

Our product candidates and any products that we maydevelop may compete with other product candidates and products for access tomanufacturing facilities. There are a limited number of manufacturers thatoperate under cGMP regulations and that are both capable of manufacturing forus and willing to do so. If the third parties that we engage to manufactureproduct for our preclinical tests and clinical trials should cease to continueto do so for any reason, we likely would experience delays in advancing thesetrials while we identify and qualify replacement suppliers and we may be unableto obtain 

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replacement supplies onterms that are favorable to us. In addition, if we are not able to obtainadequate supplies of our product candidates or the drug substances used tomanufacture them, it will be more difficult for us to develop our productcandidates and compete effectively.

Our current and anticipatedfuture dependence upon others for the manufacture of our product candidates mayadversely affect our future profit margins and our ability to develop productcandidates and commercialize any products that receive regulatory approval on atimely and competitive basis.

***We rely on third parties to conduct our clinicaltrials and those third parties may not perform satisfactorily, includingfailing to meet established deadlines for the completion of such trials.***

We do not independently conduct clinical trials forour product candidates. We rely on third parties, such as contract researchorganizations, clinical data management organizations, medical institutions andclinical investigators, to perform this function. Our reliance on these thirdparties for clinical development activities reduces our control over theseactivities. We are responsible for ensuring that each of our clinical trials isconducted in accordance with the general investigational plan and protocols forthe trial. Moreover, the FDA requires us to comply with standards, commonlyreferred to as Good Clinical Practices, for conducting, recording, andreporting the results of clinical trials to assure that data and reportedresults are credible and accurate and that the rights, integrity andconfidentiality of trial participants are protected. Our reliance on thirdparties that we do not control does not relieve us of these responsibilitiesand requirements. Furthermore, these third parties may also have relationshipswith other entities, some of which may be our competitors. If these thirdparties do not successfully carry out their contractual duties, meet expecteddeadlines or conduct our clinical trials in accordance with regulatoryrequirements or our stated protocols, we will not be able to obtain, or may bedelayed in obtaining, regulatory approvals for our product candidates and willnot be able to, or may be delayed in our efforts to, successfully commercializeour product candidates.

We also rely on otherthird parties to store and distribute drug supplies for our clinical trials.Any performance failure on the part of our existing or future distributorscould delay clinical development or regulatory approval of our productcandidates or commercialization of our products, producing additional lossesand depriving us of potential product revenue.

***We may not be successful in our efforts to in-licenseor acquire attractive development candidates.***

We may attempt toenhance our product pipeline through strategically in-licensing or acquiringproduct candidates that complement our business. However, we may be unable tolicense or acquire suitable product candidates from third parties for a numberof reasons. In particular, the licensing and acquisition of pharmaceuticalproducts is competitive. A number of more established companies are alsopursuing strategies to license or acquire products in the cancer market. Theseestablished companies may have a competitive advantage over us due to theirsize, cash resources or greater clinical development and commercializationcapabilities. Other factors that may prevent us from licensing or otherwiseacquiring suitable product candidates include the following:

·       wemay be unable to license or acquire the relevant technology on terms that wouldallow us to make an appropriate return from the product;

·       companiesthat perceive us to be their competitors may be unwilling to assign or licensetheir product rights to us; or

·       wemay be unable to identify suitable products or product candidates within our areasof expertise.

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***If we in-license product candidates in the future andfail to comply with our obligations in any such license with a third party, wecould lose license rights that are important to our business.***

We expect that anylicenses that we enter into the future will provide us rights to third partyintellectual property that is important to our business. We expect that futurelicenses will impose various development and commercialization, milestonepayment, royalty, sublicensing, patent protection and maintenance, insuranceand other obligations on us. If we fail to comply with these obligations orotherwise breach the license agreement, the licensor may have the right toterminate the license in whole, terminate the exclusive nature of the licenseor bring a claim against us for damages. Any such termination or claim wouldlikely prevent or impede our ability to market any product that is covered bythe licensed patents. Even if we contest any such termination or claim and areultimately successful, our stock price could suffer. In addition, upon anytermination of a license agreement, we may be required to license to thelicensor any related intellectual property that we developed.

***We may be unable to attract and retain the qualifiedemployees we need to be successful.***

We are highly dependent onmembers of our staff that lead or play critical roles in our research anddevelopment efforts. We require highly qualified and trained scientists withthe necessary skills to develop our product candidates. Recruiting andretaining qualified technical and managerial personnel will also be critical toour success. We face intense competition for these professionals from othercompanies in our industry and the turnover rate for these professionals can behigh. The loss of any of these persons, or our inability to recruit additionalpersonnel necessary to our business, could substantially impair our researchand development efforts and impede our ability to develop and commercialize anyof our products. In addition, we rely on other consultants and advisors toassist us in formulating our research and development strategy. Some haveconsulting or other advisory arrangements with other entities that may conflictor compete with their obligations to us.

***We expect to expand our development, regulatory andsales and marketing capabilities, and as a result, we may encounterdifficulties in managing our growth, which could disrupt our operations.***

We expect to experiencesignificant growth in the number of our employees and the scope of ouroperations, particularly in the areas of drug development, regulatory affairsand sales and marketing. To manage our anticipated future growth, we mustcontinue to implement and improve our managerial, operational and financialsystems, expand our facilities and continue to recruit and train additionalqualified personnel. Due to our limited financial resources and theinexperience of our management team in managing a company with such anticipatedgrowth, we may not be able to effectively manage the expansion of ouroperations or recruit and train additional qualified personnel. The physicalexpansion of our operations may lead to significant costs and may divert ourmanagement and business development resources. Any inability to manage growthcould delay the execution of our business plans or disrupt our operations.

***Our use of hazardous materials exposes us to the riskof material environmental liabilities. We also incur substantial costs tocomply with environmental and occupational safety laws regulating the use ofhazardous materials. If we violate these laws, we would be subject tosignificant fines, liabilities or other adverse consequences.***

We use radioactive materials and other hazardous orbiohazardous substances in our research and development activities. As aresult, we are potentially subject to material liabilities related to personalinjuries or property damages that may be caused by the spread of radioactivecontamination or by other hazardous substance releases or exposures at, orfrom, our facilities. Although we believe that our safety procedures forhandling and disposing of these materials comply with the standards prescribedby state and federal regulations, we cannot completely eliminate the risk ofaccidental contamination or injury from 

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these materials.Decontamination costs associated with radioactivity releases, other clean-upcost, and related damages or liabilities could be significant and could harmour business. The cost of this liability could exceed our resources, and we donot maintain liability insurance for these risks.

We are required to complywith increasingly stringent laws and regulations governing environmentalprotection and workplace safety, including requirements governing the handling,storage, use and disposal of radioactive and other hazardous substances andwastes, and laboratory operating and safety procedures. These laws andregulations can impose substantial fines and criminal sanctions for violations.Maintaining compliance with these laws and regulations with regard to ouroperations could require substantial additional resources. These costs couldlimit our ability to conduct operations in a cost-effective manner.

***If product liability lawsuits are brought against us,we may incur substantial liabilities and may be required to limitcommercialization of our product candidates.***

We face an inherent risk of product liability exposurerelated to the testing of our product candidates in human clinical trials andwill face an even greater risk if we commercially sell any products that we maydevelop. Product liability claims might be brought against us by clinical trialpatients, consumers or health care providers or by pharmaceutical companies orothers selling our products. If we complete clinical testing for our productcandidates and receive regulatory approval to market our products, the FDA willrequire us to include extensive warnings, precautions and other risk and safetyinformation in the label for our products that, among other things, identifythe known potential adverse effects and the patients who should not receive ourproduct. These warnings may not be deemed adequate, and physicians and patientsmay not comply with these warnings.

If we cannotsuccessfully defend ourselves against such claims, we may incur substantialliabilities. Regardless of merit or eventual outcome, liability claims mayresult in:

·       decreaseddemand for any product candidates or products that we may develop;

·       injuryto our reputation;

·       withdrawalof clinical trial participants;

·       coststo defend the related litigation;

·       substantialmonetary awards to trial participants or patients;

·       lossof revenue; and

·       theinability to commercialize any products that we may develop.

We have product liabilityinsurance that covers our clinical trials up to a $5.0 million annualaggregate limit and subject to a per claim deductible. We cannot predict all ofthe possible harms or side effects that may result from the testing and use ofour product candidates. As a result, the amount of insurance coverage wecurrently hold, or that we may obtain, may not be adequate to protect us fromany liabilities. We may require increased liability coverage as our productcandidates advance in clinical trials. In addition, we intend to expand ourinsurance coverage to include the sale of commercial products if we obtainmarketing approval for any products. Further, insurance coverage isincreasingly expensive, and we do not know whether we will be able to maintaininsurance coverage at a reasonable cost or in sufficient amounts to protect usagainst losses due to liability. A successful product liability claim broughtagainst us in excess of our insurance coverage or a product recall couldadversely affect our business, results of operations and financial condition.

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***If our internal control over financial reporting isnot considered effective, our business could be materially harmed and our stockprice could decline.***

Beginning in 2007, Section 404 of theSarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of ourinternal control over financial reporting as of the end of each fiscal year andto include a management report assessing the effectiveness of our internalcontrol over financial reporting in our annual report on Form 10-Kfor that fiscal year. Beginning in 2008, Section 404 also requires ourindependent registered public accounting firm to attest to, and report on,management’s assessment of our internal control over financial reporting.

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, thedesign of any control system is based in part upon certain assumptions aboutthe likelihood of future events. Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how remote. For example, in our Quarterly Report on Form 10-Q/Afor the quarter ended September 27, 2006, we disclosed that we did notmaintain effective control over the completeness and accuracy of the supportingschedule of weighted average shares outstanding and that as a result it wasnecessary to restate our Consolidated Statements of Operations included in thatreport. We cannot assure you that we or our independent registered publicaccounting firm will not identify additional material weaknesses in ourinternal control systems in the future. If additional material weaknesses inour internal control systems are detected, our internal control over financialreporting may not be considered effective and we may experience a loss ofpublic confidence, which could have an adverse effect on our business and on themarket price of our common stock.

**Risks Related toRegulatory Approval of Our Product Candidates**

***If we are not ableto obtain required regulatory approvals, we will not be able to commercializeour product candidates, and our ability to generate revenue will be materiallyimpaired.***

Our product candidates and the activities associatedwith their development and commercialization, including their testing,manufacture, safety, efficacy, recordkeeping, labeling, storage, approval,advertising, promotion, sale and distribution, are subject to comprehensiveregulation by the FDA and other regulatory agencies in the United States and bycomparable authorities in other countries. Failure to obtain regulatoryapproval for a product candidate will prevent us from commercializing theproduct candidate. We have not received regulatory approval to market any ofour product candidates in any jurisdiction. We have only limited experience infiling and prosecuting the applications necessary to gain regulatory approvalsand expect to rely on third party contract research organizations to assist usin this process. Securing FDA approval requires the submission of extensivepreclinical and clinical data and supporting information to the FDA for eachtherapeutic indication to establish the product candidate’s safety andefficacy. Securing FDA approval also requires the submission of informationabout the product manufacturing process to, and inspection of manufacturingfacilities by, the FDA. Our future products may not be effective, may be onlymoderately effective or may prove to have undesirable or unintended sideeffects, toxicities or other characteristics that may preclude our obtainingregulatory approval or prevent or limit commercial use.

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The process of obtainingregulatory approvals is expensive, often takes many years, if approval isobtained at all, and can vary substantially based upon a variety of factors,including the type, complexity and novelty of the product candidates involved.Changes in regulatory approval policies during the development period, changesin or the enactment of additional statutes or regulations, or changes inregulatory review criteria for each submitted product application, may causedelays in the approval or rejection of an application. The FDA has substantialdiscretion in the approval process and may refuse to accept any application ormay decide that our data are insufficient for approval and require additionalpreclinical, clinical or other studies. In addition, varying interpretations ofthe data obtained from preclinical and clinical testing could delay, limit orprevent regulatory approval of a product candidate. Any regulatory approval weultimately obtain may be limited or subject to restrictions or post-approvalcommitments that render the approved product not commercially viable.

***Any product forwhich we obtain marketing approval could be subject to restrictions orwithdrawal from the market and we may be subject to penalties if we fail tocomply with regulatory requirements or if we experience unanticipated problemswith our products, when and if any of them are approved.***

Any product forwhich we obtain marketing approval, along with the manufacturing processes,post-approval clinical data, labeling, advertising and promotional activitiesfor such product, will be subject to continual requirements of and review bythe FDA and comparable regulatory authorities. These requirements includesubmissions of safety and other post-marketing information and periodicreports, registration requirements, cGMP requirements relating to qualitycontrol, quality assurance and corresponding maintenance of records anddocuments, requirements regarding the distribution of samples to physicians andrecordkeeping. Even if regulatory approval of a product is granted, theapproval may be subject to limitations on the indicated uses for which theproduct may be marketed or to the conditions of approval, or containrequirements for costly post-marketing testing and surveillance to monitor thesafety or efficacy of the product. Later discovery of previously unknownproblems with our products, manufacturers or manufacturing processes, includingnew safety risks, or failure to comply with regulatory requirements, may resultin actions such as:

·       restrictionson such products, manufacturers or manufacturing processes;

·       warningletters;

·       withdrawalof the products from the market;

·       refusalto approve pending applications or supplements to approved applications that wesubmit;

·       productrecalls;

·       fines;

·       suspensionor withdrawal of regulatory approvals;

·       refusalto permit the import or export of our products;

·       productseizures; or

·       injunctionsor the imposition of civil or criminal penalties.

***Failure to obtainregulatory approval in international jurisdictions would prevent us frommarketing our products abroad, and regulatory approvals in some internationaljurisdictions can be conditioned on broad license grants.***

We intend to have our products marketed outside theUnited States. With respect to some of our product candidates, we expect that afuture collaborator will have responsibility to obtain regulatory approvaloutside the United States, and we will rely on our collaborator to obtain theseapprovals. The approval procedure varies among countries and can involverequirements for additional testing. The time 

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required to obtainapproval may differ from that required to obtain FDA approval. The regulatoryapproval process outside the United States may include all of the risks associatedwith obtaining FDA approval, as well as risks attributable to the satisfactionof local regulation in foreign jurisdictions. In addition, in many countriesoutside the United States, it is required that the product be approved forreimbursement before the product can be approved for sale in that country. Wemay not obtain approvals from regulatory authorities outside the United Stateson a timely basis, if at all. Approval by the FDA does not ensure approval byregulatory authorities in other countries or jurisdictions, and approval by oneregulatory authority outside the United States does not ensure approval byregulatory authorities in other countries or jurisdictions or by the FDA. Weand our collaborators may not be able to file for regulatory approvals and maynot receive necessary approvals to commercialize our products in any market.

Recently, some foreign jurisdictions have requiredbiopharmaceutical companies to grant broad licenses to domestic manufacturersas a condition to providing regulatory approval to market and sell within theapplicable jurisdiction. If we were forced to grant a broad license to ourproducts as a condition to selling within the applicable jurisdiction, ourrevenues and profitability would be materially impaired.

In addition, we, alongwith our collaborators or subcontractors, may not employ, in any capacity,persons who have been debarred under the FDA’s Application Integrity Policy.Employment of such a debarred person, even if inadvertently, may result indelays in the FDA’s review or approval of our product candidates or therejection of data developed with the involvement of such person.

**Risks Related toOur Intellectual Property**

***Our success is dependent on obtaining and defendingpatents and proprietary technology.***

Our success in commercializing, producing andmarketing products and technologies in the future depends, in large part, onour ability to obtain and maintain proprietary protection of the intellectualproperty related to our technologies and products, both in the United Statesand other countries, and to operate without infringing the proprietary rightsof third parties. We will be able to protect our proprietary rights fromunauthorized use by third parties only to the extent that our proprietarytechnologies are covered by valid and enforceable patents. The patent positionsof biotechnology companies, including our patent positions, are generallyuncertain and involve complex legal and factual questions.

We do not know whether any of our pending or future patentapplications will result in the issuance of patents. In addition, we cannotpredict the breadth of claims that may be allowed and issued to us for patentsrelated to our technologies or products, if any. Before a patent is issued, itscoverage can be significantly narrowed, either in the United States or abroad.To the extent patents have been issued or will be issued, some of these patentsare subject to further proceedings that may limit their scope and once patentshave been issued, we cannot predict how the claims will be construed orenforced. It is not possible to determine which patents may provide significantproprietary protection or competitive advantage, or which patents may becircumvented or invalidated. Furthermore, patents already issued to us, orpatents that may be issued on our pending applications, may become subject todispute, including interference proceedings in the United States to determinepriority of invention. If our currently issued patents are invalidated or ifthe claims of those patents are narrowed, our ability to prevent competitorsfrom marketing products that are currently protected by those patents could bereduced or eliminated. We could then face increased competition resulting inreduced market share, prices and profit.

In addition, the laws of some foreign countries do notprotect proprietary rights to the same extent as the laws of the United States,and many companies have encountered significant problems in protecting anddefending their proprietary rights in foreign jurisdictions. For example,methods of treating humans are not patentable in many countries outside of theUnited States.

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Our patents may not afford us protection againstcompetitors with similar technology. Because there is a lengthy time between whena patent application is filed and when it is issued, and because publicationsof discoveries in the scientific literature often lag behind actualdiscoveries, we cannot be certain that we were the first to make the inventionsclaimed in our patent applications or that we were the first to file forprotection of the inventions set forth in these patent applications. We mayalso incur substantial costs in asserting claims against, and defending claimsasserted against us by, third parties to prevent the infringement of ourpatents and proprietary rights by others. Participation in such infringementproceedings may adversely affect our business and financial condition, even ifthe eventual outcome is favorable.

In March 2007, wereceived an office action from the U.S. Patent and Trademark Office relating toone of our patent applications that makes claims to the composition of matterof TPI 287. In this action, the patent examiner rejected all of thepending claims of our patent application. We are preparing a response to thisoffice action, which we expect to file before September 2007. We cannotpredict the ultimate outcome of this office action. If the arguments in ourresponse are not successful, some or all of the original claims in our patentapplication may have to be narrowed or may not issue at all. If this occurs,this patent application may not result in an issued patent or the patent, ifissued, may not provide significant protection or competitive advantage withregard to TPI 287.

***Litigation or thirdparty claims of intellectual property infringement could require us to spendsubstantial time and money defending against any such claim and adverselyaffect our ability to develop and commercialize our products.***

Our success also depends in part on our ability toavoid infringing patents and proprietary rights of third parties and breachingany licenses that we may enter into with regard to any future products. Thereare many pharmaceutical and chemical patents and applications being filed,published, and issued frequently throughout the world. Some of these patentsand applications contain disclosures and claims that are similar totechnologies and products that we are using and developing. Some of thesepatents and disclosures contain claims and disclosures that are difficult tointerpret. It is possible that a third party may own or control issued patents,or patent applications or in the future may file, patent applications coveringtechnologies or products we are developing.

If our technology,products or activities are deemed to infringe other companies’ rights, we couldbe subject to damages or be prevented from using the technology or selling theproduct that is infringing other companies’ rights, or we could be required toobtain licenses to use that technology or sell the product. If patents coveringtechnologies required by our operations are issued to others, we may have torely on licenses from third parties, which may not be available on commerciallyreasonable terms, if at all. We could be required to pay substantial licensefees or royalties or both. Even if we are able to obtain a license, the rightsmay be nonexclusive, which could result in our competitors gaining access tothe same intellectual property. Third parties may accuse us of employing theirproprietary technology without authorization. In addition, third parties mayobtain patents that relate to our technologies and claim that our use of suchtechnologies infringes their patents, even if we have received patentprotection for our technology. These claims could require us to incursubstantial costs and could have a material adverse effect on us, regardless ofthe merit of the claims, including the following:

·       thediversion of management and technical personnel in defending against any suchclaims or enforcing our patents either in civil litigation or in a proceedingin the U.S. Patent and Trademark Office, either of which could be expensive andtime consuming;

·       payinga large sum for damages if we are found to infringe;

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·       beingprohibited from selling or licensing our products or product candidates unlessand until we obtain a license from the patent holder, who may refuse to grantus a license or who may only agree to do so on unfavorable terms;

·       redesigningour products or product candidates so they do not infringe on the patent holder’stechnology if we are unable to obtain a license, which, even if possible, couldrequire substantial additional capital and could significantly delaycommercialization while we attempt to design around the patents or rightsinfringed;

·       incurringsubstantial cost in defending ourselves and indemnifying any futurecollaborator in patent infringement or proprietary rights violation actionsbrought against them relating to their development and commercialization of ourproduct candidates; and

·       incurringsubstantial cost in indemnifying the investors in our 2006 private placement inthe event that any intellectual property infringement is deemed to be a breachof the purchase agreement for the private placement.

***We may be requiredto obtain rights to proprietary technologies that are required to furtherdevelop our business and that may not be available or may be costly.***

Our development programs may require the use ofmultiple products or technologies proprietary to other parties. Third partysuppliers may not be able to furnish us with a supply of these productssufficient to satisfy our requirements. We may not be able to obtain additionallicenses we may need in the future on terms acceptable to us. Our inability toobtain any one or more of these licenses, on commercially reasonable terms, ifat all, or to circumvent the need for any such license, could cause significantdelays and cost increases and materially affect our ability to develop and commercializeour product candidates. In connection with our efforts to obtain rights tothese proprietary technologies, we may find it necessary to convey rights toour technology to others. Some of our products may require the use of multipleproprietary technologies. Consequently, we may be required to make cumulativeroyalty payments to several third parties. These cumulative royalties couldbecome commercially prohibitive. We may not be able to successfully negotiatethe amounts of these royalties on terms acceptable to us.

We may rely in part onthird party licenses for access to intellectual property for our productcandidates. We expect that any such future licenses will impose variousdevelopment and commercialization, milestone payment, royalty, sublicensing,patent protection and maintenance, insurance and other obligations on us. If wefail to comply with these obligations or otherwise breach the licenseagreement, the licensor may have the right to terminate the license in whole,terminate the exclusive nature of the license or bring a claim against us fordamages. Any such termination or claim would likely prevent or impede ourability to market any product that is covered by the licensed patents. Even ifwe contest any such termination or claim and are ultimately successful, ourstock price could suffer. In addition, upon any termination of a licenseagreement, we may be required to license to the licensor any relatedintellectual property that we developed.

***If we are unable toprotect the confidentiality of our proprietary information and know-how, thevalue of our technology and products could be adversely affected.***

In addition to patentedtechnology, we rely upon unpatented proprietary technology, processes andknow-how. We seek to protect our unpatented proprietary information in part byconfidentiality agreements with our employees, consultants and third parties.These agreements may be breached and we may not have adequate remedies for anysuch breach. In addition, our trade secrets may otherwise become known or beindependently developed by competitors. If we are unable to protect theconfidentiality of our proprietary information and know-how, competitors may beable to use this information to develop products that compete with ourproducts, which could adversely impact our business.

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**Risks Related toOwnership of Our Common Stock**

***A small number ofour stockholders have the ability to control all matters submitted tostockholders for approval.***

A small number ofinvestors who acquired shares of our common stock and warrants to purchaseshares of our common stock in our 2006 private placement, in the aggregate,beneficially own more than 50% of our capital stock. As a result, if thesestockholders were to choose to act together, they would be able to control allmatters submitted to our stockholders for approval, as well as our managementand affairs. For example, these stockholders, if they choose to act together,would control the election of directors and approval of any merger,consolidation or sale of all or substantially all of our assets. Thisconcentration of voting power could delay or prevent an acquisition of ourcompany on terms that other stockholders may desire. In addition, one of thesestockholders, Special Situations Fund III, L.P., has the right, which it hasnot exercised, to designate up to two persons for election to our board ofdirectors.

***The investors whoacquired shares of our common stock and warrants in our 2006 private placementhave contractual preemptive rights to acquire their pro rata share of anycommon stock issued by us. If these stockholders do not waive their preemptiverights or do not otherwise cooperate with us in effecting future offering, itwill be impractical to effect a public offering and our ability to effect aprivate offering could be complicated or limited.***

Under the terms of thepurchase agreement for our 2006 private placement, we must first offer to sellto each investor that continues to hold at least 50% of the shares of commonstock acquired by that investor in our 2006 private placement such investor’spro rata share of any common stock or securities exercisable or exchangeablefor or convertible into common stock, such offer to remain open for a fifteenbusiness day period, before we can sell such securities to others. Aninvestor’s pro rata share is calculated by reference to the number of sharesthat continue to be held that were acquired in our 2006 private placement orupon the exercise of warrants and the number of shares of our common stock thenissued and outstanding. We believe it would be impractical to complete a publicoffering if we are required to comply with the preemptive rights granted to theinvestors under the purchase agreement. Procedures for compliance with thesecontractual rights, unless waived, could complicate or limit or ability toeffect a private placement of equity securities.

***The warrants issuedin our 2006 private placement provide for the reduction of the exercise priceof the warrants if we issue common stock for a consideration per share lessthan the then current exercise price of the warrants. If we issue common stockfor a consideration per share less than $2.40, the exercise price of thewarrants will be reduced and the number of shares issuable upon exercise of thewarrants will be increased.***

Under the terms of thewarrants issued in our 2006 private placement, the exercise price of thewarrants is to be reduced, subject to certain exceptions, if we issue shares ofcommon stock or certain options or rights to acquire common stock for noconsideration or for consideration per share less than the exercise price ofthe warrants in effect immediately prior to the time of such issue or sale. Thewarrants specify a formula for a weighted average adjustment in the exercise pricethat takes into account the number of shares of common stock outstanding, thenumber of shares issued below the exercise price and the aggregateconsideration received upon such issuance. Under the warrants, if the exerciseprice is decreased, the number of shares issuable upon exercise iscorrespondingly increased. The exercise price of the warrants is currently$2.40 per share. Accordingly, in general, if we issue common stock for aconsideration per share of less than $2.40, the exercise price of the warrantswill be correspondingly reduced. Any such reduction in exercise price wouldresult in additional dilution to the holders of our common stock.

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***Future sales andissuances of our common stock or rights to purchase common stock, includingpursuant to our equity incentive plans, could result in additional dilution ofthe percentage ownership of our stockholders and could cause our stock price tofall.***

We expect that significant additional capital will berequired in the future to continue our research, development and clinicalefforts. To the extent we raise additional capital by issuing equitysecurities, our stockholders may experience substantial dilution. We may sellcommon stock in one or more transactions at prices and in a manner we determinefrom time to time. Stockholders who hold our common stock or purchase stock inany of these offerings may be materially diluted by subsequent sales. Such salesmay also result in material dilution to our existing stockholders.

During 2006, our board ofdirectors and stockholders adopted our 2006 equity incentive plan, whichinitially reserved 6,577,106 shares of common stock for issuance thereunder.Immediately following any issuance of common stock by us during the three yearperiod ending April 4, 2009, other than issuances of common stock uponexercise of the warrants issued to the investors in our 2006 private placement,the number of shares available for issuance under the 2006 equity incentiveplan will be increased to 20% of the number of fully diluted shares of ourcommon stock immediately after such issuance, including all shares of commonstock issuable upon exercise of then outstanding options or warrants, less thenumber of shares of common stock subject to existing options under our otherstock option and equity incentive plans, up to a maximum of 8,177,106 shares.As a result of common stock issuances through June 27, 2007, the number ofshares available under our 2006 equity incentive plan increased to 6,676,419.

***Sales of a substantial number of shares in the futuremay impact the market price of our common stock.***

Until such time, if ever,as we can generate substantial product revenues, we expect to finance our cashneeds through public or private equity offerings and debt financings, corporatecollaboration and licensing arrangements. Any future sales of a substantialnumber of shares of our common stock, either by us or by investors, or the perceptionthat such sales may occur, could depress the market price of our common stock.We are unable to predict the effect that future sales may have on the thenprevailing market price of our common stock. Pursuant to a registration rightsagreement entered into between us and the investors in our 2006 privateplacement, we registered with the Securities and Exchange Commission, or SEC,the resale of shares of common stock acquired in the private placement andshares of common stock issuable upon exercise of the warrants. We must, amongother things, keep this registration statement effective with the SEC for theresale of such shares of common stock. While we cannot determine precisely thetotal number of shares of common stock remaining for sale under the registrationstatement, we estimate based upon publicly available information that up toapproximately 23,656,559 shares remain available for sale, includingshares that may be acquired upon the exercise of outstanding warrants.

***If we fail tocontinue to meet all applicable NASDAQ Capital Market requirements and NASDAQdetermines to delist our common stock, the delisting could adversely affect themarket liquidity of our common stock and the market price of our common stockcould decline.***

Our common stock is listed on the NASDAQ CapitalMarket. In order to maintain that listing, we must satisfy minimum financialand other requirements. On February 25, 2005, we received notice from theNasdaq Stock Market, Inc. that our common stock had not met the $1.00 per shareminimum bid price requirement for 30 consecutive business days and that, if wewere unable to demonstrate compliance with this requirement during theapplicable grace periods, our common stock would be delisted after that time.On February 6, 2006, we effected a one-for-ten reverse stock split of ourcommon stock to regain compliance with this listing requirement. Since thistime, the closing bid price of our common stock has remained above $1.00 incompliance with the minimum bid price requirement.

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It is possible that the minimum bid price of ourcommon stock could fall below the required level or that we would otherwisefail to satisfy another NASDAQ requirement for continued listing of our commonstock. For example, we could fail to maintain compliance with the NASDAQCapital Market listing requirements if we did not maintain minimum stockholderequity of at least $2.5 million as a result of continuing losses.

If we fail to continue tomeet all applicable NASDAQ Capital Market requirements in the future and NASDAQdetermines to delist our common stock, the delisting could adversely affect themarket liquidity of our common stock and the market price of our common stockcould decline. Such delisting could also adversely affect our ability to obtainfinancing for the continuation of our operations and could result in the lossof confidence by investors, suppliers and employees.

***Provisions in ourcharter documents and under Delaware law could discourage, delay or prevent anacquisition of us, which may be beneficial to our stockholders, and may preventor delay attempts by our stockholders to replace or remove our currentmanagement.***

Our certificate of incorporation and bylaws providethat our board of directors is divided into three classes, each consisting, asnearly as possible, of one-third of the total number of directors, with eachclass having a three-year term. The number of our directors may be changed onlyby a resolution of our board of directors and directors can be removed only forcause by the vote of the holders of at least 80% of the voting power of all ofour capital stock, voting together as a single class. Stockholders may takeaction only at a stockholders’ meeting and not by written consent. Certainprovisions of our certificate of incorporation and bylaws, including theprovisions providing for a classified board of directors, may not be amendedwithout the vote of at least 80% of the voting power of all of our capitalstock entitled to vote generally in the election of directors, voting togetheras a single class. Our bylaws provide that stockholders wishing to nominate adirector at an annual meeting or at a special meeting called for the purpose ofelecting directors or to bring business before any meeting of stockholders mustcomply with strict advance written notice provisions. Our bylaws also providethat special meetings of stockholders may be called only by the chairman of ourboard of directors, or certain of our officers, or by resolution of ourdirectors.

These provisions of our certificate of incorporationand our bylaws could discourage potential acquisition proposals and could delayor prevent a change in control that stockholders may consider favorable,including transactions in which an investor in our stock might otherwise receivea premium for shares. These provisions are intended to enhance the likelihoodof continuity and stability in the composition of our board of directors and inthe policies formulated by our board of directors. We also intended theseprovisions to discourage certain types of transactions that may involve anactual or threatened change of control. We designed these provisions to reduceour vulnerability to unsolicited acquisition proposals and to discouragecertain tactics that may be used in proxy contests. These provisions, however,could also have the effect of discouraging others from making a tender offerfor our shares. As a consequence, they also may inhibit fluctuations in themarket price of our shares that could result from actual or rumored takeoverattempts. Because our board of directors is responsible for appointing themembers of our management team, these provisions could in turn affect anyattempt by our stockholders to replace current members of our management team.We are permitted to issue shares of our preferred stock without stockholderapproval upon such terms as our board of directors determines. Therefore, therights of the holders of our common stock are subject to, and may be adverselyaffected by, the rights of the holders of our preferred stock that may beissued in the future. In addition, the issuance of preferred stock could have adilutive effect on the holdings of our current stockholders.

We are also subject toprovisions of Delaware law that prohibit us from engaging in any businesscombination with any “interested stockholder,” meaning generally that astockholder who beneficially owns more than 15% of our outstanding voting stockcannot acquire us for a period of three years from the date of the transactionin which the person acquired more than 15% of our outstanding voting stock,unless 

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variousconditions are met, such as approval by our board of directors of thetransaction, pursuant to which the person became an interested stockholder.

***Our stockholder rights plan could prevent a change incontrol of our company in instances in which some stockholders may believe achange in control is in their best interests.***

In December 2006, ourboard of directors adopted a stockholder rights plan to replace our stockholderrights plan that expired in November 2006 at the end of its ten-year term.Our plan may have the effect of discouraging, delaying or preventing a mergeror acquisition of us that is beneficial to our stockholders by diluting theability of a potential acquirer to acquire us. Pursuant to the terms of ourplan, ten days after a person or group, except under certain circumstances,acquires 15% or more of our outstanding common stock or 10 business days afterannouncement of a tender or exchange offer for 15% or more of ouroutstanding common stock, the rights, other than rights held by the person orgroup who has acquired or announced an offer to acquire 15% or more of ouroutstanding common stock, would generally become exercisable for shares of ourcommon stock at a discount. Because the potential acquirer’s rights would notbecome exercisable for our shares of common stock at a discount, the potentialacquirer would suffer substantial dilution and may lose its ability to acquireus. In addition, the existence of the plan itself may deter a potentialacquirer from acquiring us. As a result, either by operation of the plan or byits potential deterrent effect, mergers and acquisitions of us that ourstockholders may consider in their best interests may not occur, includingtransactions in which stockholders might otherwise receive a premium for theirshares.

Because the investors inour 2006 private placement own a substantial percentage of our outstandingcommon stock, our stockholder rights plan provides that such investors andtheir respective affiliates will be exempt from the stockholder rights plan,unless an investor and its affiliates acquire, after April 4, 2006,subject to certain exceptions, more than 1% of our then issued and outstandingcommon stock, not including the shares of common stock issued to such investorin the private placement or shares of common stock issued upon exercise of thewarrants issued to such investors.

***Because we do not expect to pay dividends in theforeseeable future, you must rely on stock appreciation for any return on yourinvestment.***

We have paid no cashdividends on our common stock to date, and we currently intend to retain ourfuture earnings, if any, to fund the development and growth of our business. Asa result, we do not expect to pay any cash dividends in the foreseeable future,and payment of cash dividends, if any, will also depend on our financialcondition, results of operations, capital requirements and other factors andwill be at the discretion of our board of directors. Furthermore, we may in thefuture become subject to contractual restrictions on, or prohibitions against,the payment of dividends. Accordingly, the success of your investment in ourcommon stock will likely depend entirely upon any future appreciation. Therecan be no assurance that our common stock will appreciate in value or evenmaintain the price at which you purchased your shares, and you may not realizea return on your investment in our common stock.

***If our stock priceis volatile, purchasers of our common stock could incur substantial losses.***

Ourstock price is likely to be volatile. The stock market in general and themarket for biotechnology companies in particular have experienced extremevolatility that has often been unrelated to the operating performance ofparticular companies. As a result of this volatility, investors may not be ableto sell their common stock at or above the price at which they purchased theirstock. The market price for our common stock may be influenced by many factors,including:

·       resultsof clinical trials of our product candidates or those of our competitors;

·       regulatoryor legal developments in the United States and other countries;

·       variationsin our financial results or those of companies that are perceived to be similarto us;

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·       changesin the structure of healthcare payment systems;

·       marketconditions in the pharmaceutical and biotechnology sectors and issuance of newor changed securities analysts’ reports or recommendations;

·       generaleconomic, industry and market conditions; and

·       theother factors described in this “Risk Factors” section.

**Item2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

None.

**Item3.**                        Defaultsupon Senior Securities

None.

**Item4.**                        Submissionof Matters to a Vote of Security Holders

On June 7, 2007, theCompany held its annual meeting of shareholders. There were 9,231,924 sharespresent at the meeting, either in person or by proxy, representing over 56% ofthe Company’s outstanding shares.

The following shareholderactions were taken:

The Honorable Richard N. Perle 8,078,526 votes castfor re-election; 1,153,398 votes withheld.

Additionally, theselection by the Audit Committee of the Board of Directors of Grant ThorntonLLP as independent auditors of the Company for the fiscal year ending January 2,2008 was ratified with 8,180,720 votes for ratification, 298,851 votes againstratification, and 752,353 votes abstained.

**Item5.**                        OtherInformation

None.

**Item6.**                        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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*                    Filed herewith

#                 Thiscertification “accompanies” this Form 10-Q, is not deemed filed withthe SEC and is not to be incorporated by reference into any filing of theCompany under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q),irrespective of any general incorporation language contained in such filing.

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**Signatures**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                     | TAPESTRY PHARMACEUTICALS, INC. |
|---------------------|-------------------------------------|
| August 9, 2007 | By:                                 | /s/ LEONARD P. SHAYKIN |
| ** **          | ** **                          | **Leonard P. Shaykin** |
| *** ***        | *** ***                        | ***Chairman of the Board of  Directors, Chief Executive Officer*** |
| August 9, 2007 | By:                                 | /s/ GORDON LINK |
| ** **          | ** **                          | **Gordon Link** |
| *** ***        | *** ***                        | ***Senior Vice President, Chief  Financial Officer (Principal Financial Officer)*** |
| August 9, 2007 | By:                                 | /s/ MATTHEW J. MAJOROS |
| ** **          | ** **                          | **Matthew J. Majoros** |
| *** ***        | *** ***                        | ***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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*                    Filed herewith

#                 Thiscertification “accompanies” this Form 10-Q, is not deemed filed withthe SEC and is not to be incorporated by reference into any filing of theCompany under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q),irrespective of any general incorporation language contained in such filing.

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