**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**Form 10-K**

**(Mark One)**

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

**FORTHE FISCAL YEAR ENDED DECEMBER 27, 2006**

**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 |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

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

**(303) 516-8500**(Registrant’stelephone number, including area code)

**Securitiesregistered pursuant to Section 12(b) of the Act :**

| **Title of Each Class**                    | ** ** | **Name of  Each Exchange of Which Registered** |
|--------------------------------------------|------------|------------------------------------------------|
| Common Stock, par  value $0.0075 per share |       | NASDAQ Capital  Market                         |
| Preferred Share  Purchase Rights           |       | NASDAQ Capital  Market                         |

 

**Securitiesregistered pursuant to Section 12(g) of the Act:** None

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the SecuritiesAct.  Yes o  No x

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o  No x

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 if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.  o

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

| 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

The aggregate market value of the voting and non-votingcommon equity held by non-affiliates of the registrant was 13,599,512 as of June 28,2006 (the last business day of the registrant’s second fiscal quarter in 2006).For purposes of making this calculation, the registrant has defined affiliatesas including Special Situations Fund III, L.P. (“SSF”) and all directors andexecutive officers and related parties thereto. SSF and certain otherstockholders are beneficial owners of more than 10% of the registrant’soutstanding common stock. However, only SSF is included as an affiliate becauseonly it has a contractual right to designate persons for election to the boardof directors. SSF has not exercised that right.

As of February 27, 2007, the registrant had 16,374,395shares of Common Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

Part III of this Form 10-K incorporatescertain information by reference from the registrant’s definitive proxystatement for its 2007 Annual Meeting of Stockholders, which proxy statement isto be filed with the Securities and Exchange Commission within 120 days afterthe end of the Company’s fiscal year end of December 27, 2006.

 

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**Tableof Contents**

| Part I          |   | Item 1   |   | Business                                                                                                           |   | 3  |
|----------------------|--------|----------|--------|--------------------------------------------------------------------------------------------------------------------|--------|----|
|                 |   | Item 1A  |   | Risk  Factors                                                                                                      |   | 8  |
|                 |   | Item 1B  |   | Unresolved Staff Comments                                                                                          |   | 21 |
|                 |   | Item 2   |   | Properties                                                                                                         |   | 21 |
|                 |   | Item  3  |   | Legal  Proceedings                                                                                                 |   | 21 |
|                 |   | Item 4   |   | Submission of Matters to Vote of Security Holders                                                                  |   | 22 |
| Part II         |   | Item 5   |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 24 |
|                 |   | Item  6  |   | Selected  Financial Data                                                                                           |   | 25 |
|                 |   | Item 7   |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   | 26 |
|                 |   | Item 7A  |   | Quantitative and Qualitative Disclosures about Market  Risk                                                        |   | 34 |
|                 |   | Item 8   |   | Financial Statements and Supplementary Data                                                                        |   | 34 |
|                 |   | Item 9   |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |   | 34 |
|                 |   | Item  9A |   | Controls  and Procedures                                                                                           |   | 34 |
|                 |   | Item  9B |   | Other  Information                                                                                                 |   | 35 |
| Part III        |   | Item 10  |   | Directors, Executive Officers and Corporate Governance                                                             |   | 36 |
|                 |   | Item  11 |   | Executive  Compensation                                                                                            |   | 36 |
|                 |   | Item 12  |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |   | 36 |
|                 |   | Item 13  |   | Certain Relationships and Related Transactions, and  Director Independence                                         |   | 36 |
|                 |   | Item 14  |   | Principal Accountant Fees and Services                                                                             |   | 36 |
| Part IV         |   | Item 15  |   | Exhibits and Financial Statement Schedules                                                                         |   | 37 |
| Financial Statements |   | F-1      |
|                      |        |          |        |                                                                                                                    |        |    |  |  |

 

 

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**Part I**

**Item 1Special Note Regarding Forward Looking Statements**

*This report contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. These forward-lookingstatements include, but are not limited to, statements concerning our plans tocontinue development of TPI 287 and our current product candidates; develop anoral formulation of TPI 287; commence Phase II clinical trials of TPI 287 inthe first half of 2007 and thereafter; increase clinical spending;  seek regulatory approvals;  address certain markets; and raise additionalcapital, as well as our statement as to the adequacy of our capital to fund ouroperations and capital expenditures for the next 12 months. In some cases,these statements may be identified by terminology such as “may,” “will,” “should,”“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”or “continue” or the negative of such terms and other comparable terminology.These statements involve known and unknown risks and uncertainties that maycause our or our industry’s results, levels of activity, performance orachievements to be materially different from those expressed or implied by theforward-looking statements. Factors that may cause or contribute to suchdifferences include, among other things, those discussed under the captions “Business,”“Risk Factors” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”  Forward-looking statements not specificallydescribed above also may be found in these and other sections of this report.*

**Business**

**General**

Tapestry Pharmaceuticals, Inc. (“we,” “Tapestry”or the “Company”) is a pharmaceutical company focused on the development ofproprietary therapies for the treatment of cancer. We are also engaged inevaluating new therapeutic agents and/or related technologies. Our evaluationof new products and technologies may involve the examination of individualmolecules, classes of compounds, or platform technologies. Acquisitions of newproducts or technologies may involve the purchase or license of such productsor technologies, or the acquisition of, or merger with, other companies.

We incursubstantial research and development expense related to the development of ourproprietary anti-cancer compounds. We incurred significant losses sinceformation, including losses from continuing operations of $16.6 million for theyear ended December 27, 2006. Our accumulated deficit was $123.9 millionas of December 27, 2006. We anticipate that losses will continue untilsuch time, if ever, as we are able to generate sufficient revenue to supportour development operations, including the research and development activitydiscussed below.

Our abilityto generate sufficient sales to support our operations will depend upon thesuccessful development and commercialization of products based on ourproprietary oncology technologies.

Wecommenced Phase I clinical trials of TPI 287, our proprietary thirdgeneration taxane, in May 2005 with an every 7 day dosing (“Q7D”) study,and in January 2006, we commenced a second Phase I study with analternative every 3 week dosing (“Q21D”) regimen.

All of ourproducts and technologies are in the early stages of development and we cannotassure you that our efforts to bring these products either to market or toprofitability will be successful.

Historically, through 2003, the focus of our businesswas the production and sale of paclitaxel, a naturally occurringchemotherapeutic anti-cancer agent. The majority of our resources had beendevoted to this endeavor. Prior to the sale of the paclitaxel business, we hadaccumulated approximately $100 million of losses, principally throughresearch and development activities, and the development and implementation ofour manufacturing capabilities so that we could supply bulk paclitaxel to ourmarketing 

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partners, including MaynePharma (USA) Inc. (f/k/a/ Faulding Pharmaceutical Co.) (“Mayne Pharma”), asubsidiary of Mayne Group Limited, and Abbott Laboratories (“Abbott”).

On December 12, 2003, we sold our worldwidegeneric injectable paclitaxel business to Mayne Pharma for $71.7 millionin cash minus an inventory adjustment of $4.6 million. In addition, MaynePharma assumed certain liabilities associated with our paclitaxel business.Approximately $21.9 million of the proceeds of the transaction were paidto Abbott to retire all outstanding debt and payables we owed to Abbott.

Upon closing of the asset sale, we exited the genericpaclitaxel business, terminated the development agreements with Abbott andMayne Pharma, and transferred our other generic paclitaxel marketing agreementsto Mayne Pharma.

We were incorporated as aWashington corporation in 1991, and reincorporated as a Delaware corporation in1993. Our principal executive offices are located at 4840 Pearl East Circle, Suite 300W,Boulder, Colorado 80301.

**Tapestry Researchand Development Activities**

Thefollowing chart identifies our two therapeutic candidate programs that are inthe most advanced stages of development. 

| Program                        | ** ** | ** **                                        | ** ** | **Potential Indications**       | ** ** | **Development Status** |
|--------------------------------|------------|---------------------------------------------------|------------|---------------------------------|------------|------------------------|
| TPI 287 IV           |       | Prostate, Non-Small Cell  Lung and Other Cancers  |       | Phase I and  Phase II |
| TIP 287 Oral  Formulation |       | Prostate, Non-Small Cell  Lung, and Other Cancers |       | Preclinical Development         |

 

TPI 287 is a proprietary third generation taxane. On December 21,2004, we filed an Investigational New Drug (“IND”) application, and on January 21,2005, we were cleared to proceed into clinical trials by the U.S. Food and DrugAdministration (“FDA”). In May 2005, we treated our first patient in thisQ7D Phase I clinical trial of the intravenous (“IV”) formulation of TPI 287. InJanuary 2006, we began a second Phase I clinical trial of TPI 287 IV toevaluate an alternative dosing schedule. In preclinical testing, TPI 287demonstrated the ability to inhibit tumor cell growth in a number of *in vitro* cell lines and in general, has shown equivalentinhibition of tumors in certain animal xenograft models when tested againststandard comparative agents. In some cell lines resistant to taxanes, TPI 287has demonstrated greater inhibition of tumors in certain animal xenograftmodels when tested against standard comparative agents. The *in vitro* activity was seen across multiple cell linesincluding cell lines known to be sensitive to taxanes and cell lines known tobe resistant to taxanes. Taxane sensitive cell lines in which TPI 287 showsactivity include cell lines derived from breast cancer, uterine cancer andnon-small cell lung cancer. Taxane resistant cell lines in which TPI 287 showsgreater activity include lines derived from breast cancer and colon cancer. In *in vivo* animal testing, TPI 287 demonstrated greater tumorgrowth inhibition activity in four tumor cell lines with multiple drugresistance, or MDR1.

We expect to begin treating patients in our firstPhase II trial of TPI 287 in prostate cancer in the first half of fiscal 2007. AdditionalPhase II studies in other indications will follow thereafter. Our Phase IItrials are designed to determine in what tumor type our compound might beadvanced for Phase III studies. As we recruit patients for these first Phase IIstudies, and others to follow, we will see an increase in our clinicalspending.

On November 16, 2004, we decided to discontinueresearch on our genomics products, excluding Huntington’s Disease, and closethe Genomics division. We terminated our research agreement and patent fundingwith the University of Delaware and Thomas Jefferson University in December 2005and 

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subsequently discontinuedour research activities relating to the Huntington’s Disease program in January 2006.We also terminated our research agreement with MD Anderson in December 2005and subsequently discontinued our development activities on TPI 284, ourpeptide linked cytotoxic compound in January 2006. In June 2006, wediscontinued the study of quassinoid analogs.

*CertainRisks and Limitations.**  *Theclinical development of these drugs has many risks of failure. We have included adiscussion of a number of the risks and uncertainties associated withcompleting our product development plans under “Risk Factors” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”below.

We continuously reassess all of our research anddevelopment efforts, including those for the therapeutic products describedabove. At any time, we may expand, delay, terminate or dispose of all or anyportion of our research and development programs and therapeutic products or wemay develop or acquire rights to new product candidates.

**Patents andProprietary Technology**

We own or have licensed issued patents and haveapplied for patents relating to our oncology programs. We (and our licensors)have applied for and will continue to apply for patents covering ourtechnologies, processes and products as and when we deem appropriate. However,these applications may fail to result in issued patents.

We also rely on tradesecrets and other proprietary information to develop and protect ourcompetitive position, some of which is not patented. Our success will depend inpart on our ability to protect our trade secrets related to our programs. Whilewe believe that we have protected our trade secrets, some of our current orformer employees, consultants, scientific advisors or collaborators could makeunauthorized disclosures of our confidential information to competitors or useour technology for their own benefit. Enforcing a claim alleging theinfringement of our trade secrets would be expensive and difficult to prove,making the outcome uncertain. Our competitors may also independently developequivalent knowledge, methods and technology, or gain access to our proprietaryinformation through some other means.

**GovernmentRegulation and Product Approvals**

Pharmaceutical research, preclinical development,clinical trials, manufacturing and marketing activities are subject toregulation for safety, efficacy and quality by governmental authorities in theU.S. and other countries. Regulations govern, among other things, the testing,manufacture, labeling, storage, record keeping, approval, advertising andpromotion of our products and product candidates. Product development andapproval within this regulatory framework take a number of years and involvethe expenditure of substantial resources.

The steps required before a pharmaceutical agent maybe marketed in the U.S. include preclinical laboratory tests, animalpharmacology and toxicology studies and formulation studies, the submission ofan IND to the FDA for human clinical testing, the carrying out of adequatehuman clinical trials to establish the safety and efficacy of thepharmaceutical agent, the submission of a New Drug Application (“NDA”) to theFDA, and FDA approval of the NDA. In addition to obtaining FDA approval foreach product, a drug manufacturing establishment also must be registered withthe FDA. Drug manufacturing establishments are subject to regular inspectionsby the FDA and must comply with FDA regulations.

Preclinical studies include the laboratory evaluationof *in vitro* pharmacology, productchemistry and formulation, as well as animal studies to assess safety.Preclinical safety tests must be conducted by laboratories that comply with FDAregulations. The results of some of the preclinical tests form a part of anIND, along with the proposed clinical study, chemistry and manufacturinginformation.

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Clinical trials are typically conducted in threesequential phases. In Phase I, the initial introduction of the drug into asmall number of healthy volunteers is undertaken. The drug is evaluated forsafety. For certain drugs, such as cancer drugs, Phase I trials may beconducted in patients rather than in healthy volunteers. Clinical trials mustbe conducted in accordance with good clinical practice regulations.

Phase II trials involve studies in a limited patientpopulation in order to obtain initial indications of the efficacy of the drugfor specific, targeted indications, to determine dosage tolerance and optimaldosage, and to identify possible adverse affects and safety risks. When acompound is determined preliminarily to be effective and to have an acceptablesafety profile in Phase II evaluation, Phase III trials can be undertaken toevaluate safety and efficacy further in expanded patient populations atgeographically diverse clinical trial sites. Positive results in Phase II areno guarantee of positive results in Phase III.

The results of the clinical trials, manufacturing,toxicology and pharmacology information are submitted to the FDA in the form ofa NDA. The approval of an NDA permits commercial-scale manufacturing,marketing, distribution, and sale of the drug in the U.S. The FDA may deny anew drug application filed by us or our collaborators, if any, if theapplicable scientific and regulatory criteria are not satisfied. The FDA mayrequire additional testing or information, and may require post-approvaltesting, surveillance and reporting to monitor the products. The FDA mayultimately decide that an NDA does not meet the applicable agency standards,and even if approval is granted, it can be limited or revoked.

Federal and state laws protect the confidentiality ofcertain patient health information, including patient records, and restrict theuse and disclosure of that protected information. In particular, the U.S.Department of Health and Human Services published patient privacy rules underthe Health Insurance Portability and Accountability Act of 1996. These privacy rules protectmedical records and other personal health information by limiting its use andrelease, giving patients the right to access their medical records and limitingmost disclosures of health information to the minimum amount necessary toaccomplish an intended purpose. We believe that we generally have taken allnecessary steps to comply with health information privacy and confidentialitystatutes and regulations in all jurisdictions, both state and federal. However,we, or the parties with which we do business, may not be able to maintaincompliance in all jurisdictions where we do business. Failure to maintaincompliance, or changes in state or federal laws regarding privacy could resultin civil and/or criminal penalties and could have a material adverse effect onour business.

Outside the U.S., ourability to market a product is contingent upon receiving a marketingauthorization from the appropriate regulatory authority. This foreignregulatory approval process includes many of the same steps and uncertaintiesassociated with FDA approval described above.

**Competition**

The biopharmaceuticalindustry is an expanding and rapidly changing industry characterized by intensecompetition for product sales, financing, executive talent and intellectualproperty. We compete with all entities developing and producing therapeuticagents, including those for cancer treatment. Our competitors vary in terms ofscale from small biotechnology companies to large pharmaceutical companies.Companies developing or selling taxane products include American PharmaceuticalPartners, Aventis, Bristol Myers Squibb, Wyeth, Daiichi and AbbottLaboratories, all of which have significantly greater resources than we do.

**Research and Development Expense**

During the years ended in 2006, 2005 and2004, we incurred approximately $10.4 million, $10.6 million and$13.5 million, respectively, of research and development expense fromcontinuing operations, which includes the costs of our clinical trials. Research and development isexpected to remain a significant 

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expense of our business and isexpected to concentrate on the development and clinical trials of proprietaryanti-cancer agents. Inaddition to the IV formulation of TPI 287, we are also developing an oralformulation of TPI 287. We also conduct ongoing research on a number ofcytotoxic compounds that may advance into clinical evaluation. We cannotestimate the cost of the effort necessary to complete the programs or thetiming of commencement of material net cash inflows from these programs, ifever. Continued development of these programs is dependent upon raisingadditional capital. We cannot be certain that we will be able to obtain capitalon acceptable terms.

**Foreign and Domestic Operations; Export Sales**

We had no product sales during 2006, 2005 and 2004. Allprior year sales related to discontinued operations and have been reported assuch.

**Employees**

As of December 27, 2006, we had 38 employees, whichincluded 6 part-time employees. Of these employees, 9 held Ph.D. or M.D.degrees. We had 23 employees engaged in drug development, and 15 employeesengaged in administration, legal, information technology and finance. On December 27,2006, we announced the appointment of a new President, effective January 2,2007. On February 20, 2007 we announced the appointment of a new ChiefMedical Officer, effective February 26, 2007. We believe that ourrelations with our employees are good. In addition, we contract with outsideconsultants for services relating to our drug development programs.

**Financing**

On April 6,2006, we sold an aggregate of 12,750,000 shares of common stock and warrants topurchase up to 12,750,000 shares of common stock (the “Private Placement”), fora total of $25.5 million (excluding any proceeds that might be receivedupon exercise of the warrants) or approximately $23.8 million, net of theplacement agent fees and other expenses. The purchase price was $2.00 per shareof common stock, and each warrant to purchase common stock has an exerciseprice equal to $2.40 per share. We may call up to 20% of the outstandingwarrants during any three month period if certain conditions are satisfied,including the trading price of our common stock exceeding $4.80 for 20consecutive trading days. Up to half of the warrants may be exercised on acashless or net exercise basis. There can be no assurance that we will receivefunds from the exercise of the warrants. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.”

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**Item 1ARisk Factors**

*You should carefully consider the following riskfactors related to our current business operations before making a decision toinvest in our common stock. Additional risks of which we are not yet aware orthat we currently believe are immaterial may also adversely impair us or ouroperations. If any of the events or circumstances described in the followingrisk factors actually occurs, our business may suffer, the trading price ofcommon stock could decline, and you may lose all or part of your investment.*

**RisksRelated to Our Business**

**We currently are focusing our development efforts ononly one product candidate, TPI 287, and we will have limited prospects forsuccessful operations if TPI 287 does not prove successful in clinical trialsor is never commercialized because of the costs of continuing development orfor other reasons.**

In 2005, we closed ourGenomics division. In 2006, we terminated our program relating to Huntington’sDisease, terminated development of TPI 284 and also the study of quassinoidanalogs. These actions have permitted us to focus our development effortsprimarily on the development of TPI 287, which is still in Phase I clinicaltrials. We have no products that are approved for commercial sale. TPI 287 willrequire extensive additional clinical evaluation, regulatory review, marketingefforts and significant investment before we receive any revenues from it, ifever. We currently do not have the capital resources necessary to bring any ofour product candidates through to commercial approval, and we do not expect TPI287 or any of our other product candidates or technologies to be commerciallyavailable for several years. We believe that the proceeds received from thePrivate Placement will only be sufficient to permit us to generate preliminaryPhase II data on TPI 287 in a number of tumor types. Our efforts may not leadto commercially successful products for a number of reasons, including theinability to be proven safe and effective in clinical trials, the lack ofregulatory approvals or obtaining regulatory approvals that are narrower thanwe seek, inadequate financial resources to complete the development andcommercialization of our product candidates or the lack of acceptance in themarketplace. Given the limited focus on one product candidate, if TPI 287 doesnot prove successful in clinical trials or is not commercialized because wehave insufficient resources for continued development for any other reason, wemay be required to suspend or discontinue our operations and one could losetheir entire investment.

**If wefail to obtain the capital necessary to fund our operations when needed, wecould be forced to discontinue our operations.**

Pharmaceuticaldevelopment is a costly and time-consuming process. We have limited resourcesand we will have to raise substantial additional financing in the future tocarry out our research and development activities. The amount and timing offuture capital expenditures will depend upon many factors, including:

·       the development of new products andtechnologies;

·       the acquisition of new products and technologies;

·       the nature of our relationship with anystrategic partners that we are able to attract;

·       the progress of our research and developmentprograms;

·       competing technological and marketingdevelopments;

·       changes in facilities; and

·       changes in staffing levels.

Our business will requiresubstantial additional investment that we have not yet secured. We cannot besure how much we will need to spend in order to develop, market and manufacturenew products and 

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technologiesin the future. We expect to continue to spend substantial amounts on researchand development, including amounts spent on conducting clinical trials for ourproduct candidates. Further, we will not have sufficient resources to developfully any new products or technologies unless we are able to raise substantialadditional financing on acceptable terms. We could also be required to seekstrategic partners at an earlier stage than might be preferable and/or on lessfavorable terms than might be otherwise available. To the extent we raise additionalcapital by issuing equity securities, our stockholders may experiencesubstantial dilution. In addition, any new securities issued might have rights,preferences or privileges senior to those of the securities held bystockholders. If we raise additional funds through the issuance of debt, wemight become subject to restrictive covenants or we may subject our assets tosecurity interests. To the extent that we raise additional funds throughcollaboration and licensing arrangements, we may be required to relinquish somerights to our technologies or product candidates, or grant licenses on termsthat are not favorable to us. Our failure to raise capital when needed wouldadversely affect our business, financial condition and results of operations,and could force us to reduce or discontinue our operations at some time in thefuture.

**Our product candidates and technologies are in anearly state of development and there is a high risk that they may never becommercialized because of the costs of continuing development or for otherreasons.**

We do not currently haveany products that have received regulatory approval for commercial sale, and weface the risk that none of our product candidates will ever receive regulatoryapproval. All of our product candidates are in early stages of development. Ourexisting product candidates will require extensive additional clinicalevaluation, regulatory review, marketing efforts and significant investmentbefore they result in any revenues. We currently do not have the funds to bringany of our product candidates through to commercial approval. Therefore,advancing the development of our product candidates will require substantialadditional investment. Continued development of these programs is thereforedependent upon raising additional capital. We cannot be certain that we will beable to obtain capital on acceptable terms, or at all. We do not expect any ofour prospective products or technologies to be commercially available for atleast several years and our efforts may not lead to commercially successfulproducts for a number of reasons including the inability to be proven safe andeffective in clinical trials, the lack of regulatory approvals or obtainingregulatory approvals that are narrower than we seek, inadequate financialresources to complete the development and commercialization of our productcandidates or the lack of acceptance in the marketplace. We continuouslyreassess all of our research and development efforts, including those for thetherapeutic products described under Item 1 above. As new information abouteach technology becomes available, it may change perceptions of previouslyaccepted data, which could require additional periods of time to review andinterpret these data. As a result, we may find deficiencies in the design orapplication stages while developing our clinical trial studies, or in thesubsequent implementation stages of such studies, which could cause us or theFDA to delay, suspend or terminate our trials at any time. Potential problemswe may encounter in the implementation stages of our studies include the chancethat we may not be able to conduct clinical trials at preferred sites, obtainsufficient test subjects or begin or successfully complete clinical trials in atimely fashion, if at all. Furthermore, the FDA may suspend clinical trials atany time if it believes the subjects participating in trials are being exposedto unacceptable health risks or if it finds deficiencies in the clinical trialprocess or conduct of the investigation. At any time, we may expand, delay,terminate or dispose of all or any portion of our research and developmentprograms and therapeutic products or we may develop or acquire rights to newproduct candidates.

**We have ahistory of net losses and an accumulated deficit, and we may never achieve ormaintain revenue or profitability in the future.**

We have experienced net losses since our inception in 1991.To date, we have financed our operations primarily with the net proceeds ofpublic offerings of common stock, private placements of equity 

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securities, with the exercise ofwarrants and options, and with debt. We have also funded our capitalrequirements with the proceeds of the sale of our paclitaxel business(approximately $71.7 million) to Mayne Pharma on December 12, 2003.  We incurred losses from continuing operationsof approximately $16.6 million, $17.2 million and $21.6 million for the yearsended December 27, 2006, December 28, 2005 and December 29,2004, respectively. We have an accumulated deficit of $123.9 million as ofDecember 27, 2006. We have incurred these net losses primarily from costsincurred in our research and development programs and from our general andadministrative expenses. We anticipate that losses will continue until such time,if ever, as we are able to generate sufficient sales to support our developmentoperations. We may never generate revenue from our product candidates or becomeprofitable in the future. We expect to continue to spend substantial amounts onresearch and development, including amounts spent on conducting clinical trialsfor our product candidates. In addition, we may seek to in-license or purchasenew products or technologies. We may not be able to continue as a going concernif we are unable to generate meaningful amounts of revenue to support ouroperations or cannot otherwise raise the necessary capital to support ouroperations.

**Our potential products and technologies must undergorigorous clinical testing and regulatory approvals and compliance, which couldsubstantially delay or prevent us from marketing any products.**

The clinical developmentof our product candidates has many risks of failure. Drugs must be proven safeand effective before they can be approved for human use. The advancement ofdrug candidates into human clinical trials is dependent on the positive outcomeof pending preclinical studies, decisions by the FDA, institutional reviewboards, and other regulatory factors. Patient recruitment for clinical trialscan be difficult, and clinical trials may be delayed or prolonged due toinability to recruit a sufficient number of patients. We may encountersignificant delays or excessive costs in our efforts to secure regulatoryapprovals. Our product candidates rely on new and unproven technologies, andnone of our proposed products or technologies has yet completed clinical testsdesigned to measure their safety or effectiveness in humans. The data obtainedfrom preclinical and clinical activities are susceptible to varyinginterpretations which could delay, limit or prevent regulatory approvals. Failureto comply with applicable FDA or other regulatory requirements may result incriminal prosecution, civil penalties and other actions that would seriouslyimpair our ability to conduct our business. Even if regulatory approval isgranted for a product, this approval will be limited to those disease statesand conditions for which the product is useful, as demonstrated throughclinical trials. In addition, regulatory agencies may not approve the labelingclaims that are necessary or desirable for the successful commercialization ofour product candidates. Even if we receive regulatory approvals, our productcandidates may later exhibit adverse effects that limit or prevent theirwidespread use or that force us to withdraw those product candidates from themarket. In addition, a marketed product continues to be subject to strictregulation after approval. Any unforeseen problems with an approved product orany violation of regulations could result in restrictions on the product,including its withdrawal from the market.

Any delay in, or failureto receive or maintain regulatory approval for, any of our products couldprevent us from ever generating meaningful revenues or achieving profitability.Given the uncertainty of drug development, it is impossible to say how long theclinical development of any of these compounds will take. We cannot be surethat our clinical testing for these programs will progress at the timesestimated in this document. We also cannot be sure of the cost of the effortnecessary to complete these programs or when, if ever, we will receive materialrevenues from these programs. Successfully completing these programs andobtaining an approved product for sale in the U.S. and offshore will bedependent upon our raising additional capital. We cannot be certain that wewill be able to obtain capital on acceptable terms or at all. Delays orfailures in the drug development process may adversely affect the terms oravailability of future capital.

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**Reports ofadverse events or safety concerns involving our product candidates or inrelated technology fields or other companies’ clinical trials could delay orprevent us from obtaining regulatory approval or negatively impact publicperception of our product candidates.**

Our product candidates may produce serious unforeseenadverse events. These adverse events could interrupt, delay or halt clinicaltrials of our product candidates and could result in the FDA or otherregulatory authorities denying approval of our product candidates for any orall targeted indications. An independent data safety monitoring board, the FDA,other regulatory authorities or we may suspend or terminate clinical trials atany time. In addition, if other pharmaceutical companies announce that theyobserved frequent unforeseen adverse events or unknown safety issues in theirtrials involving products or product candidates similar to, or competitivewith, our product candidates, we could encounter delays in the timing of ourclinical trials or difficulties in obtaining the approval of our productcandidates. The public perception of our product candidates might also beadversely affected, which could adversely affect our business, financialcondition and results of operations, even if the concern relates to anothercompany’s product or product candidate.

**Manufacturing issues may delay or hinder developmentor marketing of our product candidates.**

The manufacture of ourdrug candidates is a complex process. Manufacturing these drugs for use inclinical trials, according to FDA guidelines, presents a number of significantrisks and challenges. The manufacture of TPI 287, in particular, is a verycomplex and difficult process. If we are unable to manufacture adequatesupplies of any of our compounds for our clinical trials, our timelines fordevelopment could be delayed significantly. If we are able to gain regulatoryapproval of our products after successful clinical trials and thencommercialize and sell those products, we may be unable to manufacture enoughproducts to maintain our business, which could have a negative impact on ourfinancial condition. We have no experience in manufacturing any of our proposedproduct candidates on a commercial basis. We also have no laboratories ormanufacturing facilities for such commercial manufacturing activity. If we areunable to manufacture our products in a cost-effective manner, we are notlikely to become profitable. We have not received a license from the FDA forany necessary manufacturing facilities, and cannot apply for one until wesubmit a new potential product for commercial approval. Even if we do receive amanufacturing license, we may fail to maintain adequate compliance with the FDA’sregulations concerning current good manufacturing practices, in which case thelicense, and our authorization to manufacture the product, would be revoked. Unlesswe build our own manufacturing facilities, we will have to rely on thirdparties to manufacture our products. The construction of our own manufacturingfacilities would require additional capital which we cannot be certain that wewill be able to obtain or at acceptable terms. Although we may be able to findthird-party manufacturers with experience and the proper licensing requirementsfrom the FDA, we may not be able to negotiate favorable terms regarding costsor a long-term commitment to manufacture our products or problems with suchthird-party manufactures could lead to inability to deliver on our contracts. Ourdependence on third parties may reduce future profit margins and delay or limitour ability to develop and commercialize our products on a timely andcompetitive basis.

**We rely on third-parties to perform certain servicesfor us and any interruption or termination of these arrangements may adverselyaffect our business.**

Werely on third-party contractors to provide certain services related to ourresearch and development activities. Contractors handle our U.S. andinternational regulatory affairs, provide certain manufacturing, technical andanalytical services and manage certain aspects of our clinical development. Ouroutsourcing of certain functions to independent, third parties poses thefollowing risks:

·       ourcontracts with independent contractors may expire or be terminated, and we maynot be able to replace them;

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·       acontractor may not commit sufficient resources to our projects;

·       acontractor may file for bankruptcy protection or otherwise lack sufficientresources to perform all of its obligations under our agreement;

·       theterms of our contracts with contractors may not be favorable to us; and

·       disputeswith our contractors may arise, leading to delays in or termination of thedevelopment or commercialization of our products or resulting in significantlitigation or arbitration proceedings.

The failure of ourthird-party contractors to provide services to us in a timely manner couldmaterially harm our business and financial condition. In addition, our use ofoutside parties could potentially lead to difficulties in coordinatingactivities. Outside parties may have staffing difficulties, may undergo changesin priorities or may have inadequate financial or other resources, adverselyaffecting their willingness or ability to provide certain services to us. Wemay experience unexpected cost increases that are beyond our control. Problemswith the timeliness or quality of the work of a third party contractor may leadus to seek to terminate the relationship and use an alternative serviceprovider. Making this change might be costly and may delay our clinical trials.Further, contractual restrictions may make such a change difficult orimpossible. Additionally, it may be impossible to find a replacementorganization that can assist us in an acceptable manner and at an acceptablecost.

**We may be required to rely on strategic partners forthe development, marketing and manufacturing of future products andtechnologies that may delay or impair our ability to generate significantrevenue and may otherwise adversely affect our profitability.**

Wemay, in the future rely on strategic partners for the development, marketingand manufacturing of future products and technologies because we lack theresources or capabilities to develop our product candidates. Our reliance onstrategic partners poses a number of risks, including the following:

·       itmay be difficult to successfully negotiate arrangements with potentialstrategic partners on acceptable terms;

·       ifan arrangement with a strategic partner expires or is terminated, we may not beable to replace it or the terms on which we replace it may be unacceptable;

·       apartner involved in the development of new products or technologies may notcommit enough capital or other resources to develop or commercialize theseproducts or technologies successfully;

·       astrategic partner may not commit enough resources to the marketing anddistribution of our products;

·       wemay have disputes with strategic partners that could delay or terminate thedevelopment or commercialization of our products or result in significantlitigation or arbitration proceedings;

·       contractswith our strategic partners may not provide significant protection or may bedifficult to enforce if a strategic partner fails to perform;

·       ourstrategic partners may decide not to further develop or commercialize ourproducts;

·       ourstrategic partners could develop drugs which compete with our products;

·       ourstrategic partners could turn their focus away from oncology;

·       ourstrategic partners who may manufacture future products could fail to operatetheir facilities in accordance with federal good manufacturing practicesregulations; and

·       third-party manufacturersmay be unable to manufacture products in a cost-effective or timely manner.

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**We may not be successful in obtaining required foreignregulatory approvals, which would prevent us from marketing our productsinternationally.**

Outside the U.S., ourability to market a product is contingent upon receiving a marketingauthorization from the appropriate regulatory authority. This foreignregulatory approval process includes many of the same steps and uncertaintiesassociated with FDA approval described above. We cannot be certain that we willobtain any regulatory approvals for our product candidates and technologies inother countries. In order to market our products outside of the U.S., we alsomust comply with numerous and varying foreign regulatory requirementsimplemented by foreign regulatory authorities governing the conduct of clinicaltrials, product licensing, pricing and reimbursement. The approval procedurevaries among countries and can involve additional testing. The time required toobtain approval may differ from that required to obtain FDA approval andapproval by the FDA does not ensure approval by the health authorities of anyother country. The process of obtaining foreign regulatory approvals can belengthy and require the expenditure of substantial capital and other resources.We may not be successful in obtaining the necessary approvals. Any delay orfailure to demonstrate the safety and effectiveness of a pharmaceutical productcandidate under development and obtain foreign regulatory approval could have amaterial adverse effect on our business.

**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.

**Our use of hazardous materials exposes us to the riskof material environmental liabilities, and we may incur substantial additionalcosts to comply with environmental laws in connection with the operation of ourresearch and manufacturing facilities.**

We may use radioactivematerials and other hazardous or biohazardous substances in our research anddevelopment. As a result, we are potentially subject to material liabilitiesrelated to personal injuries or property damages that may be caused by thespread of radioactive contamination or by other hazardous substance releases orexposures at, or from, our facilities. Decontamination costs associated withradioactivity releases, other clean-up costs, and related damages orliabilities could be significant and could harm our business. The cost of thisliability could exceed our resources.

We are required to complywith increasingly stringent laws and regulations governing environmentalprotection and workplace safety, including requirements governing the handling,storage and disposal of radioactive and other hazardous substances and wastes,and laboratory operating and safety procedures. These laws and regulations canimpose substantial fines and criminal sanctions for violations. Maintainingcompliance with these laws and regulations with regard to our operations couldrequire substantial additional resources. These costs could decrease ourability to conduct operations in a cost-effective manner.

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

Our business may expose usin the future to product liability risks, which are inherent in the testing,manufacture, marketing and sale of pharmaceutical products. Product liabilityclaims might be brought against us by clinical trial patients, consumers orhealth care providers or by pharmaceutical companies or others selling ourproducts. If we complete clinical testing for our product candidates andreceive regulatory approval to market our products, we will include warnings onour products that identify the known potential adverse effects and the patientswho should not receive our product. There can be no assurance that thesewarnings will be deemed adequate, or that physicians and patients will complywith these warnings.

If we cannot successfullydefend ourselves against such claims, we may incur substantial liabilities orbe required to limit commercialization of our future products. We cannotpredict all of the possible harms or side effects that may result and, as aresult, the amount of insurance coverage we currently hold, or that we mayobtain, may not be adequate to protect us from any liabilities. We may requireincreased liability coverage as our product candidates’ advance in clinicaltrials and later develop and commercialize these products. Further, insurancecoverage is increasingly expensive, and we do not know whether we will be ableto maintain insurance coverage at a reasonable cost or in sufficient amounts toprotect us against losses due to liability. A successful product liabilityclaim brought against us in excess of our insurance coverage or a productrecall could adversely affect our business, results of operations and financialcondition.

**If ourinternal controls over financial reporting are not considered effective, ourbusiness and stock price could be adversely affected.**

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

Any system of controls, however well designed and operated,can provide only reasonable, and not absolute, assurance that the objectives ofthe system are met. In addition, the design of any control system is based inpart upon certain assumptions about the likelihood of future events. Because ofthese and other inherent limitations of control systems, there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions, regardless of how remote. In the Quarterly Reporton Form 10-Q/A for the third quarter ended September 27, 2006,we disclosed that we did not maintain effective control over the completenessand accuracy of the supporting schedule of weighted average shares outstandingand that as a result it was necessary to restate the Consolidated Statements ofOperations included in such report. We cannot assure you that we or ourindependent registered public accounting firm will not identify additionalmaterial weaknesses in our internal controls in the future. If additionalmaterial weaknesses in our internal controls are detected, our internalcontrols over financial reporting may not be considered effective and we mayexperience a loss of public confidence, which could have an adverse effect onour business and on the market price of our common stock.

**RisksRelated to Our Industry**

**Competition from third parties may hinder our success.**

If wedevelop and commercialize our product candidates in the future, we expectcompetition from fully integrated pharmaceutical companies and more establishedbiotechnology companies as well as government, universities and public andprivate research institutions. These companies and institutions 

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conduct research, seek patent protection and establishcollaborative arrangements for product development and marketing. Most of thesecompanies and institutions have significantly greater financial resources andexpertise than we do in the following:

·       researchand development;

·       preclinicalstudies and clinical trials;

·       obtainingregulatory approvals;

·       manufacturing;and

·       marketingand distribution.

Smaller companies may alsoprove to be significant competitors, particularly through collaborativearrangements with large pharmaceutical companies or other organizations. Inaddition, other companies and institutions compete with us in recruiting andretaining highly qualified scientific and management personnel. If we developand commercialize our product candidates in the future, our competitors maydevelop more effective, safer or more affordable products and technologies, or commercializeproducts earlier than we do. If our competitors are successful in this respect,it could limit the prices that we are able to charge for the products that wemarket, and prevent us from becoming profitable. In some cases, competingproducts could render obsolete any products we eventually develop.

**Legislative and regulatory proposals to reduce thecost of health care could adversely affect our business.**

There have been a numberof federal and state proposals in the U.S. to implement government controls onpricing and other efforts to reduce the cost of health care, includingproposals to reform health care or reduce government insurance programs. Ourbusiness is affected by these efforts and these efforts could adversely affectprices of our products. In addition, government pricing controls exist invarying forms in other countries. The emphasis on managed care in the U.S. hasalso increased and will likely continue to increase the pressure to reduce theprices of pharmaceutical products. We cannot predict whether any of theseproposals will be adopted or the effect these proposals or managed care effortsmay have on our business. In addition, the current discussion of drugreciprocation into the U.S. could also affect our future business operations. Someproposals would permit the reimportation of approved drugs that were originallymanufactured in the U.S. from other countries where the drugs were sold at alower price. These and other initiatives could decrease the price we or anypotential marketing partners receive for our products, adversely affecting ourprofitability. The pendency or approval of such proposals could result in adecrease in our stock price or limit our ability to raise capital, enter intostrategic partnerships or obtain licenses.

**We may be unable to effectively price our products orobtain adequate reimbursement for sales of our products, which would preventour products from becoming profitable.**

Our product candidates, ifdeveloped and commercialized, may not be considered cost-effective, andcoverage and adequate payments may not be available or may not be sufficient toallow us to sell these products on a competitive basis. In both the UnitedStates and elsewhere, sales of medical products and treatments are dependent,in part, on the availability of reimbursement from health maintenanceorganizations, other private insurance plans, governmental programs such asMedicare, and other third-party payors. Third-party payers are increasinglychallenging the prices charged for pharmaceutical products and services. Governmentand other third-party payors increasingly are attempting to contain health carecosts by limiting both coverage and the level of reimbursement for new drugsand by refusing, in some cases, to provide coverage for uses of approvedproducts for diseases or conditions for which the FDA has not granted labelingapproval. Significant uncertainty exists as to whether and how much third-partypayors will reimburse patients for their use of newly-approved drugs, which inturn will put pressure on the pricing of drugs. Third-party insurance coveragemay not be available to patients for our products. 

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Ifgovernment and other third-party payors do not provide adequate coverage andreimbursement levels for our products, their market acceptance may be reducedor we may not be able to commercialize our products.

**RisksRelated to Our Intellectual Property**

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

Our success incommercializing, producing and marketing products and technologies in thefuture depends, in part, on our ability to obtain and maintain adequateprotection of the intellectual property related to our technologies andproducts, both in the U.S. and other countries, and to operate withoutinfringing the proprietary rights of third parties. We will be able to protectour proprietary rights from unauthorized use by third parties only to theextent that our proprietary technologies are covered by valid and enforceablepatents. The patent positions of biotechnology companies, including our patentpositions, are generally uncertain and involve complex legal and factualquestions.

We cannot predict thebreadth of claims that will be allowed and issued to us for patents related tobiotechnology or pharmaceutical applications. Before a patent is issued, itscoverage can be significantly narrowed, either in the U.S. or abroad. We alsodo not know whether any of our pending or future patent applications willresult in the issuance of patents. To the extent patents have been issued orwill be issued, some of these patents are subject to further proceedings thatmay limit their scope and once patents have been issued, we cannot predict howthe claims will be construed or enforced. It is not possible to determine whichpatents may provide significant proprietary protection or competitiveadvantage, or which patents may be circumvented or invalidated. Furthermore,patents already issued to us, or patents that may be issued on our pendingapplications, may become subject to dispute, including interference proceedingsin the U.S. to determine priority of invention. If our currently issued patentsare invalidated or if the claims of those patents are narrowed, our ability toprevent competitors from marketing products that are currently protected bythose patents could be reduced or eliminated. We could then face increasedcompetition resulting in reduced market share, prices and profit.

In addition, the laws ofsome foreign countries do not protect proprietary rights to the same extent asthe laws of the U.S., and many companies have encountered significant problemsin protecting and defending their proprietary rights in foreign jurisdictions.For example, methods of treating humans are not patentable in many countriesoutside of the U.S.

Our patents may not affordus protection against competitors, especially since there is a lengthy timebetween when a patent application is filed and when it is issued. We may alsoincur substantial costs in asserting claims against, and defending claimsasserted against us by third parties to prevent the infringement of our patentsand proprietary rights by others. Participation in such infringementproceedings may adversely affect our business and financial condition, even ifthe eventual outcome is favorable.

**Litigation or third party claims of intellectualproperty infringement could require us to spend substantial time and money andadversely affect our ability to develop and commercialize our products.**

Our commercial successalso depends in part on our ability to avoid infringing patents and proprietaryrights of third parties and not breaching any licenses that we have enteredinto with regard to any future products. There are many pharmaceutical andchemical patents and applications being filed, published, and issued frequentlythroughout the world. Some of these patents and applications containdisclosures and claims that are similar to technologies and products that weare using and developing. Some of these patents and disclosures contain claimsand disclosures that are difficult to interpret. It is possible that a thirdparty may own or control issued patents, or patent applications or in thefuture may file, patent applications covering technologies or products we aredeveloping.

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If our technology,products or activities are deemed to infringe the other companies’ rights, wecould be subject to damages or be prevented from using the technology orselling the product that is infringing other companies’ rights, or we could berequired to obtain licenses to use that technology or sell the product. Ifpatents covering technologies required by our operations are issued to others,we may have to rely on licenses from third parties, which may not be availableon commercially reasonable terms, if at all. Third parties may accuse us ofemploying their proprietary technology without authorization. In addition,third parties may obtain patents that relate to our technologies and claim thatour use of such technologies infringes their patents, even if we have receivedpatent protection for our technology. Such 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 us against anysuch claims or enforcing our patents. In this regard, we may be required todefend a lawsuit or defend a proceeding in the United States Patent andTrademark Office, either of which could be expensive and time consuming;

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

·       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. Even if weare granted a license, we may have to pay substantial royalties or grantcross-licenses to our patents;

·       redesigningour products or product candidates so they do not infringe on the patent holder’stechnology if we are unable to obtain a license. This may not be possible and,even if possible, it could require substantial additional capital and couldsignificantly delay commercialization while we attempt to design around thepatents or rights infringed;

·       incurringsubstantial cost in defending ourselves and indemnifying our strategic partnersin patent infringement or proprietary rights violation actions brought againstthem relating to their development and commercialization of our products; and

·       incurring substantial costin indemnifying the investors in the financing that closed on April 6,2006 in the event that any intellectual property infringement is deemed to be abreach of the purchase agreement for the financing.

**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 oncology programs may require the use of multipleproducts or technologies proprietary to other parties. Third party suppliersmay not be able to furnish us with a supply of these products sufficient tosatisfy our requirements. We may not be able to obtain additional licenses wemay need in the future on terms acceptable to us. Our inability to obtain any oneor more of these licenses, on commercially reasonable terms, if at all, or tocircumvent the need for any such license, could cause significant delays andcost 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 relating to ouroncology programs. Such licenses may obligate us to exercise diligence inpursuing the development of product candidates, to make specified milestonepayments and/or to pay royalties. Our inability or failure to meet 

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any suchdiligence requirements or make any required payments would likely result in areversion to the licensor of the rights granted, which could materially andadversely affect our ability to develop and market products based on ourlicensed technologies.

**Risks Related toOur Stock**

**A small number ofinstitutional investors have acquired shares of common stock and warrantsrepresenting substantially more than a majority of our shares. Should they all,or a subset of such investors, choose to act as a group, they have the abilityto exert control over our activities.**

A small number ofinstitutional investors have acquired shares of our common stock and warrantsto acquire such shares representing a majority of our common stock. As aresult, those investors hold a sufficient portion of our outstanding shares soas to permit them, if they chose to act in concert, to approve all actionsrequiring stockholder approval, including the election of directors and the approvalof mergers or other business combinations, without obtaining the approval ofany other stockholders.

**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 significantadditional capital will be required in the future to continue our research,development and clinical efforts. To the extent we raise additional capital byissuing equity securities, our stockholders may experience substantial dilution.We may sell common stock in one or more transactions at prices and in a mannerwe determine from time to time. If we sell common stock in more than onetransaction, stockholders who purchase stock may be materially diluted bysubsequent sales. Such sales may also result in material dilution to ourexisting stockholders. During 2006, our Board of Directors and stockholdersadopted a new equity incentive plan that provided for an initial reservation of6,577,106 shares of common stock, for which 5,119,629 options were issued andare outstanding as of December 27, 2006. The shares available for issuanceunder this equity incentive plan may be increased by up to 1,600,000 shares ofcommon stock based upon the number of shares of common stock we issue duringthe three year period after April 5, 2006. As a result of common stockissued during 2006, we have increased the number of shares available under the2006 Equity Incentive Plan to 6,622,935, resulting in 1,503,306 shares thatremain reserved for future grants as of December 27, 2006. During 2006,our stockholders also approved an amendment to our bylaws and our existingstock option plans to permit the repricing of stock options. Approximately626,568 of the outstanding stock options as of April 4, 2006, wereaffected on that date and the exercise price of each such repriced option wasreduced to $4.02 per share.

**Substantial salesof shares may impact the market price of our common stock.**

Sales of a substantialnumber of shares of our common stock in the public market, or the perceptionthat these sales might occur, could depress the market price of our commonstock and could impair our ability to raise capital through the sale ofadditional equity securities. We are unable to predict the effect that salesmay have on the then prevailing market price of our common stock. Pursuant to aRegistration Rights Agreement entered into between us and the purchasers of ourcommon stock and warrants in the Private Placement, such purchasers areentitled to certain registration rights with respect to the shares of commonstock that may be issued upon exercise of the warrants issued to them. We must,among other things, maintain effectiveness with the Securities and ExchangeCommission, the registration statement for the resale of such shares of commonstock underlying such warrants.

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**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 decrease.**

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 pershare minimum bid price requirement for 30 consecutive business days and that,if we were unable to demonstrate compliance with this requirement during theapplicable grace periods, our common stock would be delisted after that time. OnFebruary 6, 2006, we effectuated a one for ten reverse stock split toregain compliance with this listing requirement. Since the reverse stock spiltwas effectuated, the closing bid price of our common stock has remained above$1.00 in compliance with the minimum bid price requirement.

Notwithstanding that the trading price of our commonstock currently exceeds the minimum bid price required to maintain compliancewith the Nasdaq Capital Market listing requirements, it is possible that theminimum bid price of our common stock could fall below the required level orthat we would otherwise fail to satisfy another Nasdaq requirement forcontinued listing of our common stock. For example, we could fail to maintaincompliance with the Nasdaq Capital Market listing requirements if we did notmaintain minimum stockholder equity of at least $2.5 million as a result ofcontinuing 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 decrease. Such delisting could also adversely affect our ability toobtain financing for the continuation of our operations and could result in theloss of confidence by investors, suppliers and employees.

**Our stockcompensation expense will negatively impact our earnings, and as we report thefair value of employee stock options as an expense in conjunction with a newaccounting standard, our reported financial performance will be adverselyaffected, which may cause our stock price to decline.**

In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards (“SFAS”) 123(R), “Accounting for Stock-Based Compensation.”  SFAS 123(R) establishes standards forthe accounting for transactions in which an entity exchanges its equityinstruments for goods or services. This statement focuses primarily onaccounting for transactions in which an entity obtains employee services inshare-based payment transactions. SFAS 123(R) requires that the fair valueof such equity instruments be recognized as an expense in the historicalfinancial statements as services are performed. Prior to SFAS 123(R), onlycertain pro forma disclosures of fair value were required. As a result of theadoption of SFAS 123(R), we have recognized stock-based compensation expense of$3.4 million or $.26 basic and diluted per share from continuing operations forthe year ended December 27, 2006. Included in the stock-based compensationexpense for the year ended December 27, 2006 is a one-time non-cash fixedcharge in the amount of $381,000 as a result of the amendment of certain vestedoptions under our existing equity incentive plans. As of December 27,2006, there was $11.9 million of total unrecognized compensation expenserelated to unvested share-based compensation arrangements granted under ourstock option plans. This amount will be recognized over a weighted-averageperiod of approximately 4.5 years. Periodic changes in the assumptions used toestimate stock option and restricted stock values could lead to volatility inthe amount of stock-based compensation expense we recognize on a year-to-yearbasis.

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**Anti-takeoverprovisions in our charter documents and under Delaware law could discourage,delay or prevent an acquisition of us, even if the acquisition would be seen bysome to be beneficial to our stockholders, and may for a time, delay attemptsby our stockholders to replace or remove our current management.**

Our certificate of incorporation and bylaws providethat the Board of Directors will be divided into three classes, eachconsisting, as nearly as possible, of one-third of the total number ofdirectors, with each class having a three-year term. 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. These provisions are intended to enhance thelikelihood of continuity and stability in the composition of our Board ofDirectors and in the policies formulated by our Board of Directors. We alsointended these provisions to discourage certain types of transactions that mayinvolve an actual or threatened change of control. We designed these provisionsto reduce our vulnerability to unsolicited acquisition proposals and todiscourage certain tactics that may be used in proxy contests. Theseprovisions, however, could also have the effect of discouraging others frommaking a tender offer for our shares. As a consequence, they also may inhibitfluctuations in the market price of our shares that could result from actual orrumored takeover attempts. Such provisions also may have the effect ofpreventing changes in our management. We are permitted to issue shares of ourpreferred stock without stockholder approval upon such terms as our Board ofDirectors determines. Therefore, the rights of the holders of our common stockare subject to, and may be adversely affected by, the rights of the holders ofour preferred stock that may be issued in the future. In addition, the issuanceof preferred stock could have a dilutive effect on the holdings of our currentstockholders.

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 stock cannot acquire usfor a period of three years from the date this person became an interestedstockholder, unless various conditions are met, such as approval of thetransaction by our Board of Directors.

**We have implementedanti-takeover provisions that may reduce the market price of our common stock.**

In December 2006, our board of directors adopteda stockholder rights plan to replace our stockholder rights plan that expiredin November 2006 at the end of its ten-year term. Our plan may have theeffect of discouraging, delaying or preventing a merger or acquisition of usthat is beneficial to our stockholders by diluting the ability of a potentialacquirer to acquire us. Pursuant to the terms of our plan, when a person orgroup, except under certain circumstances, acquires 15% or more of ouroutstanding common stock or 10 business days after announcement of a tender orexchange offer for 15% or more of our outstanding common stock, the rights(except those rights held by the person or group who has acquired or announcedan offer to acquire 15% or more of our outstanding common stock) wouldgenerally become exercisable for shares of our common stock at a discount.Because the potential acquirer’s rights would not become exercisable for ourshares of common stock at a discount, the potential acquirer would suffersubstantial dilution and may lose its ability to acquire us. In addition, theexistence of the plan itself may deter a potential acquirer from acquiring us.As a result, either by operation of the plan 

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or by its potentialdeterrent effect, mergers and acquisitions of us that our stockholders mayconsider in their best interests may not occur.

Because the investors inour financing that closed on April 6, 2006 own a substantial percentage ofour outstanding common stock, our stockholder rights plan provides that suchinvestors and their respective affiliates will be exempt from the stockholderrights plan, unless an investor and its affiliates acquire, after April 4,2006, more than 1% of our then issued and outstanding common stock, notincluding the shares of common stock issued to the investors in the financingor shares of common stock issued upon exercise of the warrants issued to theinvestors in the financing.

**Item 1BUnresolved Staff Comments**

None.

**Item 2Properties**

We lease 16,000square feet of administrative, research and development space in Boulder,Colorado. We also sublease approximately 850 square feet of office space in NewYork, New York for administration.  Inaddition, we conduct biological research at two additional facilities that werent on a month to month basis in Boulder, Colorado. We also own five acres ofundeveloped land in Longmont, Colorado which is accounted for as other assets.

Some of ouroncology research and development activities are conducted at a contractresearch laboratory leased to us by ChromaDex, Inc., a supplier ofphytochemical reference standards. We sold our analytical service group toChromadex in April 2003 in exchange for approximately 15% of ChromaDex’sthen outstanding common stock. As part of this transaction, ChromaDex assumedthe lease for our research facility in Boulder, Colorado, and we sublease aportion of this facility back from ChromaDex.

In February 2007,we entered into an agreement to sublease 2,300 square feet of office space inRoseland, New Jersey, into which we will build our clinical research team.

We believe that these existing facilities are adequate tomeet current foreseeable requirements or that suitable additional or substitutespace will be available on commercially reasonable terms.

**Item 3Legal Proceedings**

The Companyis currently in arbitration through the American Arbitration Association withthe licensor of certain patents and patent applications relating topharmaceutical formulations containing Vitamin E TPGS. The arbitration wasinstituted in November, 2005 in Boulder, Colorado. The Company licensed thesepatent applications in 1998. The inventor/licensor claims that the Company hasfailed in its obligation to develop the licensed technology and is demandingreturn of the patents. The Company denies this claim, and in addition allegesthat the inventor/licensor committed fraud in inducing the Company to enterinto the license agreement. The Company is seeking as yet unspecified damagesagainst the inventor/licensor.

We agreed to employ DonaldH. Picker, Ph.D., as our President in December 2006. Prior to joining theCompany, Dr. Picker had served as Executive Vice President, R&D ofCallisto Pharmaceuticals, Inc. (“Callisto”). On December 21, 2006,Callisto filed a complaint in the Supreme Court of New York, County of NewYork, relating to our employment of Dr. Picker. The suit names the Companyand two of our officers, Leonard Shaykin and Kai Larson, as defendants. In itscomplaint, Callisto alleges breaches of a confidentiality agreement betweenCallisto and Tapestry, and also interference with Dr. Picker’s 

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contractualrelationship with Callisto. Callisto seeks unspecified actual and punitivedamages. We believe these claims are without merit and we are vigorouslydefending ourselves against such claims.

**Item 4Submission of Matters to Vote of Security Holders**

None.

**************************

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**ExecutiveOfficers of the Registrant**

Leonard P. Shaykin, 63, has served as our Chairman of the Board since 1993,and our Chairman and Chief Executive Officer since 1999. In 1995,Mr. Shaykin founded Shaykin & Co., LLC, a private investment andmanagement company. Prior to founding Shaykin & Co., Mr. Shaykinwas a managing partner of Adler & Shaykin, an investment partnershiporganized to sponsor management leveraged buyouts. Prior to that,Mr. Shaykin was Vice President, Director and a member of the InvestmentCommittee of Citicorp Venture Capital, Ltd. and Citicorp CapitalInvestors, Inc., the venture capital and equity investment subsidiaries ofCiticorp and Citibank. Mr. Shaykin is a trustee of The Jackson Laboratory,a not-for-profit genetic research institute; a member of the board of TriremeSystems, Ltd., a private company that provides integrated tracking andsurveillance technology solutions for the commercial and security needs ofbusinesses and government agencies; a member of the Board of the AmericanFriends of the University of Sussex, Brighton, UK; and serves on the AdvisoryBoard of the American Center for Democracy. Mr. Shaykin received a B.A.and an M.A. from the University of Chicago and an M.B.A. from the University ofChicago Graduate School of Business.

Donald H. Picker, Ph.D., 61, was appointed to theposition of President, effective January 2, 2007. Prior to joining us,from 2003 to 2006, he was Executive Vice President of Research and Developmentof Callisto Pharmaceuticals. In 2004 and 2005, Mr. Picker co-foundedXenomics, a public DNA diagnostic company and Ferma Vir, a public infectiousdisease company. In addition, Mr. Picker has held various senior executivepositions at Synergy Pharmaceuticals, LXR Biotechnology, Genta, and JohnsonMatthey. Mr. Picker received a BS in Chemistry from Brooklyn PolytechnicInstitute and a Ph. D. in organic chemistry from State University of New Yorkat Albany.

Martin Batt, 64, has served as our Senior VicePresident, Chief Operating Officer since April 2005. Mr. Batt hasalso been Vice President, Chief Operating Officer since July 2004 andChief Information Officer since 2002. Prior to joining us, from 1986 to 2002,he was a Partner in the consulting firm of Grisanti, Galef & Goldresswhich specializes in operating and fixing distressed companies by providingleadership in senior executive positions. Mr. Batt has assumed variouspositions including CEO, President and Vice President in many industriesincluding retailing, aerospace, communications, computer software, steel,computer hardware, carpet, apparel, and automotive parts manufacturing. Priorto that, Mr. Batt served in various Information Technology positions at U.S. Steel Corporation. Mr. Batt received a B.S. in Computer Sciences, CumLaude, from Point Park College, Pittsburgh and has also taught Computer Scienceand Information Technology.

Kai P. Larson, 42, has served as our Vice Presidentand General Counsel since 1999, and previously held the position of Director ofLegal Affairs from 1994 to 1999. Prior to joining us, he worked as an attorneyin the New York office of Kirkland & Ellis. Mr. Larson received aB.A. from Brigham Young University, and a J.D. from Columbia University Schoolof Law.

**Gordon Link, Jr., 53, acertified public accountant (inactive) and a certified management accountant,has served as our Senior Vice President and Chief Financial Officer since 2002,and previously held the position of Vice President and Chief Financial Officerfrom 1993 to 2002 and President of the Genomics Division from 2000 to 2002.Prior to that, Mr. Link served concurrently as Corporate Controller ofSynergen, Inc. and Treasurer of the Syntex-Synergen NeuroscienceJoint Venture. From 1991 to 1993, Mr. Link was Treasurer of SynergenDevelopment Corporation. From 1983 to 1990, Mr. Link practiced as acertified public accountant, including the position of Audit Manager withDeloitte & Touche. He attended the graduate school of the Universityof Denver and received undergraduate degrees in chemistry from RensselaerPolytechnic Institute in 1976 and in accounting from Metropolitan State Collegein 1983.**

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**Part II**

**Item 5Market for Registrant’s Common Equity, Related Stockholder Mattersand Issuer Purchases of Equity Securities**

**Market Information**

Our common stock is listed on theNasdaq Capital Market, where it trades under the symbol “TPPH.”  We implemented a one-for-ten reverse split ofour common stock effective for trading on February 6, 2006. All share andper share amounts for all periods presented have been restated to reflect thisreverse stock split. The following table sets forth, for the periods indicated,the high and low closing sale prices for our common stock for the fiscal yearsended December 27, 2006 and December 28, 2005:

| ** ** | ** ** | ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|----------------|------------|----------|------------|---------|------------|
| 2006       |       | Fourth Quarter |       | $        | 2.22       |    | $          | 1.47 |   |
|       |       | Third Quarter  |       | 3.60     |       | 2.12    |       |
|       |       | Second Quarter |       | 4.38     |       | 2.35    |       |
|       |       | First Quarter  |       | 4.70     |       | 2.30    |       |
| 2005       |       | Fourth Quarter |       | $        | 4.00       |    | $          | 2.60 |   |
|       |       | Third Quarter  |       | 5.50     |       | 3.50    |       |
|       |       | Second Quarter |       | 6.60     |       | 4.50    |       |
|       |       | First Quarter  |       | 12.20    |       | 6.50    |       |

 

On February 27, 2007, the last sale price of ourcommon stock on the Nasdaq Capital Market was $1.61 per share.

**Stockholders**

As of February 27, 2007, we had 350 stockholders ofrecord.

**Dividends**

To date, we have not paid any dividends on our commonstock. We intend to retain future earnings, if any, to finance the operationand expansion of our business and, therefore, we do not anticipate paying anycash dividends on our common stock in the foreseeable future, if at all.

**Securities Authorized for Issuance Under EquityCompensation Plans**

See Item 12 regarding securities authorized for issuanceunder our equity compensation plans.

**Sales of Unregistered Securities**

On December 12, 2006,we issued 30,000 shares of common stock to Schwartz Communications, Inc.under the terms of a consulting agreement. The shares were issued in relianceupon an exemption provided by Section 4(2) of the Securities Act of1933, as amended, and Regulation D thereunder.

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**Item 6Selected Financial Data**

Theselected financial data presented below for each year in the five years ended December 27,2006, are derived from our financial statements, which have been audited for2006, 2005 and 2004 by Grant Thornton LLP and for the other years by Ernst &Young LLP, registered public accounting firms, and are qualified by referenceto such Financial Statements and Notes thereto. The data presented below shouldbe read in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and our consolidated financial statementsat December 27, 2006 and December 28, 2005 and for each of the threeyears reported in the period ended December 27, 2006, and other financialinformation included elsewhere in this report. The selected consolidatedstatement of operations data for the years ended December 31, 2003 and2002, and the consolidated balance sheet data as of December 31, 2004, 2003and 2002, were derived from audited consolidated financial statements notincluded in this Form 10-K. The historical results are notnecessarily indicative of the operating results to be expected in the future.

| ** **                                         | ** ** | **Year Ended**                                                | ** ** |
|----------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                         | ** ** | **(In thousands, except per share data)** | ** ** |
| **Statement  of Operations Data:**                 | ** ** | ** **                                                         |       |   | ** ** | ** ** |   |   | ** ** | ** ** | ** ** |
| Operating  expenses:                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development                           |       | $                                                                  | 10,389     |   | $ | 10,630 |   | $ | 13,504 |   | $ | 6,485 |   | $ | 6,067 |   |
| General and administrative                         |       | 6,974                                                              |       | 5,628 |   | 7,794 |   | 8,616 |   | 8,446 |   |
| Operating loss                                     |       | 17,363                                                             |       | 16,258 |   | 21,298 |   | 15,101 |   | 14,513 |   |
| Other income (expense):                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest and other income                          |       | 1,296                                                              |       | 731 |   | 694 |   | 110 |   | 267 |   |
| Interest and other expense                         |       | (518                                                               | )          | (557 | ) | (947 | ) | (865 | ) | (723 | ) |
| Impairment charges                                 |       | —                                                             |       | (1,067 | ) | — |   | — |   | — |   |
| Loss from  continuing operations before taxes      |       | (16,585                                                            | )          | (17,151 | ) | (21,551 | ) | (15,856 | ) | (14,969 | ) |
| Provision for income taxes                         |       | (8                                                                 | )          | (29 | ) | (4 | ) | — |   | — |   |
| Loss from  continuing operations                   |       | (16,593                                                            | )          | (17,180 | ) | (21,555 | ) | (15,856 | ) | (14,969 | ) |
| Income/(loss) from discontinued operations, net(1) |       | (59                                                                | )          | (358 | ) | (2,619 | ) | 53,984 |   | 6,304 |   |
| Net income/(loss)                                  |       | $                                                                  | (16,652    | ) | $ | (17,538 | ) | $ | (24,174 | ) | $ | 38,128 |   | $ | (8,665 | ) |
| Diluted income/(loss) per share                    |       | $                                                                  | (1.29      | ) | $ | (5.15 | ) | $ | (7.38 | ) | $ | 12.38 |   | $ | (2.93 | ) |
| Diluted weighted average shares outstanding        |       | 12,909                                                             |       | 3,408 |   | 3,274 |   | 3,080 |   | 2,960 |   |

 

| ** **                                                    | ** ** | **Year Ended**     | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                    | ** ** | **(In thousands)** | ** ** |
| **Balance  Sheet Data:**                                      |       |                    |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents, short-term and long-term investments |       | $                  | 22,457     |   | $  | 14,086 |   | $  | 35,722 |   | $  | 50,782 |   | $  | 6,762 |   |
| Working capital                                               |       | 20,207                  |       | 11,627 |   | 23,473 |   | 47,053 |   | 33,595 |   |
| Total assets                                                  |       | 24,606                  |       | 16,474 |   | 39,293 |   | 57,766 |   | 45,328 |   |
| Long-term debt,  net of current maturities                    |       | 112                     |       | 2,483 |   | 3,245 |   | 41 |   | 19,861 |   |
| Deferred income,  long term                                   |       | —                  |       | — |   | — |   | — |   | 5,887 |   |
| Convertible debt                                              |       | —                  |       | — |   | — |   | 5,702 |   | 5,151 |   |
| Accumulated  deficit                                          |       | (123,914                | )          | (107,262 | ) | (89,724 | ) | (65,550 | ) | (103,678 | ) |
| Stockholders’ equity                                     |       | 21,909                  |       | 10,886 |   | 27,780 |   | 45,998 |   | 6,796 |   |
|                                                               |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The results of ourGenomics division operations, excluding the Huntington’s Disease program, andour generic paclitaxel business, which was sold on December 12, 2003 toMayne Pharma, have been reported as discontinued operations.

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**Item 7Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

The following discussion and analysis provides informationthat management believes is relevant to an assessment and understanding of theresults of operations of Tapestry Pharmaceuticals, Inc. You should readthis discussion in conjunction with the Financial Statements and Notes includedelsewhere in this report. Certain statements set forth below constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, referred to as the “Reform Act.” See “Special Note Regarding Forward-Looking Statements” under Item 1 and“Risk Factors” under Item 1A.

**General**

We are a pharmaceutical company focused on thedevelopment of proprietary therapies for the treatment of cancer. Our lead compound, TPI 287is currently undergoing human clinical trials. We are also engaged inevaluating new therapeutic agents and/or related technologies. Our evaluationof new products and technologies may involve the examination of individualmolecules, classes of compounds, or platform technologies, in cancer as well asother therapeutic areas. Acquisitions of new products or technologies mayinvolve the purchase or licensing of such products or technologies, or theacquisition of, or merger with, other companies.

We haveincurred significant losses, including losses from continuing operations of$16.6 million, $17.2 million and $21.6 million for the years ended December 27,2006, December 28, 2005 and December 29, 2004, respectively. Ouraccumulated deficit was $123.9 million as of December 27, 2006. Weanticipate that losses will continue until such time, if ever, as we are ableto generate sufficient sales to support our development operations, includingthe research and development activity discussed above.

Our ability to generate sufficient sales to support ouroperations currently depends primarily upon the successful development andcommercialization of products. Our oncology program consists of developing bothtargeted as well as non-targeted chemical compounds for the treatment ofcancer. All of our products and technologies are in the early stages ofdevelopment and we cannot assure you that our efforts will be successful.

**Reverse Stock Split**

We have implemented a one-for-ten reversesplit of our common stock effective for trading on February 6, 2006. Allshare and per share amounts for all periods presented prior to fiscal 2006 havebeen restated to reflect this reverse stock split.

**Private Placement**

OnApril 5, 2006 we sold an aggregate of 12,750,000 shares of common stockand warrants to purchase up to 12,750,000 shares of common stock for a total of$25.5 million (excluding any proceeds that might be received upon exerciseof the warrants) or approximately $23.8 million, net of the placementagent fees and other expenses, pursuant to a Purchase Agreement datedFebruary 2, 2006 (the “Purchase Agreement”). The purchase price was $2.00per share of common stock, and each warrant to purchase common stock has anexercise price equal to $2.40 per share. We may call up to 20% of theoutstanding warrants during any three month period if certain conditions aresatisfied, including the trading price of our common stock exceeding $4.80 for20 consecutive trading days. Up to half of the warrants may be exercised on acashless or net exercise basis. There can be no assurance, however, that wewill receive funds from the exercise of warrants.

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In addition, weissued warrants to purchase 50,000 shares of common stock to a financialadvisor and issued warrants to purchase 100,000 shares of common stock to anoutside consultant as a finders’ fee on substantially similar terms as thewarrants issued under the Purchase Agreement.

In connection with the Private Placement, we enteredinto a registration rights agreement wherein we agreed to make the requisiteSEC filings to achieve and substantially maintain the effectiveness of aregistration statement covering shares sold in the Private Placement, as wellas shares underlying warrants issued in the Private Placement. If the Companyfails to maintain effectiveness of that registration statement through as lateas April 6, 2013 (subject to the Company’s right to suspend use of theregistration statement in certain circumstances) we will be obligated to payliquidated damages, in an amount up to 1.5% of the purchase price paid by theinvestors for each 30 day period or pro rata for any portion thereof duringwhich the registration statement should have been effective.

Pursuant to the PurchaseAgreement, we are required to use the net proceeds from the Private Placementsolely to fund the development of our TPI 287 compound in accordance with abudget for calendar years 2006 and 2007 that was adopted by our Board ofDirectors prior to the closing of the Private Placement. Any amendment orvariance with respect to such aspect of the budget will require the priorwritten approval of a majority of the independent members of the Board ofDirectors.

**Research and Development**

Our current business is focused onresearch and development of proprietary therapies for the treatment ofcancer. In 2005and 2004, we were also engaged in development of genomic technologies. In 2003and 2002, we were engaged in research and development related to our paclitaxelbusiness. Costs relating to genomic technologies, excluding the Huntington’sDisease program, and the paclitaxel business, are aggregated in discontinuedoperations. During the last three fiscal years, we have incurred the followingexpenses related to research and development projects (in thousands):

| ** **                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Oncology                   |       | $        | 10,476     |     | $          | 9,818    |       | $ | 12,474 |   |
| Huntington’s  Disease |       | (87      | )          | 812      |       | 1,030    |       |
| Discontinued  operations   |       | 59       |       | 393      |       | 4,242    |       |
|                       |       | $        | 10,448     |     | $          | 11,023   |       | $ | 17,746 |   |

 

Researchand development, which includes the cost of our clinical programs, willcontinue to be the most significant expense of our business for the foreseeablefuture. Our research and development activity is subject to change as wedevelop a better understanding of our projects and their prospects. We filed anoncology IND application in December 2004 and were cleared by the FDA in January 2005to proceed into clinical trials. We commenced Phase I clinical trials in May 2005with a Q7D dosing regimen. In January 2006, we commenced a second Phase Istudy with an alternative Q21D dosing regiment.  In October 2006, we reached themaximum tolerated dose (“MTD”) in our once every 21 day Phase I trial. Inaddition, we are continuing to recruit patients in our once every 7 day Phase Itrial.

We expect to begin treating patients in our firstPhase II trial of TPI 287 in prostate cancer in the first half of fiscal 2007. AdditionalPhase II studies in other indications will follow thereafter. Our Phase IItrials are designed to determine in what tumor type our compound might beadvanced for Phase III studies. As we recruit patients for these first Phase IIstudies, and others to follow, we will see an increase in our clinicalspending.

We cannot be sure that we will be able to achieve our goalsrelating to these programs. We also cannot estimate the cost necessary tocomplete the programs or the timing of material net cash inflows from theseprograms, if ever. Continued development of these programs is dependent uponraising 

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additional capital. We cannot becertain that we will be able to obtain capital on acceptable terms. We haveincluded a number of the risks and uncertainties associated with completing ourproduct development plans on schedule in the “Special Note RegardingForward-Looking Statements” and “Risk Factors” described in this report.

*Year Ended December 27, 2006 Compared to Year Ended December 28,2005*

*Research and Development Expense.**  *Researchand development expense from continuing operations for 2006 was $10.4 million,a decrease of $241,000 from the prior year. Oncology research and developmentexpenditures increased by $657,000 to $10.5 million for 2006, and Huntington’sDisease related spending decreased by $899,000 to ($87,000). The gain related tothe Huntington’s Disease program was a result of a reversal of laboratory feesowed to a research university as well as a reduction in work force.

Theincrease in oncology expense was due to an increase in compensation costs ($1.0million), increased clinical trial cost ($292,000) as well as increasedsupplies costs ($403,000), legal fees ($173,000) and insurance ($173,000),offset by reductions in outside manufacturing costs ($1.2 million) associatedwith preparing active pharmaceutical ingredient and drug product material forthe clinical trials of TPI 287.

Theincrease in compensation expense for 2006 was primarily related to the non-cashcompensation expense in the amount of $1.3 million for 2006 compared to $36,000for 2005, as a result of the implementation of SFAS 123(R) and themodifications of vested stock options. In addition, in the first quarter of2006, we recorded a $646,000 charge in connection with the termination of theemployment of the Company’s Executive Vice President and Secretary. Theseincreases were offset by lower salary expense due to staffing reductions in July 2005.

*General and Administrative Expense.**  *General and administrativeexpense for 2006 was $7.0 million, an increase of $1.3 million from the sameperiod in 2005. This increase was due to higher compensation related costs($1.5 million) and Board of Directors costs ($231,000) offset by lowerinsurance costs ($174,000), lower outside legal costs ($68,000), and loweroutside service costs related to investor relations ($133,000). The increase incompensation related expenses, including Board of Director costs, was primarilythe result of non-cash compensation expense in the amount of $2.0 million and $11,000for the years ended December 27, 2006 and December 28, 2005,respectively, as a result of the implementation of SFAS 123(R), offset by lowersalary expense due to the staffing reductions in July 2005.

*Interest and Other Income.**  *Interest and other incomefor 2006 of $1.3 million represented an increase of $565,000 compared to theprior year period. The increase was attributable to higher interest income dueto higher investment balances and higher effective interest rates earned in theyear ended December 27, 2006 compared to the prior year period.

*Interest and Other Expense.**  *Interest and other expensefor 2006 of $518,000 was $39,000 less than the prior year period as the resultof the repurchase of notes payable to TL Ventures in November of 2006.

*Impairment Charges.**  *Impairment charges for 2005of $1.1 million were primarily the result of a revaluation of ourinvestment in ChromaDex (see “Note 12. Investment in ChromaDex, Inc.”) in theamount of $963,000 and a reduction in value of our land (see “Note 5. OtherAssets,”) in the amount of $104,000. There were no impairment charges in 2006.

*Discontinued Operations.**  *Loss from discontinuedoperations was $59,000 for 2006 compared to a loss of $358,000 in the prioryear period. This decrease is primarily a result of there being no activity inthe Genomics Division in 2006, except for non-cash compensation expense in theamount of $57,000 primarily a result of the implementation of SFAS 123(R), ascompared to occupancy and patent related charges in the prior year period.

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*Year Ended December 28, 2005 Compared to Year Ended December 29,2004*

*Research and Development Expense.**  *Research and developmentexpense from continuing operations for 2005 was $10.6 million compared to $13.5million in 2004. The $2.9 million decrease was primarily due to our preclinicaldevelopment activities which consisted of lower outside toxicology expense($1.2 million) and lower contract manufacturing expense ($1.8 million).Reductions in compensation and consulting expense, which were mostly due to thereduction in operations in July 2005, were partially offset by the payoutof an employment agreement between the Company and a former founder of theCompany to his estate following his death in August 2005.

*General and Administrative Expense.**  *General and administrativeexpense from continuing operations for 2005 was $5.6 million, a decrease of$2.2 million from 2004. The decrease was primarily due to lower compensationexpense ($868,000) as a result of our reduction in operations in July 2005,lower legal expense ($352,000), lower insurance expense ($206,000), lowerconsulting and outside service expense ($467,000), as well as lower rent andoccupancy expense ($108,000).

*Interest and Other Income.**  *Interest and other income of$731,000 for 2005 increased by $37,000 from the prior year primarily due to again on sale of investments ($28,000).

*Interest and Other Expense.**  *Interest and other expensefor 2005 and 2004 was $557,000 and $947,000, respectively. The decrease is dueto a partial repayment of our obligations to TL Ventures in February 2005in connection with the restructuring of our notes owed to them.

*Impairment Charges.**  *Impairment charges for 2005were $1.1 million due to charges of $963,000 and $104,000 on the value of ourinvestment in ChromaDex and the value of our land, respectively. There where noimpairment charges from continuing operations in 2004.

*Discontinued Operations.**  *Loss from discontinuedoperations was $358,000 in 2005 compared to $2.6 million in the prioryear. The 2005 loss was due to the remaining activity related to the closure ofthe Genomics division. The loss in 2004 was primarily due to the closure of theGenomics division ($5.7 million), partially offset by $3.0 million ofproceeds from the settlement of litigation against Mylan Laboratories relatedto the paclitaxel business that we sold in 2003.

Researchand development expense included in discontinued operations was $393,000 in2005 compared to $4.2 million in 2004. The decrease in expense was due to theclosure of the Delaware facility, which resulted in 2005 costs consisting ofoccupancy charges associated with the closure and patent legal charges($185,000).

There were no general and administrative expenses includedin discontinued operations in 2005 or 2004.

**Liquidity and Capital Resources**

Our capital requirements for operations have been, and willcontinue to be, significant. As of December 27, 2006, we had a workingcapital balance of $20.2 million compared to a working capital balance of $11.6million at December 28, 2005. Through December 27, 2006, we havefunded our capital requirements primarily with the net proceeds of publicofferings of common stock, with private placements of equity securities, withthe exercise of warrants and options and with debt. We have also funded ourcapital requirements with the proceeds of the sale of our paclitaxel business(approximately $71.7 million) to Mayne Pharma (USA) Inc. (f/k/a FauldingPharmaceutical, Inc.), a subsidiary of Mayne Group Limited, on December 12,2003.

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*Reverse Stock Splitand Nasdaq Listing*

Our common stock is listedon the Nasdaq Capital Market. In order to maintain that listing, we mustsatisfy minimum financial and other requirements. On February 25, 2005, wereceived notice from the Nasdaq Stock Market, Inc. that our common stockhad not met the $1 per share minimum bid price requirement for 30 consecutivebusiness days and that, if we were unable to demonstrate compliance with thisrequirement during the applicable grace periods, our common stock would bedelisted after that time. On February 6, 2006, we effectuated a one forten reverse stock split to regain compliance with this listing requirement. Sincethe reverse stock split was effectuated, the closing bid price of our commonstock has remained above $1.00 in compliance with the minimum bid pricerequirement.

*Notes Payable*

On November 17, 2006, we repurchased two non-interestbearing promissory notes issued by us to TL Ventures V L.P. and TL Ventures VInterfund L.P. in February 2005 (the “Notes”). The Notes had anoutstanding principal balance of $3.0 million. The Notes were repurchased foran aggregate payment of $2.7 million in cash. The repurchase of the Notes didnot have a material impact on our financial results.

*Private Placement*

On April 6, 2006 we sold an aggregate of 12,750,000shares of common stock and warrants to purchase up to 12,750,000 shares ofcommon stock for a total of $25.5 million (excluding any proceeds thatmight be received upon exercise of the warrants) or approximately$23.8 million, net of the placement agent fees and other expenses,pursuant to a Purchase Agreement dated February 2, 2006 (the “PurchaseAgreement”). The purchase price was $2.00 per share of common stock, and eachwarrant to purchase common stock has an exercise price equal to $2.40 pershare. We may call up to 20% of the outstanding 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. Upto half of the warrants may be exercised on a cashless or net exercise basis.There can be no assurance, however, that we will receive funds from theexercise of warrants.

*Other*

In December of 2005, we terminated our technologylicense agreement with the University of Delaware and Thomas JeffersonUniversity relating to the use of proprietary oligonucleotides (DNA fragments)designed to precisely alter genes in humans, animals, plants, viruses andmicrobes. The license provided for research and patent funding commitments andpayments in common stock. As of December 28, 2005, we had issued 45,750shares of common stock under the license to the University of Delaware, 7,125shares to Thomas Jefferson University and 7,125 shares to The Samuel RobertsNoble Foundation, Inc., each of which had an ownership interest in thelicensed intellectual property. There were no issuances of common stockin 2006 under this agreement.

*Liquidity*

We have no revenue and we have incurred losses ofapproximately $16.7 million, $17.5 million and $24.2 million for the yearsended December 27, 2006, December 28, 2005 and December 29,2004, respectively. We have an accumulated deficit of $123.9 million as of December 27,2006. As of December 27, 2006, we had cash and short-term investmentstotaling approximately $22.5 million. Our capital requirements forresearch and development, including the cost of clinical trials, have been andwill continue to be significant.

We believe we have sufficient capital to fund ouroperations and capital expenditures for at least the next 12 months. Pharmaceutical developmentis a costly, risky and time intensive activity. To bring our 

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various programs to completion will require us to raiseadditional capital in the near future. We cannot assure you that we will beable to obtain additional capital on terms that will be acceptable to us or onany terms. In addition, we may seek to in-license or purchase new products ortechnologies. The cost and related capital expenditures of acquiring and developingsuch resources may be significant, and we may not be able to obtain capital forthe development of these products or technologies. See “Risk Factors” underItem 1A above.

*Working Capital and Cash Flow.*   Cash and cash equivalentsand short-term investments were $22.5 million at December 27, 2006and $14.1 million at December 28, 2005, an increase of $8.4 million. Forthe year ending December 27, 2006, the net cash used in operatingactivities was $11.8 million. Net cash used in investing activities was $8.7million for the year ended December 27, 2006 primarily due to netpurchases of investments. Net cash provided by financing operations during thefiscal 2006 year was $20.2 million due to financing that occurred during thesecond quarter offset by the payment of notes payable in conjunction with thepayoff of the TL Ventures debt.

Our cashused in operating activities was primarily used to advance our productdevelopment efforts and for general corporate purposes. The majority of ourfuture cash expenditures are expected to continue to be used to advance ourproduct development programs including clinical trials of our TPI 287 programas well as for general corporate purposes.

*Capital Expenditures.*   We spent $290,000during 2006 for capital projects. We expect capital expenditures to increaseduring 2007. The primary focus of capital spending during 2007 is expected tobe in support of our research and development activities as well as to fundadditional equipment related to an anticipated consolidation of ouradministrative and research and development facilities. We may seek additionalfinancing to fund our capital expenditures. We cannot assure you that we willbe able to obtain such financing on terms that are acceptable to us.

*Net Operating Loss Carryforwards.*   As of December 27,2006, we had approximately $113.7 million of net operating loss carryforwardsto offset future taxable income. The Internal Revenue Code of 1986, as amended(the “Code”), contains provisions that may limit  the tax net operating losses (“NOL”) and taxcredits available for use in any given year upon the occurence of certainevents, including significant changes in ownership interest. A change inownership of a company (as defined in Section 382 of the Code) within athree-year period results in an annual limitation on the company’s ability toutilize its NOL and credit carryforwards from tax periods prior to theownership change. As a result of the private placement of equity securities in April 2006,which is considered to be a significant change in ownership for tax purposes,under the Code, our NOL and tax credit carryforwards as of December 27,2006 are subject to such limitations.  Webelieve that we will not be able to utilize a significant portion of our NOLand tax credits.

*Business Development Activities.*   In the normal courseof our business, we investigate, evaluate, and discuss licensing relationships,acquisitions, and other business combination opportunities. In the event weenter into any such relationships or transactions, we may consider using availablecash, issuing equity securities or increasing our debt. Such transactions couldmaterially affect our capital structure.

**Critical Accounting Policies**

We haveidentified certain accounting policies as critical to our business operationsand the understanding of our results of operations. The impact and anyassociated risks related to these policies on our business operations arediscussed throughout this Item 7 where such policies affect our reported andexpected financial results. For a detailed discussion on the application ofthese and other accounting policies, see Note 1 in the Notes to ourConsolidated Financial Statements.

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*Long-Lived Assets Policy:*   In accordance withSFAS No. 144, “*Accounting for theImpairment of Long-Lived Assets*,” we review the carrying amount oflong-lived assets when facts and circumstances suggest they may be impaired. Ifthis review indicates long-lived assets will not be recoverable as determinedbased on the undiscounted cash flow estimated to be generated by these assets,we reduce the carrying amount of these long-lived assets to estimated fairvalue or discounted cash flow, as appropriate.

In thesecond quarter of 2005, we recognized an impairment on the value of land of$104,000 and in the third quarter recognized an impairment of $963,000 on thevalue of our investment in ChromaDex. In 2004, we recognized an impairment lossof $205,000 associated with the gene isolation and service business due to ourdecision to discontinue our efforts in that business and our inability to finda buyer for the assets. Also in 2004, as part of our preparation of thefinancial statements, we recognized an impairment loss of $1.2 million inconnection with the closure of our Genomics division. These 2004 impairmentsare included in discontinued operations. Such impairment losses were the onlyimpairment charges of long-lived assets recorded in the fiscal years ended December 28,2005 and December 29, 2004. There was no impairment of assets in 2006.

*Stock Based Compensation:*   On December 29,2005, we adopted SFAS No. 123 (revised 2004), “*Share-BasedPayment*,*”* (“SFAS 123(R)”)which requires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors including employeestock based on estimated fair values. SFAS 123(R) supersedes our previousaccounting under Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees”* (“APB 25”). Underthe provisions of APB 25 and its related interpretations, no compensationexpense was recognized with respect to the grant to employees of options topurchase our common stock when such stock options were granted with exerciseprices equal to or greater than market value of the underlying common stock onthe date of grant.

We adopted SFAS 123(R) using the modifiedprospective transition method, which requires the application of the accountingstandard as of December 29, 2005, the first day of our 2006 fiscal year.Our Consolidated Financial Statements as of and for the fiscal year ended December 27,2006 reflect the impact of SFAS 123(R). In accordance with the modifiedprospective transition method, our Consolidated Financial Statements for priorperiods have not been restated to reflect, and do not include, the impact ofSFAS 123(R).

Stock-based compensation expense recognized under SFAS123(R) for the fiscal year ended December 27, 2006 was $3.4 millionor $.26 basic and diluted loss per share from continuing operations. Includedin the stock-based compensation expense for the fiscal year ended December 27,2006, is a one time non-cash fixed period charge in the amount of $381,000, asa result of the modification of vested options on April 4, 2006 asdiscussed in Note 8. Equity Incentive Plans. The stock-based compensation expenseis calculated on a straight-line basis over the vesting periods of the relatedoptions. This charge had no impact on the Company’s reported cash flows.

*Investments:*   Short-terminvestments consist of commercial paper, investment grade government agency,auction rate, and corporate debt securities due within one year. Investmentswith maturities beyond one year may be classified as short-term based on theirhighly liquid nature and because such investments represent the investment ofcash that is available for current operations. The Company’s investments inauction rate securities are recorded at cost, which approximates fair marketvalue. In accordance with ARB 43, “*Restatement and Revisionof Accounting Research Bulletins*,*”* despite thelong-term nature of their stated contractual maturities, the Company has theability and the intent to liquidate investments in auction rate securitieswithin six months and therefore has classified these investments as short term.The Company’s investments are classified as available-for-sale, and arereported at market value as of the balance sheet date. Interest income isrecognized when earned. The unrealized gains and 

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losses are reported as aseparate component of stockholder’s equity until the security is sold or untila decline in fair value is determined to be other than temporary.

The Company’s investmentin ChromaDex, Inc. is accounted for under the cost method. Under the costmethod, the investment is carried at cost and adjusted only forother-than-temporary declines in fair value, distributions of earnings oradditional investments. See “Note 12. Investment in ChromaDex, Inc.,”for further information on ChromaDex.

**Future Contractual Obligations**

The table below summarizes ourfuture contractual obligations at December 27, 2006 (in thousands):

| ** **       | ** ** | ** ** | ** ** | **Less than** | ** ** | ** **         | ** ** | ** **         | ** ** | **After**        | ** ** |
|------------------|------------|------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------------|------------|
| ** **       | ** ** | **Total**  | ** ** | **1 year**    | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **5 years** | ** ** |
| Capital lease    |       | $          | 250        |               |       | $                  | 130        |               |       |             | $          | 120 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating leases |       | 162        |       |               | 151        |               |       |               | 11         |             |       |   | — |   |   |   | — |   |   |
| Total            |       | $          | 412        |               |       | $                  | 281        |               |       |             | $          | 131 |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

In February 2007, we leased 2,300 square feet ofoffice space in Roseland, New Jersey for research and development support.  The lease runs through December 31, 2008and requires monthly rental payments of $4,500.

We have employmentagreements with key employees. These employment agreements contain provisionsregarding the termination of employment including termination of employmentassociated with a change in control (as defined). These termination benefitsrange from 100% to 300% of the employee’s base salary for the prior 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 prior 12-month period.

**Impact of Recent Accounting Pronouncements**

On June 9, 2005, theFASB issued SFAS No. 154, “*Accounting Changes andError Corrections*.” SFAS No. 154 replaces APB Opinion No. 20,“*Accounting Changes*,” and SFAS No. 3,“*Reporting Accounting Changes in Interim FinancialStatements*,” and changes the requirements for the accounting for andreporting of a change in accounting principle. SFAS No. 154 applies to allvoluntary changes in accounting principle. It also applies to changes requiredby an accounting pronouncement in the unusual instance that the pronouncementdoes not include specific transition provisions. SFAS No. 154 must beadopted for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005. Early adoption is permitted foraccounting changes and corrections of errors made in fiscal years beginningafter the date SFAS No. 154 is issued. The adoption of SFAS No. 154did not have a material impact on our financial results.

In July 2006, theFinancial Accounting Standards Board issued FASB Interpretation 48,*“Accounting for Uncertainty in Income Taxes: aninterpretation of FASB Statement No. 109*.”  Interpretation 48, which clarifies Statement109,*“Accounting for Income Taxes*,”establishes the criterion that an individual tax position has to meet for someor all of the benefits of that position to be recognized in our financialstatements. On initial application, Interpretation 48 will be applied to alltax positions for which the statute of limitations remains open. Only taxpositions that meet the more-likely-than-not recognition threshold at theadoption date will be recognized or continue to be recognized. The cumulativeeffect of applying Interpretation 48 will be reported as an adjustment toretained earnings at the beginning of the period in which it is adopted. Interpretation48 is effective for fiscal years beginning after December 15, 2006, andwill be adopted by the Company on December 28, 2006. The Company currentlydoes not believe that the adoption of Interpretation 48 will have a significanteffect on its financial statements.

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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. We willbe required to adopt SFAS No. 157 in the first quarter of fiscal year2008. Management has not yet determined the impact of adopting this statement.

**Item 7AQuantitative and 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 decline if interest rates decline. Our investments are subjectto a loss of principal with an increase in interest rates if sold prior totheir maturity. However, due to the short-term nature of the majority of ourinvestments, the high credit quality of our portfolio and our ability to holdour investments until maturity, an immediate change in interest rates would nothave a material impact on our financial position, results of operations or cashflows.

**Item 8Financial Statements and Supplementary Data**

The information required by this itembegins at Page F-1.

**Item 9Changes in and Disagreements with Accountants on Accounting and FinancialDisclosures**

None.

**Item 9AControls and Procedures**

The Company maintains asystem of disclosure controls and procedures. The term “disclosure controls andprocedures,” as defined by regulations of the SEC, means controls and otherprocedures that are designed to ensure that information required to bedisclosed in the reports that the Company files or submits to the SEC under theSecurities Exchange Act of 1934, as amended (“the Act”), is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by the Company in the reports that it files or submitsto the SEC under the Act is accumulated and communicated to the Company’smanagement, including its Principal Executive Officer and its PrincipalFinancial Officer, as appropriate to allow timely decisions to be maderegarding required disclosure. The Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Officer, of the effectivenessof the design and operation of the Company’s disclosure controls and proceduresas of December 27, 2006. Based upon that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were not effective as of December 27,2006 because of the material weakness described below.

As of December 27,2006, we determined that we did not maintain effective control over thecompleteness and accuracy of the supporting schedule of weighted average sharesoutstanding. Specifically, our supervisory review and approval controls did notdetect a computational error in the weighted average shares outstandingcalculation. This control deficiency made it necessary to restate the ConsolidatedStatements of Operations included in the Form 10-Q/A for the thirdquarter ended September 27, 2006. Management concluded that this controldeficiency constitutes a material weakness in 

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internalcontrol over financial reporting. A material weakness is a control deficiency,or combination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements, including the related disclosures, will not be prevented or detected.Management has implemented additional controls and procedures relating to thepreparation of the supporting schedule of weighted average shares outstanding,including formalization of policies and procedures regarding the preparationand supervisory review of the condensed consolidating financial information.Such policies and procedures include the implementation of check totals andanalytical analyses to increase accuracy, as well as two levels of review ofthe supporting schedules from which it was derived, which management believeswill remediate the material weakness described above.

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.

**Item 9BOther Information**

None.

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**Part III**

All items in Part III areincorporated herein by reference as indicated below to our definitive proxystatement for our 2007 annual meeting of stockholders anticipated to be held June 28,2007, which will be filed with the SEC, except for information relating toexecutive officers under the heading “Executive Officers of the Registrant,”which can be found in Part I following Item 4.

**Item 10Directors, Executive Officers and Corporate Governance**

The information required by Item 10 isincorporated herein by reference to the information contained under theheadings “Election of Directors” and “Executive Officers and Key Employees” and“Section 16(a) Beneficial Ownership Reporting Compliance” as setforth in our definitive proxy statement for our 2007 annual meeting ofstockholders.

**Item 11** Executive Compensation

The information required by Item 11relating to our directors is incorporated herein by reference to theinformation contained under the heading “Compensation of Directors” and theinformation relating to our executive officers is incorporated by reference tothe information under the heading “Compensation of Executive Officers” as setforth in our definitive proxy statement for our 2007 annual meeting ofstockholders.

**Item 12Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters**

The information required by Item 12 isincorporated herein by reference to the information contained under theheadings “Compensation of Executive Officers—Securities Authorized for Issuanceunder Equity Compensation Plans” and  “SecurityOwnership of Certain Beneficial Owners and Management” as set forth in ourdefinitive proxy statement for our 2007 annual meeting of stockholders.

**Item13**Certain Relationships and Related Transactions, and DirectorIndependence

The information required by Item 13 isincorporated herein by reference to the information contained under the heading“Certain Relationships and Related Transactions” as set forth in our definitiveproxy statement for our 2007 annual meeting of stockholders.

**Item 14Principal Accountant Fees and Services**

The information required by Item 14 is incorporated herein by reference tothe information contained under the heading “Ratification of Selection of IndependentRegistered Public Accounting Firm” as set forth in our definitive proxystatement for our 2007 annual meeting of stockholders.

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**Part IV**

**Item 15Exhibits and Financial Statement Schedules**

**Financial Statements**

The Financial Statement Index is on Page F-1.

**Financial Statement Schedules**

All schedules are omitted because they are not applicable or not requiredor because the information is included in the consolidated financial statementsor the notes thereto.

| Exhibit    | ** ** | ** **                                                                                                                                     |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description of Exhibit**                                                                                                                     |
| 3.1        |       | Second Amended and Restated Certificate of  Incorporation of the Company, as amended February 3, 2006(1)                                  |
| 3.2        |       | Bylaws of the Company as  amended through April 4, 2006*                                                                                  |
| 3.3        |       | Certificate of  Designation of Series C Junior Participating Preferred Stock(3)                                                           |
| 4.1        |       | Common Stock  Certificate(1)                                                                                                                   |
| 4.2        |       | Restated Rights  Agreement dated December 12, 2006 between the Company and American Stock  Transfer and Trust Company, as Rights Agent(3) |
| 4.3        |       | The Certificate of  Incorporation and Bylaws of the Company are included as Exhibits 3.1 - 3.2                                                 |
| 10.1**     |       | Company’s Amended and  Restated 1994 Long-Term Performance Incentive Plan, as amended through  March 4, 2002(2)                      |
| 10.2       |       | Company’s Amended and  Restated 1998 Stock Incentive Plan, as amended through October 15,  2002(2)                                   |
| 10.3**     |       | Company’s 2004 Equity  Incentive Plan, as amended and restated effective June 10, 2005(4)                                            |
| 10.4**     |       | Form of Stock Option  Agreement for certain options granted under the Company’s 2004 Equity  Incentive Plan(8)                       |
| 10.5**     |       | Company’s 2004 Non  Employee Director’s Stock Option Plan(5)                                                                         |
| 10.6**     |       | Form of Stock  Option Agreement for options granted under the Company’s 2004 Non-Employee  Directors’ Stock Option Plan(8)      |
| 10.7**     |       | Company’s 2006 Equity  Incentive Plan(13)                                                                                                 |
| 10.8**     |       | Form of Stock  Option Agreement for options granted under the Company’s 2006 Equity  Incentive Plan(14)                              |
| 10.9**     |       | Employment Agreement  effective October 1, 2001 between the Company and Leonard Shaykin(6)                                                |
| 10.10**    |       | Employment Agreement  effective October 1, 2001 between the Company and Patricia Pilia(6)                                                 |
| 10.11**    |       | Employment Agreement  effective October 1, 2001 between the Company and Gordon Link(6)                                                    |
| 10.12**    |       | Employment Agreement  effective October 1, 2001 between the Company and Kai Larson(6)                                                     |
| 10.13**    |       | Employment Agreement  effective October 28, 2005 between the Company and Martin Batt(4)                                                   |

37

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| 10.14** |   | Employment Agreement  effective January 2, 2007 between the Company and Donald H. Picker  Ph.D.*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.15** |   | Form of waiver  agreement signed by Patricia A. Pilia, Gordon Link and Kai P. Larson on  September 10, 2003 and by Leonard P. Shaykin on September 12, 2003  (together with Schedule required by Instruction 2 to Item 601 Regulation  S-K)(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10.16** |   | Settlement Agreement  dated March 22, 2006 between the Company and Patricia A. Pilia(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10.17** |   | Amendment to Employment  Agreement executed by the Company and Patricia Pilia dated March 22,  2006(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
| 10.18** |   | Form of Amendment  to Employment Agreement executed by the Company and Leonard Shaykin, Gordon  Link and Kai Larson dated February 27, 2006 (together with Schedule  required by Instruction 2 to Item 601 of Regulation S-K)(11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 10.19   |   | Form of Director  and Officer Indemnification Agreement signed by the Company and each of  Martin M. Batt, George Gould, Esq., Arthur Hull Hayes, Jr., M.D.,  Kai Larson, Gordon H. Link, Jr., Patricia A. Pilia, Ph.D., The Honorable  Richard N. Perle, Robert E. Pollack, Ph.D., and Leonard P. Shaykin on the  dates set forth on the Schedule previously filed and incorporated herein by  reference, which Schedule is amended to include the Director and Officer  Indemnification Agreement signed by Stephen Carter, M.D. on March 7,  2004 and Elliot Maza on December 14, 2004(7)                                                                                                                                                                                                                                                                                                                                               |   |
| 10.20   |   | Purchase Agreement,  dated as of February 2, 2006, by and among Tapestry  Pharmaceuticals, Inc., Special Situations Cayman Fund, L.P., Special  Situations Fund III, L.P., Special Situations Fund III QP, L.P., Special  Situations Life Sciences Fund, L.P., Special Situations Private Equity Fund,  L.P., Tang Capital Partners, LP, Baker Biotech Fund II (Z), L.P., Baker  Biotech Fund III, L.P., Baker Biotech Fund III (Z), L.P., Baker Bros.  Investments II, L.P., 14159, L.P., Biotechnology Value Fund, L.P., Biotechnology  Value Fund II, L.P., BVF Investments, L.L.C., Investment 10, L.L.C., Fort  Mason Master, L.P., Fort Mason Partners, L.P., Capital Ventures  International, Merlin BioMed Long Term Appreciation, LP, Merlin BioMed  Offshore Master Fund, Versant Capital Management LLC, Xmark JV Investment  Partners, LLC, Xmark Opportunity Fund, L.P., Xmark Opportunity Fund, Ltd. and  the other parties signatory thereto(1) |
| 10.21   |   | Registration Rights  Agreement, dated April 5, 2006 entered into by and among Tapestry Pharmaceuticals, Inc.  and the Purchasers(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.22   |   | Form of Warrant,  dated April 5, 2006 between the Company and the Purchasers (together  with schedule prepared in accordance with Instruction 2 to Item 601 of  Regulation S-K)(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.23** |   | Salaries and Bonuses of  Named Executive Officers*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.24** |   | Compensation of  Directors(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.1    |   | List of Subsidiaries(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 23.1    |   | Consent of Grant  Thornton LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 24.1    |   | Power of Attorney*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|         |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |        |  |  |

38

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| 31.2  |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934, as amended* |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.1# |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (18 U.S.C. Section 1350)*    |
| 32.2# |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. Section 1350)*    |   |
|       |        |                                                                                                                                                  |  |  |  |

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                 * Filedherewith

          ** Amanagement compensation plan

              # Thiscertification shall not be deemed “filed” for purposes of Section 18 ofthe Exchange Act, or otherwise subject to liability pursuant to that section.Such certification shall not be deemed to be incorporated by reference into anyfiling under the Securities Act or the Exchange Act, except to the extent thatthe Company specifically incorporates it by reference

       (1) Incorporatedherein by reference to the Company’s Current Report on Form 8-K dated February 2, 2006(File No. 0-24320)

       (2) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003 (File No. 0-24320)

       (3) Incorporatedherein by reference to the Company’s Current Report on Form 8-K dated December 14, 2006(File No. 0-24320)

       (4) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K for the year endedDecember 28, 2005 (File No. 0-24320)

       (5) Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Q for the period endingJune 30, 2004 (File No. 0-24320)

       (6) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001 (File No. 0-24320)

       (7) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K/A for the year endedDecember 31, 2002, filed on August 8, 2003 (File No. 0-24320)

       (8) Incorporatedherein by reference to the Company’s Current Report on Form 8-K dated December 14, 2004(File No. 0-24320)

       (9) Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Q for the period endingMarch 30, 2005 (File No. 0-24320)

(10) Incorporatedherein by reference to the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2001 (File No. 0-24320)

(11) Incorporatedherein by reference to the Company’s Current Report on Form 8-K dated February 23, 2006(File No. 0-24320)

(12) Incorporatedherein by reference to the Company’s Current Report on Form 8-K dated March 22, 2006 (FileNo. 0-24320)

(13) Incorporatedherein by reference to the Company’s Current Report on Form 8-K dated April 4, 2006 (FileNo. 0-24320)

(14) Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Qfor the period ending March 29, 2006 (File No. 0-24320)

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**Signatures**

Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934,the registrant has duly caused this report on Form 10-K to be signedon its behalf by the undersigned, thereunto duly authorized.

| TAPESTRY PHARMACEUTICALS, INC. |                                  |   |
|-------------------------------------|---------------------------------------|--------|
|                                |                                  |   |   |
| By:                                 | /s/ LEONARD P.  SHAYKIN               |   | March 6, 2007 |
|                                | Leonard P. Shaykin                    |   |   |
| * *                            | *Chairman of the Board of Directors,* |   |   |
| * *                            | *Chief Executive Officer*             |   |   |

 

Pursuant to the requirements of Section 13 of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

| /s/ LEONARD  P. SHAYKIN         |                          | Chairman of the Board of Directors, |   | March 6, 2007 |
|---------------------------------|-------------------------------|-------------------------------------|--------|-------------------------|
| Leonard P. Shaykin              |                          | Chief Executive Officer             |   |                    |
|                            |                          | (Principal Executive Officer)       |   |                    |
| /s/ GORDON LINK                 |                          | Senior Vice President,              |   | March 6,  2007     |
| Gordon Link                     |                          | Chief Financial Officer             |   |                    |
|                            |                          | (Principal Financial Officer)       |   |                    |
| /s/ MATTHEW J. MAJOROS          |                          | Corporate Controller                |   | March 6,  2007     |
| Matthew J. Majoros              |                          | (Principal Accounting Officer)      |   |                    |
| *                               |                          | Director                            |   | March 6,  2007     |
| Stephen K. Carter, M.D.         |                          |                                |   |                    |
| *                               |                          | Director                            |   | March 6,  2007     |
| George M. Gould                 |                          |                                |   |                    |
| *                               |                          | Director                            |   | March 6,  2007     |
| Arthur H. Hayes, Jr., M.D. |                          |                                |   |                    |
| *                               |                          | Director                            |   | March 6,  2007     |
| Elliot M. Maza                  |                          |                                |   |                    |
| *                               |                          | Director                            |   | March 6,  2007     |
| The Honorable Richard N. Perle  |                          |                                |   |                    |
| *                               |                          | Director                            |   | March 6,  2007     |
| Patricia A. Pilia, Ph.D.        |                          |                                |   |                    |
| *                               |                          | Director                            |   | March 6,  2007     |
| Robert E. Pollack, Ph.D.        |                          |                                |   |                    |
| *By                             | /s/ GORDON LINK               |                                |   |                    |   |
|                            | Gordon Link                   |                                |   |                    |   |
|                            | pursuant to power of attorney |                                |   |                    |   |

 

40

----

**Tapestry Pharmaceuticals, Inc. and SubsidiariesFinancial StatementsIndex to Consolidated Financial Statements**

|                                                                                                                                                                             | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                                                    |       |     | F-2        |   |   |
| Audited  Consolidated Financial Statements:                                                                                                                                 |       |     |       |   |   |
| Consolidated Balance Sheets as of December 27,  2006 and December 28, 2005                                                                                        |       |     | F-3        |   |   |
| Consolidated Statements of Operations for the years  ended December 27, 2006, December 28, 2005 and December 29,  2004                                       |       |     | F-4        |   |   |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Loss for the years ended December 27, 2006,  December 28, 2005 and December 29, 2004 |       |     | F-5        |   |   |
| Consolidated Statements of Cash Flows for the years  ended December 27, 2006, December 28, 2005 and December 29,  2004                                       |       |     | F-6        |   |   |
| Notes to Consolidated Financial Statements                                                                                                                                  |       |     | F-7        |   |   |

 

F-1

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

Board of Directors andStockholders    ofTapestry Pharmaceuticals, Inc.

Wehave audited the accompanying consolidated balance sheets of TapestryPharmaceuticals, Inc. and subsidiaries (a Delaware corporation) (collectively,the “Company”) as of December 27, 2006 and December 28, 2005, and therelated consolidated statements of operations, stockholders’ equity and comprehensiveloss, and cash flows for each of the three years in the period ended December 27, 2006.These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  TheCompany is not required to have, nor were we engaged to perform an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit proceduresthat are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internalcontrol over financial reporting. Accordingly, we express no such opinion. Anaudit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of the Company as of December 27,2006 and December 28, 2005, and the results of its operations and itscash flows for each of the three years in the period ended December 27,2006, in conformity with accounting principles generally accepted in the UnitedStates of America.

Asdiscussed in Note 1 to the consolidated financial statements, the Companyadopted the Statement of Financial Accounting Standards No. 123(R), *Share-Based Payment*, on a modified prospective basis as of December 27,2006.

/s/ Grant Thornton LLP

Denver, ColoradoFebruary 23, 2007

F-2

----

**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Balance SheetsAs of December 27, 2006 and December 28, 2005(In thousands, except share data)**

| ** **                                                                                                                                                                                 | ** ** | **December 27,** | ** ** | **December 28,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                                 | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                            |       |                  |       |                  |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                  |       |                  | $          | 180                   |       |   |   | $ | 534 |   |   |
| Short-term investments                                                                                                                                                                     |       |                  | 22,277     |                  |       |   | 13,552 |   |   |
| Prepaid expense and other current assets                                                                                                                                                   |       |                  | 335        |                  |       |   | 646 |   |   |
| Total current  assets                                                                                                                                                                      |       |                  | 22,792     |                  |       |   | 14,732 |   |   |
| Property, plant and equipment, net                                                                                                                                                         |       |                  | 681        |                  |       |   | 608 |   |   |
| Investment in  ChromaDex, Inc.                                                                                                                                                        |       |                  | 459        |                  |       |   | 451 |   |   |
| Other assets                                                                                                                                                                               |       |                  | 674        |                  |       |   | 683 |   |   |
| Total assets                                                                                                                                                                               |       |                  | $          | 24,606                |       |   |   | $ | 16,474 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                              |       |                  |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                       |       |                  |       |                  |       |   |   |   |   |
| Accounts payable and accrued liabilities                                                                                                                                                   |       |                  | $          | 904                   |       |   |   | $ | 1,024 |   |   |
| Accrued payroll and payroll taxes                                                                                                                                                          |       |                  | 1,566      |                  |       |   | 1,241 |   |   |
| Current portion of long-term debt                                                                                                                                                          |       |                  | 115        |                  |       |   | 840 |   |   |
| Total current  liabilities                                                                                                                                                                 |       |                  | 2,585      |                  |       |   | 3,105 |   |   |
| Long-term debt, excluding current portion                                                                                                                                                  |       |                  | 112        |                  |       |   | 2,483 |   |   |
| 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; 16,374,395 and 3,480,704 shares issued and outstanding at  December 27, 2006 and December 28, 2005, respectively |       |                  | 123        |                  |       |   | 26 |   |   |
| Additional paid in capital                                                                                                                                                                 |       |                  | 145,700    |                  |       |   | 118,278 |   |   |
| Deferred compensation                                                                                                                                                                      |       |                  | —     |                  |       |   | (114 | ) |   |
| Accumulated deficit                                                                                                                                                                        |       |                  | (123,914   | )                     |       |   | (107,262 | ) |   |
| Accumulated other comprehensive loss                                                                                                                                                       |       |                  | —     |                  |       |   | (42 | ) |   |
| Total stockholders’  equity                                                                                                                                                           |       |                  | 21,909     |                  |       |   | 10,886 |   |   |
| Total liabilities and  stockholders’ equity                                                                                                                                           |       |                  | $          | 24,606                |       |   |   | $ | 16,474 |   |   |

 

See accompanying notes to Consolidated Financial Statements.

F-3

----

**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements of OperationsYears Ended December 27, 2006, December 28, 2005 andDecember 29, 2004(In thousands, except per share data)**

| ** **                                                     | ** ** | **2006**                                                      | ** ** | **2005**                 | ** ** | **2004**                 | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Operating expenses:                                            |       |                                                          |       |                     |       |                     |       |
| Research and development                                       |       | $ 10,389                                                 |       | $ 10,630            |       | $ 13,504            |       |
| General and administrative                                     |       | 6,974                                                         |       | 5,628                    |       | 7,794                    |       |
| Operating loss                                                 |       | 17,363                                                        |       | 16,258                   |       | 21,298                   |       |
| Other income  (expense):                                       |       |                                                          |       |                     |       |                     |       |
| Interest and other income                                      |       | 1,296                                                         |       | 731                      |       | 694                      |       |
| Interest and other expense                                     |       | (518                                                          | )          | (557                     | )          | (947                     | )          |
| Impairment charges                                             |       | —                                                        |       | (1,067                   | )          | —                   |       |
| Loss from  continuing operations before taxes                  |       | (16,585                                                       | )          | (17,151                  | )          | (21,551                  | )          |
| Provision for income taxes                                     |       | (8                                                            | )          | (29                      | )          | (4                       | )          |
| Loss from  continuing operations                               |       | (16,593                                                       | )          | (17,180                  | )          | (21,555                  | )          |
| Loss from discontinued operations                              |       | (59                                                           | )          | (358                     | )          | (2,619                   | )          |
| Net loss                                                       |       | $ (16,652                                                | )          | $ (17,538           | )          | $ (24,174           | )          |
| Basic and diluted loss per share from continuing  operations   |       | $   (1.29                                      | )          | $   (5.04 | )          | $   (6.58 | )          |
| Basic and diluted  loss per share from discontinued operations |       | $         — |       | $   (0.11 | )          | $   (0.80 | )          |
| Basic and diluted  loss per share                              |       | $   (1.29                                      | )          | $   (5.15 | )          | $   (7.38 | )          |
| Basic and diluted  weighted average shares outstanding         |       | 12,909                                                        |       | 3,408                    |       | 3,274                    |       |

 

 

See accompanying notes to Consolidated Financial Statements.

F-4

----

**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements of Stockholders’ Equity and Comprehensive LossYears Ended December 27, 2006, December 28, 2005 andDecember 29, 2004(In thousands, except share data)**

| ** **                                                                                                      | ** ** | **Number of** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|----------------|------------|------------------|------------|-----------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                                      | ** ** | **Common**         | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **       | ** ** | ** **      | ** ** | **Other**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                                                      | ** ** | **Shares**         | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Deferred**     | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                                                                      | ** ** | **Issued**         | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Compensation** | ** ** | **Deficit**     | ** ** | **Loss**          | ** ** | **Stock**    | ** ** | **Total**  | ** ** |
| Balance at  December 31, 2003                                                                              |       | 3,095,395          |       |       | $          | 24             |       |             | $          | 111,705         |       |              | $          | —       |       |       |       | $ | (65,550 | ) |   |   | $ | — |   |   |   | $ | (181 | ) |   | $ | 45,998 |   |
| Issuance of common  stock in connection with private placement, net of issuance costs                           |       | 200,000            |       |       | 1          |           |       | 4,836            |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 4,837 |   |
| Contributions of  33,564 shares, including 5,431 from treasury, to the ESOP                                     |       | 28,133             |       |       | —     |           |       | 610              |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | 181 |   |   | 791 |   |
| Issuance of common  stock for in-licensing of genomics technology                                               |       | 10,000             |       |       | —     |           |       | 91               |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 91 |   |
| Issuance of common  stock for payment of interest expense                                                       |       | 6,143              |       |       | —     |           |       | 161              |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 161 |   |
| Compensation  expense related to options issued to consultants                                                  |       | —             |       |       | —     |           |       | 141              |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 141 |   |
| Exercise of stock  options and warrants                                                                         |       | 3,869              |       |       | —     |           |       | 36               |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 36 |   |
| Comprehensive income/(loss)                                                                                     |       |               |       |       |       |           |       |             |       |            |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on  investments                                                                                 |       | —             |       |       | —     |           |       | —           |       |            | —     |              |       |         | —     |       |       |   | (101 | ) |   |   | — |   |   | (101 | ) |
| Net loss                                                                                                        |       | —             |       |       | —     |           |       | —           |       |            | —     |              |       |         | (24,174    | )          |       |   | — |   |   |   | — |   |   | (24,174 | ) |
| Comprehensive loss                                                                                              |       |               |       |       |       |           |       |             |       |            |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   | (24,275 | ) |
| Balance at  December 29, 2004                                                                              |       | 3,343,540          |       |       | 25         |           |       | 117,580          |       |            | —     |              |       |         | (89,724    | )          |       |   | (101 | ) |   |   | — |   |   | 27,780 |   |
| Contributions of  75,000 shares at $5.60 per share to the ESOP                                                  |       | 75,000             |       |       | 1          |           |       | 419              |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 420 |   |
| Issuance of common  stock for in-licensing of genomics technology                                               |       | 10,000             |       |       | —     |           |       | 30               |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 30 |   |
| Compensation  expense related to options issued to consultants                                                  |       | —             |       |       | —     |           |       | 50               |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 50 |   |
| Issuance of common  stock for payment of services                                                               |       | 4,730              |       |       | —     |           |       | 17               |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 17 |   |
| Issuance of  restricted stock for compensation                                                                  |       | 42,075             |       |       | —     |           |       | 151              |       |            | (151       | )                 |       |         | —     |       |       |   | — |   |   |   | — |   |   | — |   |
| Amortization of  restricted stock grant                                                                         |       | —             |       |       | —     |           |       | —           |       |            | 37         |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 37 |   |
| Exercise of stock  options and warrants                                                                         |       | 5,359              |       |       | —     |           |       | 31               |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 31 |   |
| Comprehensive income/(loss)                                                                                     |       |               |       |       |       |           |       |             |       |            |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on  investments                                                                                 |       | —             |       |       | —     |           |       | —           |       |            | —     |              |       |         | —     |       |       |   | 59 |   |   |   | — |   |   | 59 |   |
| Net loss                                                                                                        |       | —             |       |       | —     |           |       | —           |       |            | —     |              |       |         | (17,538    | )          |       |   | — |   |   |   | — |   |   | (17,538 | ) |
| Comprehensive loss                                                                                              |       |               |       |       |       |           |       |             |       |            |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   | (17,479 | ) |
| Balance at  December 28, 2005                                                                              |       | 3,480,704          |       |       | 26         |           |       | 118,278          |       |            | (114       | )                 |       |         | (107,262   | )          |       |   | (42 | ) |   |   | — |   |   | 10,886 |   |
| Contribution of  100,000 shares at $3.88 per share and 2,479 shares at $1.87 per share to the  ESOP             |       | 102,479            |       |       | 1          |           |       | 392              |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 393 |   |
| Compensation  expense related to options                                                                        |       | —             |       |       | —     |           |       | 3,382            |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 3,382 |   |
| Amortization of  restricted stock grants                                                                        |       | —             |       |       | —     |           |       | 94               |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 94 |   |
| Issuance of common  stock in connection with private placement, net of issuance costs                           |       | 12,750,000         |       |       | 96         |           |       | 23,655           |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 23,751 |   |
| Reclassification  of deferred compensation to additional paid-in capital upon adoption of SFAS  No. 123(R) |       | —             |       |       | —     |           |       | (114             | )          |            | 114        |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | — |   |
| Issuance of  restricted stock for compensation                                                                  |       | 10,000             |       |       | —     |           |       | —           |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | — |   |
| Cancellation of  restricted stock                                                                               |       | (3,517             | )          |       | —     |           |       | (5               | )          |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | (5 | ) |
| Issuance of common  stock for payment of services                                                               |       | 34,729             |       |       | —     |           |       | 18               |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | 18 |   |
| Comprehensive income/(loss)                                                                                     |       |               |       |       |       |           |       |             |       |            |       |              |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on  investments                                                                                 |       | —             |       |       | —     |           |       | —           |       |            | —     |              |       |         | —     |       |       |   | 42 |   |   |   | — |   |   | 42 |   |
| Net loss                                                                                                        |       | —             |       |       | —     |           |       | —           |       |            | —     |              |       |         | (16,652    | )          |       |   | — |   |   |   | — |   |   | (16,652 | ) |
| Comprehensive loss                                                                                              |       | —             |       |       | —     |           |       | —           |       |            | —     |              |       |         | —     |       |       |   | — |   |   |   | — |   |   | (16,610 | ) |
| Balance at  December 27, 2006                                                                              |       | 16,374,395         |       |       | $          | 123            |       |             | $          | 145,700         |       |              | $          | —       |       |       |       | $ | (123,914 | ) |   |   | $ | — |   |   |   | $ | — |   |   | $ | 21,909 |   |

 

See accompanying notes to Consolidated Financial Statements.

F-5

----

**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements of Cash FlowsYears Ended December 27, 2006, December 28, 2005 andDecember 29, 2004**

| ** **                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                              |       |     |       |     |       |     |       |
| Net loss                                                                           |       | $        | (16,652    | )        | $          | (17,538  | )          | $ | (24,174 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities:       |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                     |       | 215      |       | 263      |       | 475      |       |
| Amortization of debt  issue costs and debt discount                                |       | 479      |       | 579      |       | 630      |       |
| Amortization of  investment (discount)/premium                                     |       | (329     | )          | 240      |       | 257      |       |
| License fee paid with  common stock                                                |       | —   |       | 30       |       | 8        |       |
| Compensation paid with  common stock and options                                   |       | 3,534    |       | 105      |       | 141      |       |
| Retirement contributions  paid with common stock                                   |       | 393      |       | 420      |       | 791      |       |
| Interest expense paid  with common stock                                           |       | —   |       | —   |       | 30       |       |
| Impairment charges                                                                 |       | —   |       | 1,067    |       | —   |       |
| (Gain)/loss on sale of  investments                                                |       | 38       |       | (27      | )          | —   |       |
| Investment in  ChromaDex, Inc.                                                |       | (8       | )          | —   |       | —   |       |
| Loss on disposal of  assets                                                        |       | —   |       | 38       |       | —   |       |
| Asset writedown  associated with discontinued operations                           |       | —   |       | —   |       | 1,440    |       |
| Changes in operating assets and liabilities:                                       |       |     |       |     |       |     |       |
| Accounts receivable                                                                |       | —   |       | —   |       | 1,495    |       |
| Prepaid expense and other  assets                                                  |       | 320      |       | (64      | )          | 247      |       |
| Accounts payable and  accrued liabilities                                          |       | (164     | )          | (2,095   | )          | (87      | )          |
| Accrued payroll and  payroll taxes                                                 |       | 324      |       | (776     | )          | (589     | )          |
| Net cash used in  operating activities                                             |       | (11,850  | )          | (17,758  | )          | (19,336  | )          |
| Investing activities:                                                              |       |     |       |     |       |     |       |
| Additions to property,  plant and equipment                                        |       | (290     | )          | (240     | )          | (161     | )          |
| Proceeds from the sale of  assets                                                  |       | 2        |       | 15       |       | —   |       |
| Proceeds from sale of  assets held for sale                                        |       | —   |       | 104      |       | —   |       |
| Purchases of investments                                                           |       | (77,178  | )          | (26,179  | )          | (79,429  | )          |
| Proceeds from sale of  investments                                                 |       | 68,786   |       | 46,481   |       | 93,563   |       |
| Net cash (used in)  provided by investing activities                               |       | (8,680   | )          | 20,181   |       | 13,973   |       |
| Financing activities:                                                              |       |     |       |     |       |     |       |
| Proceeds from the sale of  common stock, net of issuance costs                     |       | 23,751   |       | —   |       | 4,837    |       |
| Proceeds from notes  payable                                                       |       | 289      |       | —   |       | —   |       |
| Payments of notes payable                                                          |       | (3,864   | )          | (3,633   | )          | (78      | )          |
| Proceeds from the  exercise of common stock options and warrants                   |       | —   |       | 31       |       | 36       |       |
| Net cash provided  by (used in) financing activities                               |       | 20,176   |       | (3,602   | )          | 4,795    |       |
| Net decrease in  cash and cash equivalents                                         |       | (354     | )          | (1,179   | )          | (568     | )          |
| Cash and cash  equivalents at beginning of period                                  |       | 534      |       | 1,713    |       | 2,281    |       |
| Cash and cash  equivalents at end of period                                        |       | $        | 180        |     | $          | 534      |       | $ | 1,713 |   |
| Supplemental disclosure of cash flow information:                                  |       |     |       |     |       |     |       |
| Cash paid for interest                                                             |       | $        | —     |     | $          | 137      |       | $ | 168 |   |
| Cash paid for income  taxes                                                        |       | —   |       | —   |       | 650      |       |
| Supplemental schedule of non-cash investing and  financing activities:             |       |     |       |     |       |     |       |
| Receipt of 46,503 shares  of ChromaDex, Inc. common stock                     |       | $        | 8          |     | $          | —   |       | $ | — |   |
| Issuance of 42,075 shares  of common stock for compensation                        |       | —   |       | 114      |       | —   |       |
| Issuance of 6,143 shares  of common stock for payment of accrued interest          |       | —   |       | —   |       | 131      |       |
| Issuance of 10,000 shares  of common stock for prepayment of license fee           |       | —   |       | —   |       | 83       |       |
| Settlement of convertible debentures by issuance of  note payable, net of discount |       | —   |       | 3,375    |       | —   |       |

 

See accompanying notes to Consolidated Financial Statements.

F-6

----

**TapestryPharmaceuticals, Inc.Notes to Consolidated Financial Statements**

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

**Description ofBusiness**

Tapestry Pharmaceuticals, Inc. together with itssubsidiaries (referred to herein as “Tapestry” or the “Company”) is apharmaceutical company focused on the development of proprietary therapies forthe treatment of cancer. It is also engaged in evaluating the in-licensing orpurchasing of new therapeutic agents and/or related technologies. The Company’sevaluation of new products and technologies may involve the examination ofindividual molecules, classes of compounds, or platform technologies.Acquisitions of new products or technologies may involve the purchase orlicensing of such products or technologies, or the acquisition of, or mergerwith, other companies.

Except for the sale of thepaclitaxel business on December 12, 2003, the Company has incurred netlosses since inception and will likely incur additional losses for the foreseeablefuture. Tapestry was incorporated as a Washington corporation in 1991, andreincorporated as a Delaware corporation in 1993.

**Principles ofConsolidation**

The consolidated financialstatements, prepared in accordance with accounting principles generallyaccepted in the United States of America, include the accounts of the Companyand its wholly-owned subsidiaries. All intercompany balances have beeneliminated in consolidation.

**Fiscal Year**

The Company reports on a52 or 53 week year ending on the last Wednesday closest to December 31.

**Liquidity**

The Companyhas no revenue and has incurred a net loss of approximately $16.7 million,$17.5 million and $24.2 million in 2006, 2005 and 2004, respectively. Inaddition, the Company has an accumulated deficit of $123.9 million as of December 27,2006. As of December 27, 2006, the Company had a working capital balanceof $20.2 million compared to a working capital balance of$11.6 million at December 28, 2005. As of December 27, 2006, theCompany had cash and short-term investments totaling $22.5 million.Through December 27, 2006, the Company has funded its capital requirementsprimarily with the net proceeds of public offerings of common stock, withprivate placements of equity securities, with the exercise of warrants andoptions, and with debt. The Company has also funded its capital requirementswith the gross proceeds of the sale of its paclitaxel business (approximately$71.7 million) to Mayne Pharma (USA) Inc. (f/k/a Faulding Pharmaceutical, Inc.),a subsidiary of Mayne Group Limited, on December 12, 2003.

The Company anticipatesthat its existing capital resources will enable it to continue operations for atleast the next twelve months. However, the Company’s capital requirements have been and willcontinue to be significant. To bring the Company’s various programs tocompletion will require the Company to raise additional capital in the nearfuture. The Company cannot assure you that it will be able to obtain additionalcapital on terms that will be acceptable to the Company. In addition, theCompany may seek to in-license or purchase new products or technologies. Thecost and related capital expenditures of acquiring and developing suchresources may be significant, and the Company may not be able to obtain capitalfor the development of these products or technologies. Should theCompany be unable to raise the needed capital, the Company may be required todiscontinue, shutdown or cease operations. The accompanying 

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consolidatedfinancial statements do not include any adjustments that might be necessary ifthe Company is unable to continue as a going concern.

**Reverse Stock Splitand Nasdaq Listing**

On February 25, 2005,the Company received notice from the Nasdaq Stock Market, Inc. that itscommon stock had not met the $1 per share minimum bid price requirement for 30consecutive 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 effectuated a one for ten reverse stock split to regain compliance withthis listing requirement. Since the reverse stock split was effectuated, theclosing bid price of its common stock has remained above $1.00 in compliancewith the minimum bid price requirement.

**Cash, CashEquivalents and Investments**

Cash and cash equivalents includes all highly liquidinvestments with maturities of 90 days or less when purchased. The carryingamounts of cash and cash equivalents approximate their fair values. Short-terminvestments consist of commercial paper, investment grade government agency,auction rate, and corporate debt securities due within one year. Investmentswith maturities beyond one year may be classified as short-term based on theirhighly liquid nature and because such investments represent the investment ofcash that is available for current operations. The Company’s investments inauction rate securities are recorded at cost, which approximates fair marketvalue. In accordance with ARB 43, “*Restatement and Revisionof Accounting Research Bulletins*,” despite the long-term nature oftheir stated contractual maturities, the Company has the ability and the intentto liquidate investments in auction rate securities within six months andtherefore has classified these investments as short term. The Company’sinvestments are classified as available-for-sale, and are reported at marketvalue as of the balance sheet date. Interest income is recognized when earned.The unrealized gains and losses are reported as a separate component ofstockholder’s equity until the security is sold or until a decline in fairvalue is determined to be other than temporary. See “Note 3, Investments,” forfurther information on investments.

The Company’s investmentin ChromaDex, Inc. is accounted for under the cost method. Under the costmethod, the investment is carried at cost and adjusted only forother-than-temporary declines in fair value, distributions of earnings oradditional investments. See “Note 12. Investment in ChromaDex, Inc.,” forfurther information on ChromaDex.

**FinancialInstruments**

Cash and cash equivalents,accounts payable and long-term debt are carried at cost, which approximatesfair value.

**Impairment ofLong-Lived Assets**

Long-lived assets,including fixed assets and intangible assets are periodically monitored and arereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of any such asset may not be recoverable. Thedetermination of recoverability is based on an estimate of undiscounted cashflows expected to result from the use of an asset and its eventual disposition.If the sum of the undiscounted cash flows is less than the carrying value, animpairment loss will be recognized, measured as the amount by which thecarrying value exceeds the fair value of the asset. See “Note 2. DiscontinuedOperations,”, “Note 5. Other Assets,” and “Note 12. Investment in ChromaDex, Inc..”

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**Depreciation andAmortization**

Depreciation of laboratoryequipment, and furniture, fixtures and office equipment is computed using thestraight-line method over estimated useful lives ranging from three toseven years. Amortization of leasehold improvements is computed using thestraight-line method over the lesser of the improvements’ estimated useful lifeor remaining lease term. Maintenance and repairs that do not materially improveor extend the lives of the respective assets are expensed as incurred.

**Intangible Assets**

Intangible assets consistsolely of acquired intellectual property and are amortized using thestraight-line method over their estimated period of benefit, ranging from fiveto fifteen years. The Company annually evaluates the recoverability ofintangible assets and takes into account events or circumstances that warrantrevised estimates of useful lives or that indicate that an impairment exists. Inconnection with the preparation of its financial statements for 2004, theCompany determined that its intangible assets relating to acquired patents usedin the Genomics division were impaired and recorded an impairment loss of$1.1 million. See “Note 2. Discontinued Operations.”

**Share-BasedCompensation**

As of December 27, 2006, the Company had fiveequity incentive plans (the “Plans”); the 1994 Long-Term Performance IncentivePlan, the 1998 Stock Incentive Plan, the 2004 Equity Incentive Plan, the 2004Non-Employee Director’s Stock Option Plan, and the 2006 Equity Incentive Plan(the “2006 Incentive Plan”), which was approved by shareholders on April 4,2006. As a result of the approval of the 2006 Equity Incentive Plan, the 1994Long-Term Performance Incentive Plan, the 1998 Stock Incentive Plan, the 2004Equity Incentive Plan, and the 2004 Non-Employee Director’s Stock OptionPlan were suspended and any remaining shares eligible for issuance werecancelled.

On December 29, 2005, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), “*Share-Based Payment*,” (“SFAS 123(R)”) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock based onestimated fair values. SFAS 123(R) supersedes the Company’s previousaccounting under Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees”* (“APB 25”). Underthe provisions of APB 25 and its related interpretations, no compensationexpense was recognized with respect to the grant to employees of options topurchase the Company’s common stock when such stock options were granted withexercise prices equal to or greater than market value of the underlying commonstock on the date of grant.

The Company adopted SFAS 123(R) using themodified prospective transition method, which requires the application of theaccounting standard as of December 29, 2005, the first day of the Company’s2006 fiscal year. The Company’s Consolidated Financial Statements as of and forthe fiscal year ended December 27, 2006 reflect the impact of SFAS 123(R).In accordance with the modified prospective transition method, the Company’sConsolidated Financial Statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS 123(R). Stock-basedcompensation expense recognized under SFAS 123(R) for the fiscal yearended December 27, 2006 was $3.4 million or $.26 basic and diluted lossper share from continuing operations. Included in the stock-based compensationexpense for the fiscal year ended December 27, 2006, is a one timenon-cash fixed period charge in the amount of $381,000, as a result of themodification of vested options on April 4, 2006 as discussed in Note 8. “EquityIncentive Plans.”  The stock-basedcompensation expense is calculated on a straight-line basis over the vestingperiods of the related options. This charge had no impact on the Company’sreported cash flows.

Forthe periods ended December 28, 2005 and December 29, 2004, theCompany recorded approximately $50,000 and $141,000, respectively of stockcompensation expense pursuant to APB 25 

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associated with the amortization of deferred stockcompensation related to the vesting of stock options that were granted toconsultants for services rendered to the Company. The breakdown of totalstock-based compensation by expense category is as follows (in thousands):

| ** **                 | ** ** | **Year Ended**   | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **December 27,** | ** ** | **December 28,** | ** ** | **December 29,** | ** ** |
| ** **                 | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Research and  development  |       |                  | $          | 1,410 |   |   |   | $ | 36 |   |   |   | $ | 72 |   |   |
| General and administrative |       |                  | 1,940      |   |   |   | 11 |   |   |   | 9 |   |   |
| Discontinued  operations   |       |                  | 57         |   |   |   | 3 |   |   |   | 60 |   |   |
|                       |       |                  | $          | 3,407 |   |   |   | $ | 50 |   |   |   | $ | 141 |   |   |

 

Underthe modified prospective method of transition under SFAS 123(R), the Company isnot required to restate its prior period financial statements to reflectexpensing of share-based compensation under SFAS 123(R). Therefore, the resultsfor the period ended December 27, 2006 are not directly comparable toprior year periods. As required by SFAS 123(R), the Company has presented proforma disclosures of its net loss and net loss per share for the prior yearperiod assuming the estimated fair value of the options granted prior to December 28,2005 is amortized to expense over the option-vesting period as illustratedbelow (in thousands):

| ** **                                                                                                       | ** ** | **December 28,** | ** ** | **December 29,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Net loss, as  reported                                                                                           |       |                  | $          | (17,538               | )          |   |   | $ | (24,174 | ) |   |
| Add: Stock-based  employee compensation expense included in reported net loss                                    |       |                  | 50         |                  |       |   | 141 |   |   |
| Less: Total  stock-based compensation expense determined under fair value based methods  for all options granted |       |                  | (2,954     | )                     |       |   | (3,947 | ) |   |
| Pro forma net  loss                                                                                              |       |                  | $          | (20,442               | )          |   |   | $ | (27,980 | ) |   |
| Net loss per  share:                                                                                             |       |                  |       |                  |       |   |   |   |   |
| Basic and  diluted—as reported                                                                              |       |                  | $          | (5.15                 | )          |   |   | $ | (7.38 | ) |   |
| Basic and diluted—pro  forma                                                                                |       |                  | $          | (6.00                 | )          |   |   | $ | (8.55 | ) |   |

 

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 employeestock option granted in fiscal 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 stock-basedcompensation expense be based on awards that are ultimately expected to vest,stock-based compensation for the year ended December 27, 2006 has beenreduced for estimated forfeitures. When estimating forfeitures, the Companytakes into consideration both voluntary and involuntary terminations, as wellas trends of actual option forfeitures. Prior to fiscal 2006, the Companyaccounted for forfeitures as they occurred.

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| ** **       | ** ** | ** **             | ** ** | ** **   | ** ** | ** **     | ** ** | **Weighted-**         | ** ** |
|------------------|------------|------------------------|------------|--------------|------------|----------------|------------|-----------------------|------------|
| ** **       | ** ** | ** **             | ** ** | ** **   | ** ** | ** **     | ** ** | **Average**           | ** ** |
| ** **       | ** ** | **Risk-Free**          | ** ** | **Dividend** | ** ** | **Volatility** | ** ** | **Option**            | ** ** |
| ** **       | ** ** | **Interest Rate** | ** ** | **Yield**    | ** ** | **Factor**     | ** ** | **Life (Years)** | ** ** |
| Fiscal Year 2006 |       | 4.66%  - 5.18%         |       |         | 0          | %              |       | 108.82%  - 121.86%    |       | 3.35 - 5.78 |   |
| Fiscal Year 2005 |       | 3.58%  - 4.27%         |       |         | 0          | %              |       | 113.17%  - 123.33%    |       | 5 |   |
| Fiscal Year 2004 |       | 2.51% - 3.81%          |       |         | 0          | %              |       | 102.8% - 127.0%       |       | 4 - 6 |   |

 

The Black-Scholes option-pricing model requires theinput of highly subjective assumptions. The Company’s employee stock optionshave characteristics significantly different from those of traded options, andchanges in the subjective input assumptions can materially affect the fairvalue estimate. Management will continue to assess the assumptions andmethodologies used to calculate estimated fair value of share-basedcompensation. Circumstances may change and additional data may become availableover time, thereby resulting in changes to these assumptions and methodologies.These changes could materially impact the Company’s fair value determination.

A summary of optionactivity under the Plans as of December 27, 2006 is presented below:

**Summary Details for Plan Share Options**

| ** **                                       | ** ** | ** **         | ** ** | ** **    | ** ** | **Weighted-**         | ** ** | ** **             | ** ** |
|--------------------------------------------------|------------|--------------------|------------|---------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                       | ** ** | ** **         | ** ** | **Weighted-** | ** ** | **Average**           | ** ** | **Aggregate**          | ** ** |
| ** **                                       | ** ** | ** **         | ** ** | **Average**   | ** ** | **Remaining**         | ** ** | **Intrinsic**          | ** ** |
| ** **                                       | ** ** | **Number of** | ** ** | **Exercise**  | ** ** | **Contractual**       | ** ** | **Value**              | ** ** |
| ** **                                       | ** ** | **Options**        | ** ** | **Price**     | ** ** | **Life (Years)** | ** ** | **(in millions)** | ** ** |
| Outstanding  Balance, December 31, 2003     |       | 698,445            |       |          | $          | 42.60                 |       |                   |       |   |   |   |   |   |   |   |
| Granted                                          |       | 166,305            |       |          | 13.10      |                  |       |                   |       |   |   |   |   |   |   |
| Exercised                                        |       | (3,868             | )          |          | 9.30       |                  |       |                   |       |   |   |   |   |   |   |
| Forfeited or  expired                            |       | (33,172            | )          |          | 31.40      |                  |       |                   |       |   |   |   |   |   |   |
| Outstanding  Balance, December 29, 2004     |       | 827,710            |       |          | 37.30      |                  |       |                   |       |   |   |   |   |   |   |
| Granted                                          |       | 47,060             |       |          | 6.30       |                  |       |                   |       |   |   |   |   |   |   |
| Exercised                                        |       | (5,434             | )          |          | 5.90       |                  |       |                   |       |   |   |   |   |   |   |
| Forfeited or  expired                            |       | (144,534           | )          |          | 31.50      |                  |       |                   |       |   |   |   |   |   |   |
| Outstanding  Balance, December 28, 2005     |       | 724,802            |       |          | 36.70      |                  |       |                   |       |   |   |   |   |   |   |
| Granted                                          |       | 5,741,597          |       |          | 3.47       |                  |       |                   |       |   |   |   |   |   |   |
| Exercised                                        |       | —             |       |          | —     |                  |       |                   |       |   |   |   |   |   |   |
| Forfeited or  expired                            |       | (661,106           | )          |          | 37.33      |                  |       |                   |       |   |   |   |   |   |   |
| Outstanding  Balance, December 27, 2006     |       | 5,805,293          |       |          | $          | 3.83                  |       |                   |       | 8.86 |   |   |   | $ | — |   |   |
| Exercisable  shares as of December 27, 2006 |       | 597,665            |       |          | $          | 7.35                  |       |                   |       | 4.25 |   |   |   | $ | — |   |   |

 

Included in the number of stock options granted andforfeited in the table above during the period ended December 27, 2006,are 626,568 stock options that were cancelled and reissued as a result of therepricing of outstanding stock options as described in Note 8. Equity IncentivePlans.

A summary of the status ofthe Company unvested shares as of December 27, 2006, and changes duringthe period then ended is presented below:

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**Unvested Shares Issued Under the Plan**

| ** **                                | ** ** | ** **   | ** ** | **Weighted-**       | ** ** |
|-------------------------------------------|------------|--------------|------------|---------------------|------------|
| ** **                                | ** ** | ** **   | ** ** | **Average**         | ** ** |
| ** **                                | ** ** | **Unvested** | ** ** | **Grant-Date**      | ** ** |
| ** **                                | ** ** | **Shares**   | ** ** | **Fair Value** | ** ** |
| Unvested balance,  December 28, 2005 |       | 286,268      |       |                | $          | 32.15 |   |   |
| Granted                                   |       | 5,741,597    |       |                | 3.81       |   |   |
| Vested                                    |       | (557,112     | )          |                | 5.86       |   |   |
| Forfeited or  expired                     |       | (263,125     | )          |                | 39.28      |   |   |
| Unvested balance,  December 27, 2006 |       | 5,207,628    |       |                | $          | 2.79 |   |   |

 

Included in the number of stock options granted andforfeited in the table above during the period ended December 27, 2006,are 248,856 stock options that were cancelled and reissued as a result of therepricing of outstanding stock options as described in Note 8. Equity IncentivePlans.

As of December 27, 2006, there was $11.9 millionof total unrecognized compensation expense related to unvested share-basedcompensation arrangements granted under the Plans. Total unrecognizedcompensation expense will be recognized over a weighted-average period ofapproximately 4.5****years.

On November 10, 2005,the FASB issued FASB Staff Position No. 123(R)-3, “*Transition Election Related to Accounting for TaxEffects of Share-Based Payment Awards.” *TheCompany has elected to adopt the shortcut method provided in the FASB StaffPosition for determining the initial pool of excess tax benefits available toabsorb tax deficiencies related to stock-based compensation subsequent to theadoption of SFAS 123(R). The shortcut method includes simplified procedures toestablish the beginning balance of the pool of excess tax benefits (the “APICTax Pool”) and to determine the subsequent effect on the APIC Tax Pool andConsolidated Cash Flow Statements of the tax effects of employee stock-basedcompensation awards.

**Revenue Recognition**

With the sale of thepaclitaxel business, the Company does not anticipate having any significantproduct sales or license fee income for the foreseeable future. Revenueassociated with the paclitaxel business is included in discontinued operations.

**Research andDevelopment**

Research and developmentcosts are expensed as they are incurred.

**Patent Cost**

All costs incurred inobtaining, prosecuting and enforcing patents are expensed as they are incurred.

**Net Income (Loss)Per Share**

Basic earnings per share is measured as the income orloss available to common stockholders 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 have an antidilutive effect areexcluded from diluted earnings per share. Net loss per common share is computedusing the weighted average number of shares of common stock outstanding.Potential common shares from stock options, warrants and convertible securitieshave been excluded from the computation of diluted earnings per share due tonet losses from continuing operations in 2006, 2005, and 2004 as their effectis antidilutive.

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Securities that couldpotentially dilute basic earnings per share that were not included in thecomputation of diluted earnings per share because to do so would beantidilutive, amounted to 18,705,000, 724,802 and 831,696 shares atDecember 27, 2006, December 28, 2005, and December 29, 2004,respectively.

**ComprehensiveIncome**

Under Statement of FinancialAccounting Standard No. 130, *“Reporting ComprehensiveIncome,”* the Company is required to display comprehensive income(loss) and its components as part of the financial statements. The Company hasdisplayed its comprehensive income (loss) as part of the ConsolidatedStatements of Stockholders’ Equity and Comprehensive Loss. Other comprehensiveloss for 2006 includes net unrealized losses on available-for-sale securitiesthat are excluded from net loss. The activity of other comprehensive loss is asfollows (in thousands):

| ** **                                                   | ** ** | **December 27,** | ** ** | **December 28,** | ** ** | **December 29,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                   | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Net loss, as  reported                                       |       |                  | $          | (16,652               | )          |                  |       | $ | (17,538 | ) |   |   | $ | (24,174 | ) |   |
| Unrealized gain  (loss) on available-for-sale securities     |       |                  | 42         |                  |       |                  | 179        |   |   |   | (101 | ) |   |
| Reclassification  adjustment for losses included in net loss |       |                  | —     |                  |       |                  | (120       | ) |   |   | — |   |   |
| Comprehensive net loss                                       |       |                  | $          | (16,610               | )          |                  |       | $ | (17,479 | ) |   |   | $ | (24,275 | ) |   |

 

**Estimates andAssumptions**

The preparation of theCompany’s consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires the Company’smanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Significant estimates are used whendetermining useful lives for depreciation and amortization, assessing the needfor impairment charges, accounting for income taxes, stock based compensationand various others items. The Company evaluates these estimates and judgmentson 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 from these estimates underdifferent assumptions or conditions.

**Recent AccountingPronouncements**

On June 9, 2005, the FASB issued SFAS No. 154,“*Accounting Changes and Error Corrections*.”SFAS No. 154 replaces APB Opinion No. 20, “*AccountingChanges*,” and SFAS No. 3, “*Reporting AccountingChanges in Interim Financial Statements*,” and changes therequirements for the accounting for and reporting of a change in accountingprinciple. SFAS No. 154 applies to all voluntary changes in accountingprinciple. It also applies to changes required by an accounting pronouncementin the unusual instance that the pronouncement does not include specifictransition provisions. SFAS No. 154 must be adopted for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005. Early adoption is permitted for accounting changes and corrections oferrors made in fiscal years beginning after the date SFAS No. 154 isissued. The adoption of SFAS No. 154 did not have a material impact on theCompany’s financial results.

In July 2006, the Financial Accounting StandardsBoard issued FASB Interpretation 48,*“Accountingfor Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109*.”  Interpretation 48, which clarifies Statement109,*“Accounting for Income Taxes*,”establishes the criterion that an individual tax 

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position has to meet forsome or all of the benefits of that position to be recognized in the Company’sfinancial statements. On initial application, Interpretation 48 will be appliedto all tax positions for which the statute of limitations remains open. Onlytax positions that meet the more-likely-than-not recognition threshold at theadoption date will be recognized or continue to be recognized. The cumulativeeffect of applying Interpretation 48 will be reported as an adjustment toretained earnings at the beginning of the period in which it is adopted.

Interpretation 48 is effective for fiscal yearsbeginning after December 15, 2006, and will be adopted by the Company on December 28,2006. The Company currently does not believe that the adoption ofInterpretation 48 will have a significant effect on its financial statements.

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.

**Note 2.Discontinued Operations**

*Closure of theGenomics Division*

On November 16, 2004, the Company decided todiscontinue research on its genomics programs, other than the Huntington’sDisease program, and to seek a buyer of these programs. The Huntington’sDisease program was terminated in January 2006.

As a result of the decision to close the Genomicsdivision, the Company recorded a charge of $1.7 million primarily relatingto an impairment of intangible assets acquired in connection with the December 2002acquisition of the genomics business of Pangene Corporation($1.1 million), a charge for fixed assets likely to be disposed of at lessthan their book value ($150,000), severance costs ($250,000), and leasetermination costs ($200,000). Additional expenses related to the exit of theGenomics division were charged to discontinued operations as incurred in 2005($358,000).

Net losses related to theGenomics division that are included in discontinued operations totaled $59,000,$358,000 and $5.7 million in 2006, 2005 and 2004, respectively. Nomaterial revenue was previously recognized in this division.

*Sale of PaclitaxelBusiness*

On December 12, 2003, the Company sold itsworldwide generic injectable paclitaxel business to Mayne Pharma for cash inthe amount of $71.7 million minus an inventory adjustment of$4.6 million to reflect the Company’s actual inventory as of the closing.The sale resulted in a gain of $54.6 million before taxes (net of an$183,000 tax provision relating to utilization of net operating losses createdby stock option exercises), and $54.1 million after taxes. Approximately$21.9 million of the proceeds of the purchase price was paid to AbbottLaboratories to retire all outstanding debt, interest and payables the Companyowed to Abbott. The assets sold to Mayne Pharma included paclitaxelmanufacturing assets, yew plantations, domestic and international issued andpending paclitaxel patents, a worldwide registration dossier, worldwidedevelopment and supply agreements, inventories and settlement of accountsreceivable. The Company retained all of its intellectual property not used inconnection with the business sold. This transaction with Mayne Pharma providedthat the Company was entitled to a portion of the cash proceeds 

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received in connectionwith a patent infringement lawsuit against Mylan Laboratories, Inc. Thislawsuit was settled in July 2004 and the Company received$3.0 million as its share of the proceeds.

The paclitaxel businesshas been reported as a discontinued operation and results from prior years havebeen reclassified to reflect this. There were no product sales and net incomeof $3.0 million related to the paclitaxel business in 2004. The paclitaxelincome in 2004 consisted of the $3.0 million patent infringementsettlement with Mylan Laboratories and a $250,000 business interruptioninsurance claim filed and collected in 2004 for losses sustained in the thirdquarter of 2003 from a hurricane that disrupted operations of a contractmanufacturer employed by Tapestry, offset by taxes owed in connection with theoperation of the Company’s yew plantations.

**Note 3. Investments**

Short-term investments consist of investment gradegovernment agency, auction rate, and corporate debt securities due within oneyear. The Company’s investments in auction rate securities are recorded atcost, which approximates fair market value. In accordance with ARB 43, “*Restatement and Revision of Accounting ResearchBulletins*,” despite the long-term nature of their stated contractualmaturities, the Company has the ability and intent to liquidate investments inauction rate securities within six months and therefore has classified theseinvestments as short-term. All investments are classified as available-for-saleand are recorded at market value. Unrealized gains and losses are treated as aseparate component of stockholders’ equity until the security is sold or untila decline in fair value market value is determined to be other than temporary.As of December 27, 2006 and December 28, 2005, the amortized costbasis, aggregate fair value and gross unrealized holding gains and losses bymajor security type of investment classified as available-for-sale are asfollows (in thousands):

| ** **                  | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
|-----------------------------|------------|---------------|------------|----------------|------------|------------|------------|
| **Security Type**      | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Losses** | ** ** | **Value** | ** ** |
| **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 |   |
| **December 28,  2005** |       |          |       | ** **     |       |       |       |   |   |   |   |
| Auction rate  securities    |       |          | $          | 8,750          | ** ** |       |       | $ | — |   |   | $ | 8,750 |   |
| Corporate debt  securities  |       |          | 4,844      | ** **     |       |       | (42        | ) |   | 4,802 |   |
| Total investments           |       |          | $          | 13,594         | ** ** |       |       | $ | (42 | ) |   | $ | 13,552 |   |
|                             |            |               |            |                |            |            |            |  |  |  |  |  |  |  |  |  |

 

**Note 4. Property,Plant and Equipment**

Propertyand equipment consists of the following (in thousands):

| ** **                                | ** ** | **December 27,** | ** ** | **December 28,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Furniture,  fixtures and office equipment |       |                  | $          | 555                   |       |   |   | $ | 545 |   |   |
| Laboratory  equipment                     |       |                  | 676        |                  |       |   | 652 |   |   |
| Leasehold  improvements                   |       |                  | 56         |                  |       |   | 56 |   |   |
| Construction in  progress                 |       |                  | 265        |                  |       |   | 21 |   |   |
|                                      |       |                  | 1,552      |                  |       |   | 1,274 |   |   |
| Less: Accumulated  depreciation           |       |                  | (871       | )                     |       |   | (666 | ) |   |
| Property, plant and  equipment, net       |       |                  | $          | 681                   |       |   |   | $ | 608 |   |   |

 

F-15

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Included in constructionin progress is equipment purchased under a capital lease that will be installedand ready for use in January 2007. See “Note 6. Debt.”

**Note 5. OtherAssets**

Deposits as of December 27, 2006 and December 28,2005 primarily consist of rent deposits of the Company’s three facilities. In2005, a portion of the Company’s deposit at its New York office was returnedper the terms of the lease. Land, valued at $718,000, had previously beenpurchased and held for expansion of the Company’s paclitaxel manufacturingfacilities. In accordance with SFAS No. 144, “*Accountingfor the Impairment of Long-Lived Assets*,” during 2005, the Companyrecognized an impairment charge on the carrying value of its land of $104,000to revalue it to an estimated fair market value of $614,000.

Otherassets consist of the following (in thousands):

| ** ** | ** ** | **December 27,** | ** ** | **December 28,** | ** ** |
|------------|------------|-----------------------|------------|-----------------------|------------|
| ** ** | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Deposits   |       |                  | $          | 60                    |       |   |   | $ | 69 |   |   |
| Land       |       |                  | 614        |                  |       |   | 614 |   |   |
|       |       |                  | $          | 674                   |       |   |   | $ | 683 |   |   |

 

**Note 6. Debt**

Asummary of the components of debt, net of discount, is as follows (inthousands):

| ** **                    | ** ** | **December 27,** | ** ** | **December 28,** | ** ** |
|-------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| TL Ventures notes  payable(a) |       |                  | $          | —                |       |   |   | $ | 3,323 |   |   |
| Capital lease(b)              |       |                  | 227        |                  |       |   | — |   |   |
|                          |       |                  | 227        |                  |       |   | 3,323 |   |   |
| Less: Current  portion        |       |                  | (115       | )                     |       |   | (840 | ) |   |
|                          |       |                  | $          | 112                   |       |   |   | $ | 2,483 |   |   |

 

a)                TL Ventures notepayable—In 2005, theCompany entered into an agreement with TL Ventures V, L.P, and one of itsaffiliated funds providing for a complete settlement of historical litigation,a mutual release of claims and the payment of approximately $3.2 million incash and the issuance by the Company of promissory notes in an aggregate amountof $4.7 million in exchange for delivery of $8.0 million of 4% convertiblesubordinated debentures that were held by TL Ventures. The notes did not bearinterest, were not convertible and were payable in monthly installments of$110,000 in 2006 and $150,000 in 2007, with a final payment of $1.0 million dueon January 31, 2008. Accrued interest of approximately $134,000 wasincluded in the cash payment made with the closing. The Company recorded adiscount on the note attributable to the fair value of interest in the amountof $1.3 million and the discount was allocated between the current andlong-term portions of the note. An interest rate of 18.0% was used to imputethe discount. The Company recorded the obligation resulting from the settlementon its balance sheet as of December 29, 2004. No gain or loss wasrecognized in connection with the settlement. The unamortized discounton the TL Ventures note was $797,000 at December 28, 2005. The discountreduced the current portion of the note by $480,000 and the long-term portionby $317,000 at December 28, 2005.

On November 16,2006, the Company repurchased the promissory notes, which had an outstanding principalvalue of $3.0 million at the time of purchase for an aggregate payment toTL Ventures of $2.7 million in cash. Repurchase of the Notes did not havea material impact on its financial results.

F-16

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b)               Capital lease—The Companyleases equipment under a capital lease. The capital lease does not bearinterest and is payable in monthly installments of $11,000 in 2007 and 2008. TheCompany recorded a discount on the capital lease attributable to the fair valueof interest in the amount of $23,000 and the discount was allocated between thecurrent and long-term portions of the lease. An interest rate of 11.5% was usedto impute the discount.

**Note7. Stockholders’ Equity**

**Stockholder RightsPlan**

In December 2006, the Company adopted astockholder rights plan to replace its stockholder rights plan that expired in November 2006at the end of its ten-year term. Pursuant to the terms of the plan, when aperson or group, except under certain circumstances, acquires 15% or more ofthe Company’s outstanding common stock or 10 business days after announcementof a tender or exchange offer for 15% or more of the Company’s outstandingcommon stock, the rights (except those rights held by the person or group whohas acquired or announced an offer to acquire 15% or more of its outstandingcommon stock) would generally become exercisable for shares of its common stockat a discount. Because the potential acquirer’s rights would not becomeexercisable for shares of common stock at a discount, the potential acquirerwould suffer substantial dilution and may lose its ability to acquire the Company.In addition, the existence of the plan itself may deter a potential acquirerfrom acquiring the Company. As a result, either by operation of the plan or byits potential deterrent effect, mergers and acquisitions of the Company thatits stockholders may consider in their best interests may not occur.

Because the investors inthe Private Placement described below own a substantial percentage of theCompany’s outstanding common stock, the stockholder rights plan provides thatsuch investors and their respective affiliates will be exempt from thestockholder rights plan, unless an investor and its affiliates acquire, after April 4,2006, more than 1% of the Company’s then issued and outstanding common stock,not including the shares of common stock issued to the investors in the PrivatePlacement or shares of common stock issued upon exercise of the warrants issuedto the investors in the Private Placement.

**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 (the “PrivatePlacement”), for a total of $25.5 million (excluding any proceeds thatmight be received upon exercise of the warrants) or approximately$23.8 million, net of the placement agent fees and other expenses. Thepurchase price was $2.00 per share of common stock, and each warrant topurchase common stock has an exercise price equal to $2.40 per share. TheCompany may call up to 20% of the outstanding warrants during any threemonth period if certain conditions are satisfied, including the trading priceof its common stock exceeding $4.80 for 20 consecutive trading days. Up to halfof the warrants may be exercised on a cashless or net exercise basis. There canbe no assurance, however, that the Company will receive funds from the exerciseof warrants.

In addition, the Company issued warrants to purchase50,000 shares of common stock to a financial advisor and issued warrants topurchase 100,000 shares of common stock to an outside consultant as a finders’fee on substantially similar terms as the warrants issued under the PurchaseAgreement. The value of these warrants of $472,000 was determined using theBlack-Scholes model 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 

F-17

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cannot be made under theregistration statement (other than for certain periods when the Company ispermitted under the agreement to suspend use of the registration statement whenit has delayed disclosure of material nonpublic information) then the Companyis obligated to pay each investor liquidated damages, in cash, equal to 1.5%per 30 day period (or pro rata for a portion thereof) of the aggregate purchaseprice paid by such investor. The SEC declared the Company’s Form S-3effective 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 133 *“Accountingfor Derivative Instruments and Hedging Activities.”* Accordingly, theclassification of the warrants has been determined under EITF 00-19, *“Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock,”*andthe warrants have been accounted for as permanent equity.

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 is 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 liquidatedamages provision for the initial 90 day period. The liquidated damages provisionwould only have value in the future if sales may not be made thereunder forperiods other than as permitted thereunder. The Company believes the eventsthat would lead to sales being unable to be made under the registrationstatement for periods other than as permitted are unlikely to occur. In futureperiods, should the Company conclude that it is probable, as defined in SFAS No. 5,*“Accounting for Contingencies,”* that aliability for liquidated damages will occur, the Company will record theestimated cash value of the liquidated damages liability at that time.

**Restricted Stock**

In September 2005, the Company initiated aretention incentive program for non-executive employees that consisted of agrant of approximately 43,814 shares of restricted stock of the Company’scommon stock under its equity incentive plans to vest at future dates, as wellas a cash component related to the individual tax effects of the program. Todate, under the program, 5,256 shares have been surrendered due to employeesleaving employment with the Company. The stock component of the programincludes 18,463 shares that vested on September 6, 2006 and 20,095additional shares to vest on September 6, 2007, contingent uponparticipants being employed by the Company on those dates. The total value ofthe common stock component of the program is $139,000 (net of terminations)based on the value of the underlying common stock at the date of grant. Duringthe periods ended December 27, 2006 and December 28, 2005, $78,000and $37,000, respectively, of expense related to the program was recognized.The remaining expense associated with the program will be recognized over theremaining vesting period, through September 2007.

F-18

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**Warrants**

Thefollowing summarizes warrant activity:

| ** **                             | ** ** | ** **   | ** ** | **Exercise** | ** ** | **Expiration** | ** ** |
|----------------------------------------|------------|--------------|------------|--------------|------------|----------------|------------|
| ** **                             | ** ** | **Warrants** | ** ** | **Price**    | ** ** | **Date**       | ** ** |
| Outstanding at  December 28, 2005 |       | —       |       |         | —     |           |       |   | — |   |   |
| Issued                                 |       | 12,900,000   |       |         | $          | 2.40           |       |   |   | 2011 |   |   |
| Expired                                |       | —       |       |         | —     |           |       |   | — |   |   |
| Outstanding at  December 27, 2006 |       | 12,900,000   |       |         |       |           |       |   |   |   |   |
|                                        |            |              |            |              |            |                |            |  |  |  |  |  |

 

**Note 8. EquityIncentive Plans**

As of December 27, 2006, the Company had fiveequity incentive plans; the 1994 Long-Term Performance Incentive Plan, the 1998Stock Incentive 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 theapproval of the 2006 Equity Incentive Plan, the 1994 Long-Term PerformanceIncentive Plan, the 1998 Stock Incentive Plan, the 2004 Equity Incentive Plan,and the 2004 Non-Employee Director’s Stock Option Plan were suspended andany remaining shares eligible for issuance were cancelled.

**Non-plan StockOptions**

In January 1994, theCompany granted to four outside directors options to purchase 2,700 shares ofcommon stock that were immediately exercisable and expired in January 2004.In September 1997, the Company granted to its employees options topurchase 2,007 shares of common stock, which vested over a two year period andthat expire in September 2007.

**1994 Long-TermPerformance Incentive Plan**

The Company has a 1994Long-Term Performance Incentive Plan (the “1994 Plan”) whichwas approved by stockholders in July 1994. The 1994 Plan initiallyauthorized 37,500 shares for issuance. Stockholders subsequently approvedincreases in the number of authorized shares to 660,000 shares. The 1994 Planprovides for granting to employees and other key individuals who perform servicesfor the Company the following types of incentive awards: stock options, stockappreciation rights, restricted stock, performance grants and other types ofawards that the Compensation Committee deems to be consistent with the purposesof the 1994 Plan. In April 2004, in accordance with the terms of the 1994Plan, the Company’s Board of Directors extended the termination date of the1994 Plan for an additional five years through July 2009 for the purposeof granting awards thereunder, other than incentive stock options, andsuspended provisions relating to the granting of options to non-employeedirectors.

**The 1998 StockIncentive Plan**

In 1998, the Board of Directors adopted the 1998 StockIncentive Plan (formerly known as the “1998 Stock Option Plan”) (the “1998 Plan”)to provide awards of stock options, stock appreciation rights, restrictedstock, performance grants, or any other type of award deemed by the Board ofDirectors or its designated committee to employees and other individuals whoperform services for the Company. The 1998 Plan provides for option grantsdesignated as nonqualified stock options or incentive stock options.Originally, 12,500 shares were authorized for issuance under the 1998 Plan. TheBoard of Directors approved increases in the number of authorized shares inamendments to the 1998 Plan made through 2002 which increased the number ofshares authorized to 192,500. Under the terms of the 1998 Plan, stock 

F-19

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options cannot be granted topersons who are Tapestry officers subject to Section 16 of the SecuritiesExchange Act of 1934, as amended, (unless granted to officers not previouslyemployed by Tapestry, as an inducement essential to such officers entering intoemployment contracts with the Company) or to Tapestry directors. Optionsgranted under the 1998 Plan typically vest 25% after each anniversary date ofthe grant, and expire ten years from the date of grant. The exercise price forstock options issued under the 1998 Plan is equal to the fair market value ofthe Company’s common stock on the date of grant.

**2004 Equity Incentive Plan**

In 2004, shareholders adopted the 2004 Equity IncentivePlan (the “2004 EIP Plan”) to provide awards of stock options, stockappreciation rights, restricted stock, performance grants, or any other type ofaward deemed by the Board of Directors or its designated committee to employeesand other individuals who perform services for the Company. The 2004 EIP Planprovides for option grants designated as nonqualified stock options orincentive stock options. The 2004 EIP Plan authorized 200,000 shares forissuance thereunder. The 2004 Equity Incentive Plan was amended effective June 2005to increase the number of shares to 400,000. Under the terms of the 2004 EIPPlan, stock options cannot be granted to Tapestry non-employee directors.Options granted under the 2004 EIP Plan are subject to vesting, and expire tenyears from the date of grant. Vesting is determined at the time of the grant,which is typically four years. The exercise price for stock options issuedunder the 2004 EIP Plan is equal to the fair market value of the Company’scommon stock on the date of grant.

**2004 Non-Employee Directors’ Stock Option Plan**

In 2004, shareholdersadopted the 2004 Non-Employee Directors’ Stock Option Plan (the “2004 Directors’Plan”) to provide for automatic and discretionary grants of stock options tomembers of the Company’s Board of Directors who are not employees of theCompany. Options granted under the 2004 Directors’ Plan are intended to benonstatutory stock options that do not qualify as incentive stock options. The2004 Directors’ Plan originally authorized 40,000 shares of common stock forissuance. Options granted automatically under the 2004 Directors’ Plan vestafter the first anniversary date of the grant, and expire ten years from thedate of grant. Options may also be granted under the 2004 Directors’ Plan atthe discretion of the Board on such terms as the Board determines, subject tolimitations of the 2004 Directors’ Plan. The exercise price for stock optionsissued under the 2004 Directors’ Plan is equal to the fair market value of theCompany’s common stock on the date of grant. Each person who is not an employeeand (i) who is elected or re-elected as a director by the stockholders atany annual meeting of stockholders, (ii) who continues as a directorfollowing an annual meeting of stockholders at which such director is notsubject to re-election or (iii) is appointed as a director in accordancewith Company bylaws following an annual meeting, upon such election orappointment, will receive, as of the business day following the date of eachsuch election or appointment, a non-qualified option to purchase 1,000 sharesof common stock. The 2004 Directors’ Plan also provides for annual automaticgrants of options to purchase 1,000 shares to the chairs of the Board ofDirectors’ Audit, Compensation, Nominating and Corporate Governance, andResearch and Development committees. The 2004 Directors’ Plan provides for anautomatic grant of non-qualified stock options to purchase 750 shares of commonstock to members of the Research and Development committee upon their initialappointment to the committee, and an automatic grant of non-qualified stockoptions to purchase 300 shares of common stock to a Research and Developmentcommittee member who continues to serve on the committee after an annualmeeting of stockholders. Non-employee directors may also be granted options topurchase shares of common stock at the discretion of the Board of Directors.All such options are exercisable at an exercise price equal to the fair marketvalue of the common stock on the date of grant and are subject to a vestingschedule.

F-20

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**2006 Equity IncentivePlan**

In 2006, the shareholders adopted the 2006 EquityIncentive Plan. The 2006 Equity Incentive Plan provides for the grant ofincentive stock options, nonstatutory stock options, stock purchase awards,stock bonus awards, stock appreciation rights, stock unit awards and otherstock awards (collectively “awards”) to directors, employees, consultants andadvisors of the Company.  Options grantedautomatically to non-employee directors under the 2006 Equity Incentive Planvest after the first anniversary date of the grant, and expire ten years fromthe date of grant. Options may also be granted under the 2006 Equity IncentivePlan at the discretion of the Board on such terms as the Board determines,subject to limitations of the 2006 Equity Incentive Plan. The exercise pricefor awards issued under the 2006 Equity Incentive Plan is equal to the fairmarket value of the Company’s common stock on the date of grant. Optionscovering 1,500 shares of common stock will be automatically granted to eachnon-employee director who (i) is elected or reelected as a director of theCompany at an annual meeting of the Company’s stockholders, (ii) continuesservice as a director of the Company after an annual meeting of the Company’sstockholders at which the director is not subject to reelection, or (iii) isappointed as a director of the Company in accordance with its Bylaws followingan annual meeting (each, an “Eligible Director”), on the next business dayfollowing each such annual meeting or appointment. In addition, optionscovering 1,500 shares of Common Stock will be automatically granted to eachEligible Director who is appointed or continues to serve as chair of the Audit,Compensation, Nominating, or Corporate Governance Committee of the Board (orany permanent committee of the Board other than the Research and DevelopmentCommittee, whose grants are described below) following an annual meeting of theCompany’s stockholders, on the business day next succeeding each suchappointment or continuation of service, as the case may be. In addition,options covering 1,000 shares of common stock will be automatically granted toeach Eligible Director who is appointed to the Research and DevelopmentCommittee of the Board, on the next business day following such appointment.Thereafter, options covering 450 shares of common stock shall automatically begranted to each Eligible Director who continues service as a member of theResearch and Development Committee of the Board following an annual meeting ofthe Company’s stockholders, on the business day next succeeding such EligibleDirector’s continuation of service. Non-employee directors may also be grantedoptions to purchase shares of common stock at the discretion of the Board ofDirectors. All such options are exercisable at an exercise price equal to thefair market value of the common stock on the date of grant and are subject to avesting schedule.

The number of shares initially reserved for issuanceunder the 2006 Incentive Plan totals 6,577,106. This number will be increased,in an amount not to exceed 1,600,000 shares in the aggregate, immediatelyfollowing any issuance of common stock by the Company during the three yearperiod following approval by shareholders of the 2006 Equity Incentive Plansuch that the shares available under the 2006 Equity Incentive Plan at any timewill be equal to (i) 20% of fully diluted shares of common stock plusungranted options available under the 2006 Equity Incentive Plan immediatelyfollowing any such issuance of share less (ii) the number of share ofcommon stock subject to existing options pursuant to the Company’s 2004 EquityIncentive Plan, 2004 Non-Employee Directors’ Stock Option Plan, the 1998 StockIncentive Plan, and the 1994 Long-Term Performance Incentive Plan. As a resultof stock issued during the year, the number of shares reserved for issuanceunder the 2006 Incentive Plan has increased to 6,622,935.

In conjunction with the adoption of the 2006 EquityIncentive Plan, the Board granted options to purchase 30,000 shares of commonstock to each non-employee director of the Board totaling 180,000 shares. Inaddition, the Compensation Committee of the Board of Directors (“CompensationCommittee”) granted options to purchase shares of common stock to employees ofthe Company, including its executive officers, totaling 3,079,480 shares.

Subject to limitedexceptions, the grant date for the each of the options, as discussed above, is April 4,2006. The exercise price of such options is $4.02 and was established as theaverage of the closing sale prices of the Company’s common stock on the NasdaqCapital Market on the fourth through eighth 

F-21

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tradingdays following the Company’s announcement of the Private Placement. Theresulting exercise price of $4.02 was above the closing sales price of theCompany’s common stock on April 4, 2006. Each option vests as follows: 1¤6when the 20 trading day average of the closing sale prices of the common stockequals or exceeds 130% (or $5.23) of the exercise price of the stock option; 1¤6when such average equals or exceed 160% (or $6.43) of the exercise price; 1¤6when such average equals or exceeds 190% (or $7.64) of the exercise price; 1¤6when such average equals or exceeds 220% (or $8.84) of the exercise price; 1¤6when such average equals or exceeds 250% (or $10.05) of the exercise price; and1¤6when such average equals or exceeds 300% (or $12.06) of the exercise price. Allstock options vest at the latest on the fifth anniversary of the date of grant.The awards otherwise were made in accordance with the terms and conditions ofthe 2006 Incentive Plan and the Form of Stock Option Agreement for grantsthereunder.

**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. Stockholder approval of such modifications was received 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 February 8, 2006, stock options forapproximately 696,253 shares were outstanding under all of the Company’s equitycompensation plans, of which options to purchase approximately 626,568 sharesof common stock, having exercise prices ranging from $4.20 to $112.50, weremodified. 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 1).

Thefollowing summarizes stock option activity and balances:

| ** **                   | ** ** | ** **   | ** ** | ** **         | ** ** | ** **         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **2004**            | ** ** | **2006 Equity** | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|---------------------|------------|----------------------|------------|------------|------------|
| ** **                   | ** ** | ** **   | ** ** | ** **         | ** ** | ** **         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | **2004**   | ** ** | **Directors’** | ** ** | **Incentive**        | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Non-Plan** | ** ** | **1994 Plan** | ** ** | **1998 Plan** | ** ** | **EIP Plan** | ** ** | **Plan**   | ** ** | **Plan**   | ** ** | **Total**  | ** ** |
| Authorized                   |       |         | 21,223     |               |       |               | 660,000    |              |       |       | 192,500    |       |       | 400,000    |       |                | 40,000     |                 |       |       | 6,577,106  |   |   | 7,890,829 |   |
| Increased                    |       |         | —     |               |       |               | —     |              |       |       | —     |       |       | —     |       |                | —     |                 |       |       | 45,829     |   |   | 45,829 |   |
| Suspended and  cancelled     |       |         | 1,625      |               |       |               | 88,274     |              |       |       | 55,615     |       |       | 290,550    |       |                | 13,300     |                 |       |       | —     |   |   | 449,364 |   |
| Authorized—As  Adjusted |       |         | 19,598     |               |       |               | 571,726    |              |       |       | 136,885    |       |       | 109,450    |       |                | 26,700     |                 |       |       | 6,622,935  |   |   | 7,487,294 |   |
| Less:                        |       |         |       |               |       |               |       |              |       |       |       |       |       |       |       |                |       |                 |       |       |       |   |   |   |   |
| Exercised                    |       |         | 19,508     |               |       |               | 43,962     |              |       |       | 18,351     |       |       | —     |       |                | —     |                 |       |       | —     |   |   | 81,821 |   |
| Expired                      |       |         | 1,625      |               |       |               | 5,597      |              |       |       | 4,454      |       |       | 288        |       |                | —     |                 |       |       | —     |   |   | 11,964 |   |
| Stock grants                 |       |         | 40         |               |       |               | 17,495     |              |       |       | 41,739     |       |       | 16,250     |       |                | 11,350     |                 |       |       | 10,000     |   |   | 96,874 |   |
| Cancelled                    |       |         | 50         |               |       |               | 473,295    |              |       |       | 58,270     |       |       | 85,612     |       |                | 15,350     |                 |       |       | 5,400      |   |   | 637,977 |   |
| Issued and unexercised       |       |         | 50         |               |       |               | 510,269    |              |       |       | 76,795     |       |       | 93,200     |       |                | 15,350     |                 |       |       | 5,109,629  |   |   | 5,805,293 |   |
| Available to be issued       |       |         | —     |               |       |               | —     |              |       |       | —     |       |       | —     |       |                | —     |                 |       |       | 1,503,306  |   |   | 1,503,306 |   |

 

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| ** **                                 | ** ** | **Outstanding Options** | ** ** | **Exercisable Options** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                 | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                 | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                 | ** ** | **Number**                   | ** ** | **Remaining**                | ** ** | **Exercise** | ** ** | **Number** | ** ** | **Exercise** | ** ** |
| **Range of Exercise Price** | ** ** | **Outstanding**              | ** ** | **Life**                     | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| $1.88 - $2.90                              |       |                         | 1,587,300  |                         |       |   | 9.77 |   |   |   | $ | 2.10 |   |   |   | 100 |   |   |   | $ | 2.90 |   |   |
| $3.25 - $3.88                              |       |                         | 268,250    |                         |       |   | 9.36 |   |   |   | $ | 3.61 |   |   |   | 5,000 |   |   |   | $ | 3.40 |   |   |
| $4.02                                      |       |                         | 3,885,772  |                         |       |   | 8.54 |   |   |   | $ | 4.02 |   |   |   | 533,927 |   |   |   | $ | 4.02 |   |   |
| $9.50 - $48.30                             |       |                         | 47,970     |                         |       |   | 3.14 |   |   |   | $ | 22.05 |   |   |   | 42,637 |   |   |   | $ | 23.05 |   |   |
| $65.00 - $95.50                            |       |                         | 16,001     |                         |       |   | 4.10 |   |   |   | $ | 77.97 |   |   |   | 16,001 |   |   |   | $ | 77.97 |   |   |
| $1.88 - $95.50                             |       |                         | 5,805,293  |                         |       |   | 8.86 |   |   |   | $ | 3.83 |   |   |   | 597,665 |   |   |   | $ | 7.35 |   |   |

 

**Note 9. RetirementPlans**

The Company sponsors a defined contribution retirementplan (the “401(k) Plan”) for all eligible employees that allowsparticipants to make contributions by salary deduction pursuant toSection 401(k) of the Internal Revenue Code. The Company may makediscretionary contributions to the 401(k) Plan on behalf of theparticipants in the form of cash or in shares of common stock. No discretionarycontributions were made by the Company to the 401(k) Plan in 2006, 2005and 2004.

The Company adopted an Employee Stock Ownership Plan(“ESOP”) for its employees, in accordance with the Internal Revenue Code. Underthis plan, employees over the age of 17 are eligible to participate on thefirst day of the month immediately following the completion of six months ofcontinuous service or 1,000 hours of service during a 12-continuous-monthperiod. Participants make no contributions to the ESOP. The Company contributescommon stock to the ESOP that is allocated to all eligible employees based ontheir allowable pay. These contributions vest 25% each year starting with theemployees second year of employment. For 2006, 2005 and 2004 the Companycontributed 102,479, 75,000 and 33,564, shares to the ESOP and recordedcompensation expense of $393,000, $420,000 and $791,000, respectively. TheCompany’s 2004 contribution included 5,431 shares of treasury stock. All sharesheld by the ESOP are treated as outstanding in computing earnings per share.

As a result of a series ofrestructurings occurring since July 2002 and concluding with the sale ofthe paclitaxel business, there have been partial plan terminations of both the401(k) Plan and the ESOP. Under a partial plan termination, an employeewhose employment was involuntarily terminated or notified that his/heremployment would be involuntarily terminated and left the Company voluntarilyafter receiving such notification was a qualifying employee and retroactively100% vested in any previously issued Company contributions to the 401(k) Planand ESOP. Any shares previously forfeited by such qualifying employees werereturned to those employees. The Company did not have to issue any additionalshares to either the 401(k) or the ESOP as a result of the partial plantermination and it had no effect on the Company’s financial position or resultsof operations.

F-23

----

**Note 10. IncomeTaxes**

As of December 27,2006, the Company had the following net operating loss carryforwards andresearch and development credits to offset future taxable income in the U.S.(in thousands):

| ** **                          | ** ** | **Net**       | ** ** | **Research and** | ** ** |
|-------------------------------------|------------|---------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Operating** | ** ** | **Development**       | ** ** |
| **Expiring December 31,** | ** ** | ** **    | ** ** | **Losses**            | ** ** | **Credits** | ** ** |
| 2007                                |       | $             | —     |                  |       | $ | 52 |   |   |
| 2008                                |       | —        |       |                  | 54         |   |   |
| 2009                                |       | —        |       |                  | 38         |   |   |
| 2010                                |       | —        |       |                  | 15         |   |   |
| 2011                                |       | —        |       |                  | 49         |   |   |
| 2012                                |       | 10,825        |       |                  | 141        |   |   |
| 2013                                |       | —        |       |                  | —     |   |   |
| 2014                                |       | —        |       |                  | —     |   |   |
| 2015                                |       | —        |       |                  | —     |   |   |
| 2016                                |       | —        |       |                  | —     |   |   |
| 2017                                |       | —        |       |                  | —     |   |   |
| 2018                                |       | —        |       |                  | 205        |   |   |
| 2019                                |       | 8,445         |       |                  | 230        |   |   |
| 2020                                |       | 15,899        |       |                  | 340        |   |   |
| 2021                                |       | 19,781        |       |                  | 449        |   |   |
| 2022                                |       | 8,715         |       |                  | 565        |   |   |
| 2023                                |       | —        |       |                  | 390        |   |   |
| 2024                                |       | 21,074        |       |                  | 910        |   |   |
| 2025                                |       | 15,917        |       |                  | 429        |   |   |
| 2026                                |       | 13,028        |       |                  | 380        |   |   |
|                                |       | $             | 113,684    |                  |       | $ | 4,247 |   |   |
|                                     |            |               |            |                       |            |  |  |  |  |  |  |

 

Of the $113.7 million of net operating losses listedabove, $3.5 million resulted from the exercise of stock options and, as aresult, the tax effect of utilizing that portion of the net operating losseswould be credited directly to stockholder’s equity.

The Internal Revenue Code of 1986, as amended (the “Code”),contains provisions that may limit the tax net operating loss (“NOL”) and taxcredits available for use in any given year upon the occurrence of certainevents, including significant changes in ownership interest. A change inownership of a company (as defined in Section 382 of the Code) within athree-year period results in an annual limitation on the company’s ability toutilize its NOL and tax credit carryforwards from tax periods prior to theownership change.  As a result of theprivate placement of equity securities in April 2006, which is consideredto be a change in ownership for tax purposes under the Code, the Company’s NOLand tax credit carryforwards as of December 27, 2006 are subject to suchlimitations. The Company believes that it will not be able to utilize a significantportion of its NOL and tax credits.

F-24

----

Significantcomponents of the Company’s deferred tax assets (liabilities) are as follows(in thousands):

| ** **                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                         |       |     |       |     |       |
| Tax net operating  loss carryforward         |       | $        | 43,996     |     | $          | 37,784 |   |
| Research and  development credits            |       | 4,247    |       | 3,863    |       |
| Deferred compensation                        |       | 1,349    |       | —   |       |
| Depreciation                                 |       | (72      | )          | 29       |       |
| Alternative  minimum tax credit carryforward |       | 467      |       | 467      |       |
| Other                                        |       | 1,004    |       | 935      |       |
| Total deferred tax assets                    |       | 50,991   |       | 43,078   |       |
| Valuation  allowance                         |       | (50,991  | )          | (43,078  | )          |
| Net deferred tax  assets                     |       | $        | —     |     | $          | — |   |

 

Variations from the federal statutory rate are asfollows:

| ** **                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory  income tax rate                   |       | 35.00    | %          | 35.00    | %          | 35.00    | %          |
| Effect of  permenant differences                     |       | -0.05    | %          | -1.98    | %          | 0.03     | %          |
| State income tax  rate net of federal benefit        |       | 3.70     | %          | 3.25     | %          | 3.08     | %          |
| Effect of foreign  operations                        |       | —   |       | -1.47    | %          | -2.58    | %          |
| Valuation  allowance                                 |       | -38.70   | %          | -34.95   | %          | -35.55   | %          |
| Effective income  tax rate for continuing operations |       | -0.05    | %          | -0.15    | %          | -0.02    | %          |

 

**Note 11.Restructuring Costs**

Restructuring costs include the costs associated withactions taken by the Company in response to changes in the Company’s business.These charges consist of costs that were incurred to exit an activity or cancelan existing contractual obligation, including the closure of facilities andemployee termination related charges. There were no restructuring charges during 2006.

See Note 2 regarding the closure of the Company’sGenomics division in 2004 and the sale of the paclitaxel business in 2003. Thesale of the Company’s Technical and Analytical Services group to ChromaDex, Inc.,as discussed in Note 12, was also part of the Company’s restructuring.

During the third quarter of 2005, the Company incurredseverance costs of $299,000 associated with the elimination of two general andadministrative executives, five other general and administrative employees and15 research and development positions (including one consultant).

F-25

----

Thefollowing table summarizes the components of the restructuring charges, thepayments and non-cash charges, and the remaining accrual as of December 27,2006, December 28, 2005 and December 29, 2004 (in thousands):

| ** **                                          | ** ** | **Employee**           | ** ** | ** **   | ** ** | ** **        | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|--------------|------------|-------------------|------------|
| ** **                                          | ** ** | **Severance and** | ** ** | **Facility** | ** ** | **Total**         | ** ** |
| ** **                                          | ** ** | **Termination**        | ** ** | **Closure**  | ** ** | **Restructuring** | ** ** |
| ** **                                          | ** ** | **Costs**              | ** ** | **Costs**    | ** ** | **Charges**       | ** ** |
| Accrual balance  at December 31, 2003          |       |                   | $          | 153          |       |              |       | $ | — |   |   |   | $ | 153 |   |   |
| Fourth quarter  2004 restructuring charge           |       |                   | 253        |         |       |              | 203        |   |   |   | 456 |   |   |
| Payments in 2004                                    |       |                   | (200       | )            |       |              | —     |   |   |   | (200 | ) |   |
| Accrual balance  at December 29, 2004          |       |                   | 206        |         |       |              | 203        |   |   |   | 409 |   |   |
| Total  restructuring charges December 28, 2005 |       |                   | 299        |         |       |              | —     |   |   |   | 299 |   |   |
| Payments in 2005                                    |       |                   | (468       | )            |       |              | (203       | ) |   |   | (671 | ) |   |
| Accrual balance  at December 28, 2005          |       |                   | 37         |         |       |              | —     |   |   |   | 37 |   |   |
| Payments in 2006                                    |       |                   | (37        | )            |       |              | —     |   |   |   | (37 | ) |   |
| Accrual balance at  December 27, 2006          |       |                   | $          | —       |       |              |       | $ | — |   |   |   | $ | — |   |   |

 

**Note 12. Investmentin ChromaDex, Inc.**

In April 2003, the Company sold its Technical andAnalytical Services group to privately held ChromaDex, Inc. in exchangefor approximately 15%, on a fully diluted basis, of the then outstanding commonstock of ChromaDex. In exchange for the common stock received, the Company soldproperty and equipment valued at approximately $1.0 million, as well asprovided rents and other subsidies of $468,000, which included a payment of$300,000 in cash at the closing. ChromaDex assumed the lease for Tapestry’sresearch facility in Boulder, Colorado as part of this transaction. The Companysubleases a portion of this space from ChromaDex. ChromaDex is a supplier ofphytochemical reference standards for the nutraceutical, dietary supplement andfunctional food industries. See “Note 15. Related Party Transactions.”

The Company accounts for its investment in ChromaDexunder the cost method for equity investments. Accordingly, the Company performsperiodic valuation analyses on the carrying value of this investment. In thequarter ended September 29, 2005, the Company recognized an impairmentcharge related to this asset of $963,000, thereby revaluing it from $1.4million to $451,000. This charge was based on new financial information madeavailable by ChromaDex at that time.

As a result of ananti-dilution provision in the original Asset Purchase Agreement betweenChromaDex and the Company, during fiscal 2006, the Company received anadditional 46,503 shares of ChromaDex common stock and recorded an additional$7,600 to its investment in ChromaDex.

**Note 13. TechnologyLicense**

In December of 2005,the Company terminated its technology license agreement with the University ofDelaware and Thomas Jefferson University, relating to the use of proprietaryoligonucleotides (DNA fragments) designed to precisely alter genes in humans,animals, plants, viruses and microbes. The license provided for research andpatent funding commitments and payments in common stock. As of December 28,2005, the Company has issued 45,750 shares of common stock under the license tothe University of Delaware, 7,125 shares to Thomas Jefferson University and7,125 shares to The Samuel Roberts Noble Foundation, Inc., each of whichhad an ownership interest in the licensed intellectual property. There were noissuances of common stock in 2006 under this agreement.

F-26

----

**Note 14.Commitments and Contingencies**

**Operating Leases**

TheCompany has executed noncancelable operating lease agreements for office,research and production facilities, and equipment. As of December 27,2006, future minimum lease payments under noncancelable operating leaseagreements are as follows (in thousands): 

| 2007   |   | $  | 151    |   |
|--------|--------|----|--------|--------|
| 2008   |   | 11 |   |
|   |   | $  | 162    |   |

 

Tapestry has renewalclauses in some of these leases that range from one to ten years. Rent expensefor the years ended December 27, 2006, December 28, 2005 and December 29,2004, was $478,000, $574,000 and $953,000, respectively.

**Legal Proceedings**

The Company is currently in arbitration through theAmerican Arbitration Association with the licensor of certain patents andpatent applications relating to pharmaceutical formulations containing VitaminE TPGS. The Company licensed these patent applications in 1998. Theinventor/licensor claims that the Company has failed in its obligation todevelop the licensed technology and is demanding return of the patents. TheCompany denies this claim, and in addition alleges that the inventor/licensorcommitted fraud in inducing the Company to enter into the license agreement.The Company is seeking as yet unspecified damages against theinventor/licensor. The Company does not believe that this arbitration will haveany material adverse effect upon the Company.

The Company agreed toemploy Donald H. Picker, Ph.D. as its President in December 2006. Prior tojoining the Company, Dr. Picker had served as Executive Vice President,R&D, of Callisto Pharmaceuticals, Inc. (“Callisto”). On December 21,2006, Callisto filed a complaint in the Supreme Court of New York, County ofNew York, relating to the employment of Dr. Picker. The suit names theCompany and two of its officers, Leonard Shaykin and Kai Larson, as defendants.In its complaint, Callisto alleges breaches of a confidentiality agreementbetween Callisto and the Company, and also interference with Dr. Picker’scontractual relationship with Callisto. Callisto seeks unspecified actual andpunitive damages. The Company believes these claims are without merit and it isvigorously defending itself against such claims.

**EmploymentAgreements**

The Company has employmentagreements with key employees. These employment agreements contain provisionsregarding the termination of employment including termination of employmentassociated with a change in control (as defined). These termination benefitsrange from 100% to 300% of the employee’s base salary for the prior 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 prior 12-month period.

**Note 15. RelatedParty Transactions**

The Company paid ChromaDex (see “Note 12. Investmentin ChromaDex, Inc.,”) $404,000, $313,000 and $379,000 during 2006, 2005and 2004, respectively, for support services and the Company’s share of rent,utilities, supplies and maintenance costs in connection with its sublease ofChromaDex’s research facility. The Company had accounts payable balances toChromaDex of $23,000 and $31,000 at December 27, 2006 and December 28,2005, respectively.

F-27

----

One of Tapestry’s directors, Arthur H. Hayes, Jr., M.D., has providedcertain consulting services to the Company. The Company had a consultingagreement with MediScience Associates (the “MediScience Agreement”) whereby Dr. Hayes,who is President and Chief Operating Officer of MediScience, provided us withconsulting services in a variety of areas, including clinical researchplanning, strategic positioning and regulatory guidance. The Company terminatedthis consulting agreement during the second quarter of 2005. Dr. Hayes waspaid $25,000 and $50,000 under this agreement during 2005 and 2004,respectively.

On March 22, 2006 the Company and Patricia Pilia,Ph.D. entered into a Settlement Agreement (the “Settlement Agreement”) inconnection with Dr. Pilia’s termination of employment by the Companywithout cause on February 23, 2006. Dr. Pilia is a member of theBoard of Directors and previously served as Executive Vice President andSecretary of the Company and was party to an employment agreement with theCompany. In connection with the Settlement Agreement, the Company paid Dr. Pilia$646,000 for termination benefits in 2006.

In addition, Dr. Piliaholds an option entitling her to purchase up to 10% of the outstanding stock ofRegulus Pharmaceutical Consulting (“Regulus”), a firm that provides regulatoryconsulting services to the Company. The option is subject to certain vestingrequirements. In compensation for consulting services provided to the Company,the Company paid Regulus $65,000, $162,000 and $182,000 during 2006, 2005 and2004, respectively. Dr. Pilia has also made a loan to Regulus and hasguaranteed a loan to Regulus made by a bank.

**Note 16. QuarterlyData (unaudited)**

Thetable below summarizes the Company’s unaudited quarterly results for fiscalyears 2006 and 2005 (in thousands, except per share amounts): 

| ** **                                | ** ** | **First**  | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** | ** **  | ** ** |
|-------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **Years Ended**                      | ** ** | ** ** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total** | ** ** |
| *2006*                                    | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** |
| Net loss from  continuing operations      |       | $          | (4,303     | )           | $          | (4,163      | )          | $           | (3,558     | )           | $          | (4,569 | ) | $ | (16,593 | ) |
| Gain/(loss) from  discontinued operations |       | (88        | )          | —      |       | —      |       | 29          |       | (59         | )          |
| Net loss                                  |       | (4,391     | )          | (4,163      | )          | (3,558      | )          | (4,540      | )          | (16,652     | )          |
| Basic and diluted  net loss per share     |       | (1.26      | )          | (0.28       | )          | (0.22       | )          | (0.28       | )          | (1.29       | )          |
| *2005*                                    |       |       |       |        |       |        |       |        |       |        |       |
| Net loss from  continuing operations      |       | $          | (4,383     | )           | $          | (4,287      | )          | $           | (5,498     | )           | $          | (3,012 | ) | $ | (17,180 | ) |
| Loss from  discontinued operations        |       | (181       | )          | (127        | )          | (43         | )          | (7          | )          | (358        | )          |
| Net loss                                  |       | (4,564     | )          | (4,414      | )          | (5,541      | )          | (3,019      | )          | (17,538     | )          |
| Basic and diluted net  loss per share     |       | (1.36      | )          | (1.29       | )          | (1.62       | )          | (0.87       | )          | (5.15       | )          |
|                                           |            |            |            |             |            |             |            |             |            |             |            |  |  |  |  |  |  |  |

 

F-28

----

**Exhibits**

**INDEX OF EXHIBITS**

| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                                    |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                    |
| 3.1        |       | Second Amended and Restated Certificate of  Incorporation of the Company, as amended February 3, 2006(1)                                                                                                                                                 |
| 3.2        |       | Bylaws of the Company as  amended through April 4, 2006*                                                                                                                                                                                                 |
| 3.3        |       | Certificate of  Designation of Series C Junior Participating Preferred Stock(3)                                                                                                                                                                          |
| 4.1        |       | Common Stock  Certificate(1)                                                                                                                                                                                                                                  |
| 4.2        |       | Restated Rights  Agreement dated December 12, 2006 between the Company and American Stock  Transfer and Trust Company, as Rights Agent(3)                                                                                                                |
| 4.3        |       | The Certificate of  Incorporation and Bylaws of the Company are included as Exhibits 3.1 - 3.2                                                                                                                                                                |
| 10.1**     |       | Company’s Amended and  Restated 1994 Long-Term Performance Incentive Plan, as amended through  March 4, 2002(2)                                                                                                                                     |
| 10.2       |       | Company’s Amended and  Restated 1998 Stock Incentive Plan, as amended through October 15,  2002(2)                                                                                                                                                  |
| 10.3**     |       | Company’s 2004 Equity  Incentive Plan, as amended and restated effective June 10, 2005(4)                                                                                                                                                           |
| 10.4**     |       | Form of Stock  Option Agreement for certain options granted under the Company’s 2004 Equity  Incentive Plan(8)                                                                                                                                      |
| 10.5**     |       | Company’s 2004 Non  Employee Director’s Stock Option Plan(5)                                                                                                                                                                                        |
| 10.6**     |       | Form of Stock  Option Agreement for options granted under the Company’s 2004 Non-Employee  Directors’ Stock Option Plan(8)                                                                                                                     |
| 10.7**     |       | Company’s 2006 Equity  Incentive Plan(13)                                                                                                                                                                                                                |
| 10.8**     |       | Form of Stock  Option Agreement for options granted under the Company’s 2006 Equity  Incentive Plan(14)                                                                                                                                             |
| 10.9**     |       | Employment Agreement  effective October 1, 2001 between the Company and Leonard Shaykin(6)                                                                                                                                                               |
| 10.10**    |       | Employment Agreement  effective October 1, 2001 between the Company and Patricia Pilia(6)                                                                                                                                                                |
| 10.11**    |       | Employment Agreement  effective October 1, 2001 between the Company and Gordon Link(6)                                                                                                                                                                   |
| 10.12**    |       | Employment Agreement  effective October 1, 2001 between the Company and Kai Larson(6)                                                                                                                                                                    |
| 10.13**    |       | Employment Agreement  effective October 28, 2005 between the Company and Martin Batt(4)                                                                                                                                                                  |
| 10.14**    |       | Employment Agreement  effective January 2, 2007 between the Company and Donald H. Picker  Ph.D.*                                                                                                                                                         |
| 10.15**    |       | Form of waiver agreement  signed by Patricia A. Pilia, Gordon Link and Kai P. Larson on  September 10, 2003 and by Leonard P. Shaykin on September 12, 2003  (together with Schedule required by Instruction 2 to Item 601 Regulation  S-K)(2) |
| 10.16**    |       | Settlement Agreement  dated March 22, 2006 between the Company and Patricia A. Pilia(12)                                                                                                                                                                 |
| 10.17**    |       | Amendment to Employment  Agreement executed by the Company and Patricia Pilia dated March 22,  2006(12)                                                                                                                                                  |

----

 

| 10.18** |   | Form of Amendment  to Employment Agreement executed by the Company and Leonard Shaykin, Gordon  Link and Kai Larson dated February 27, 2006 (together with Schedule  required by Instruction 2 to Item 601 of Regulation S-K)(11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19   |   | Form of Director  and Officer Indemnification Agreement signed by the Company and each of  Martin M. Batt, George Gould, Esq., Arthur Hull Hayes, Jr., M.D.,  Kai Larson, Gordon H. Link, Jr., Patricia A. Pilia, Ph.D., The Honorable  Richard N. Perle, Robert E. Pollack, Ph.D., and Leonard P. Shaykin on the  dates set forth on the Schedule previously filed and incorporated herein by  reference, which Schedule is amended to include the Director and Officer  Indemnification Agreement signed by Stephen Carter, M.D. on March 7,  2004 and Elliot Maza on December 14, 2004(7)                                                                                                                                                                                                                                                                                                                                               |
| 10.20   |   | Purchase Agreement,  dated as of February 2, 2006, by and among Tapestry  Pharmaceuticals, Inc., Special Situations Cayman Fund, L.P., Special  Situations Fund III, L.P., Special Situations Fund III QP, L.P., Special  Situations Life Sciences Fund, L.P., Special Situations Private Equity Fund,  L.P., Tang Capital Partners, LP, Baker Biotech Fund II (Z), L.P., Baker  Biotech Fund III, L.P., Baker Biotech Fund III (Z), L.P., Baker Bros.  Investments II, L.P., 14159, L.P., Biotechnology Value Fund, L.P.,  Biotechnology Value Fund II, L.P., BVF Investments, L.L.C., Investment 10,  L.L.C., Fort Mason Master, L.P., Fort Mason Partners, L.P., Capital Ventures  International, Merlin BioMed Long Term Appreciation, LP, Merlin BioMed  Offshore Master Fund, Versant Capital Management LLC, Xmark JV Investment  Partners, LLC, Xmark Opportunity Fund, L.P., Xmark Opportunity Fund, Ltd. and  the other parties signatory thereto(1) |
| 10.21   |   | Registration Rights  Agreement, dated April 5, 2006 entered into by and among Tapestry  Pharmaceuticals, Inc. and the Purchasers(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.22   |   | Form of Warrant,  dated April 5, 2006 between the Company and the Purchasers (together  with schedule prepared in accordance with Instruction 2 to Item 601 of  Regulation S-K)(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.23** |   | Salaries and Bonuses of  Named Executive Officers*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.24** |   | Compensation of  Directors(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 21.1    |   | List of Subsidiaries(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 23.1    |   | Consent of Grant  Thornton LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 24.1    |   | Power of Attorney*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1    |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934, as amended*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2    |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the  Securities Exchange Act of 1934, as amended*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.1#   |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (18 U.S.C. Section 1350)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2#   |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (18 U.S.C. Section 1350)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

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                 * Filed herewith

          ** A management compensation plan

              # This certification shall not be deemed “filed”for purposes of Section 18 of the Exchange Act, or otherwise subject toliability pursuant to that section. Such certification shall not be deemed tobe 

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incorporated by referenceinto any filing under the Securities Act or the Exchange Act, except to the extentthat the Company specifically incorporates it by reference

       (1) Incorporated herein by reference to the Company’s Current Report onForm 8-K dated February 2,2006 (File No. 0-24320)

       (2) Incorporated herein by reference to the Company’s Annual Report onForm 10-K for the yearended December 31, 2003 (File No. 0-24320)

       (3) Incorporated herein by reference to the Company’s Current Report onForm 8-K dated December 14,2006 (File No. 0-24320)

       (4) Incorporated herein by reference to the Company’s Annual Report onForm 10-K for the yearended December 28, 2005 (File No. 0-24320)

       (5) Incorporated herein by reference to the Company’s Quarterly Reporton Form 10-Q for theperiod ending June 30, 2004 (File No. 0-24320)

       (6) Incorporated herein by reference to the Company’s Annual Report onForm 10-K for the yearended December 31, 2001 (File No. 0-24320)

       (7) Incorporated herein by reference to the Company’s Annual Report onForm 10-K/A for theyear ended December 31, 2002, filed on August 8, 2003 (FileNo. 0-24320)

       (8) Incorporated herein by reference to the Company’s Current Report onForm 8-K dated December 14,2004 (File No. 0-24320)

       (9) Incorporated herein by reference to the Company’s Quarterly Reporton Form 10-Q for theperiod ending March 30, 2005 (File No. 0-24320)

(10) Incorporated herein by reference to the Company’s Annual Report onForm 10-K for the yearended December 31, 2001 (File No. 0-24320)

(11) Incorporated herein by reference to the Company’s Current Report onForm 8-K dated February 23,2006 (File No. 0-24320)

(12) Incorporated herein by reference to the Company’s Current Report onForm 8-K dated March 22,2006 (File No. 0-24320)

(13) Incorporated herein by reference to the Company’s Current Report onForm 8-K dated April 4,2006 (File No. 0-24320)

(14) Incorporated herein by reference to the Company’s Quarterly Reporton Form 10-Q for the period ending March 29, 2006 (FileNo. 0-24320)

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