**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 29, 2004**

**OR**

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

**FORTHE TRANSITION PERIOD FROM                     TO                     :**

**CommissionFile Number 0-24320**

**TAPESTRY PHARMACEUTICALS, INC.**

(Exact name of Registrantas specified in its charter)
| **Delaware**                                                                     | **84-1187753**                        |
|----------------------------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                  | (I.R.S. Employer  Identification No.) |
| **4840 Pearl East Circle,  Suite 300W  Boulder, Colorado 80301**            |
| (Address of  principal executive office, including zip code)                     |
| **(303) 516-8500**(Registrant’s telephone number, including area code) |

 

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

**Securitiesregistered pursuant to Section 12(g) of the Act:** CommonStock, Par Value $0.0075 per share;Preferred Stock Purchase Rights

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

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

The aggregate market valueof the voting and non-voting common equity held by non-affiliates of theregistrant was $56,497,000 as of June 30, 2004 (the last business day ofthe registrant’s second fiscal quarter in 2004). For purposes of determiningthis number, 1,196,819 shares of common stock held by affiliates are excluded. Forpurposes of making this calculation, the registrant has defined affiliates asincluding all directors and executive officers and related parties thereto.

As of February 15,2005, the registrant had 33,436,151 shares of Common Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

None.

 

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** **

**Table of Contents**
| Part I          | Item  1 | Business                                                                                                                        |   | 3  |
|----------------------|---------|---------------------------------------------------------------------------------------------------------------------------------|--------|----|
|                 | Item 2  | Properties                                                                                                                      |   | 9  |
|                 | Item 3  | Legal Proceedings                                                                                                               |   | 9  |
|                 | Item 4  | Submission  of Matters to Vote of Security Holders                                                                              |   | 9  |
| Part II         | Item 5  | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of  Equity Securities             |   | 10 |
|                 | Item 6  | Selected Financial Data                                                                                                         |   | 11 |
|                 | Item 7  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations       |   | 12 |
|                 | Item 7A | Quantitative  and Qualitative Disclosures about Market Risk                                                                     |   | 29 |
|                 | Item 8  | Financial  Statements and Supplementary Data                                                                                    |   | 29 |
|                 | Item 9  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                  |   | 29 |
|                 | Item 9A | Controls  and Procedures                                                                                                        |   | 30 |
|                 | Item 9B | Other  Information                                                                                                              |   | 30 |
| Part III        | Item 10 | Directors  and Executive Officers of the Registrant                                                                             |   | 31 |
|                 | Item 11 | Executive  Compensation                                                                                                         |   | 35 |
|                 | Item 12 | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters                                |   | 40 |
|                 | Item 13 | Certain  Relationships and Related Transactions                                                                                 |   | 43 |
|                 | Item 14 | Principal Accountant Fees  and Services                                                                                         |   | 43 |
| Part IV         | Item 15 | Exhibits and Financial Statement Schedules                                                                                      |   | 45 |
| Financial Statements |    | F-1                                                                                                                             |

 

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**Part I**

**Item1**

*Thisreport contains forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-lookingstatements include, but are not limited to, statements concerning our plans tocontinue development of our current product candidates; conduct clinical trialswith respect to our product candidates; seek regulatory approvals; seekadditional financing; address certain markets; and evaluate additional productcandidates for subsequent clinical and commercial development. 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. Althoughwe believe that the expectations reflected in the forward-looking statementscontained herein are reasonable, we cannot guarantee future results, levels ofactivity, performance or achievements. These statements involve known andunknown risks and uncertainties that may cause our or our industry’s results,levels of activity, performance or achievements to be materially different fromthose expressed or implied by the forward-looking statements. Factors that maycause or contribute to such differences include, among other things, thosediscussed 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 thedevelopment of proprietary therapies for the treatment of cancer. We are also actively engagedin evaluating new therapeutic agents and/or related technologies. Ourevaluation of 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 anticancer compounds. We incurred significant losses sinceformation, including losses from continuing operations of $21.6 million for theyear ended December 29, 2004. Our accumulated deficit was $89.7 million asof December 29, 2004. We anticipate that losses will continue until suchtime, if ever, as we are able to generate sufficient revenue to support ourdevelopment 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.

On November 16, 2004, we decided to discontinueresearch on our genomics products, excluding Huntington’s Disease, and closethe Genomics division. We will continue our research activities relating to theHuntington’s Disease program, with the majority of such work being performed bythe University of Delaware and contract service providers.

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

Historically, the focus of our business was theproduction and sale of paclitaxel, a naturally occurring chemotherapeuticanti-cancer agent found in certain species of yew, or *Taxus,* trees. The majority of ourresources had been devoted to this endeavor. Prior to the sale of thepaclitaxel business, we had accumulated approximately $100 million oflosses, principally through research and development activities, and thedevelopment and implementation of our manufacturing capabilities so that wecould supply bulk 

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paclitaxel to ourmarketing partners, Mayne Pharma (USA) Inc. (f/k/a/ FauldingPharmaceutical Co.) (“Mayne Pharma”), a subsidiary of Mayne Group Limited, andAbbott 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 to reflect theCompany’s actual inventory as of the closing. In addition, Mayne Pharma assumedcertain liabilities associated with our paclitaxel business. Approximately$21.9 million of the proceeds of the transaction were paid to Abbott toretire all outstanding debt and payables we owed to Abbott.

The assets sold to Mayne Pharma included ourpaclitaxel manufacturing assets, yew plantations, domestic and internationalissued and pending paclitaxel patents, a worldwide registration dossier,worldwide development and supply agreements, inventories and settlement ofaccounts receivable. We retained all of our intellectual property not used inconnection with the business sold and we retained intellectual property rightsto research, develop, make, use and sell products other than those associatedwith the generic injectable paclitaxel business. We also retained liabilitiesrelated to our ongoing business, including those relating to our employees, ourcontracts and license agreements unrelated to the paclitaxel business andcertain leases and purchase orders. In addition, we retained other liabilitiesrelated to our manufacturing and sale of paclitaxel that arose prior to theclosing of the asset sale. Upon closing of the asset sale, we exited thegeneric paclitaxel business, terminated the development agreements with Abbottand Mayne Pharma, and transferred our other generic paclitaxel marketingagreements to 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.

**TapestryResearch and Development Activities**

Thefollowing chart identifies our four therapeutic candidate programs that are inthe most advanced stages of development. 
| **Program**          | ** ** | ** **                                                            | ** ** | **Potential  Indication(s)**                               | ** ** | **Development  Status** |
|---------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-------------------------|
| TPI 287                   |       | Prostate,  Non-Small Cell Lung, Pancreatic, Ovarian, and Colon Cancer |       | Received FDA  clearance to commence Phase I Clinical Trial |
| Quassinoids               |       | Cancers                                                               |       | Preclinical Development                                    |
| Peptide Linked Cytotoxics |       | Cancers                                                               |       | Preclinical Development                                    |
| Oligo Therapy             |       | Huntington’s Disease                                             |       | Preclinical Development                                    |

 

We terminated thedevelopment status of the Sickle Cell hereditary disease program and theBombesin targeted oncology program. Both the quassinoid analog program and thepeptide linked cytotoxic program remain in active development with additionalpotential lead compounds being tested.

·       TPI287 is a novel third generation taxane. On December 21, 2004, we filed anInvestigational New Drug (“IND”) application, and on January 21, 2005, wewere cleared to proceed into clinical trials by the U.S. Food and Drug Administration(“FDA”). Assuming that we are able to manufacture and formulate sufficientquantities of TPI 287 for clinical testing, and we obtain authorization frominstitutional review boards and other relevant bodies, we believe we will beable to commence human clinical trials with TPI 287 in the first half of 2005. Inpreclinical testing, TPI 287 demonstrated the ability to inhibit tumor cellgrowth in a number of *in vitro* celllines and has shown inhibition of tumors in certain animal xenograft modelswhen tested against standard comparative agents. The *in vitro*activity was seen across multiple cell lines including cell lines known to be 

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sensitive to taxanes andcell lines known to be resistant to taxanes. Taxane sensitive cell lines inwhich TPI 287 shows activity include cell lines derived from breast cancer,uterine cancer and small cell lung cancer. Taxane resistant cell lines in whichTPI 287 shows activity include lines derived from breast cancer, colon cancer,prostate cancer and pancreatic cancer. In *in vivo* animaltesting, TPI 287 demonstrated reduction in the rate of tumor growth whencompared to paclitaxel in both taxane resistant and taxane sensitive breastcancer xenografts. In similar experiments, it was also superior to docetaxel inboth prostate cancer and non-small cell lung cancer xenografts. It was alsocomparable to SN-38, a pro-drug of irinotecan (a camptothecan analog), incolon cancer.

·       Quassinoidsare complex polyfunctional, polycyclic natural products of the plant family *Simaroubaceae*, which exhibitantineoplastic activity. We have in-licensed several quassinoid compositions aswell as their isolation and synthesis. We have completed several *in vitro* and *in vivo* preclinical studies on TPI 273 and other proprietaryQuassinoid analogs, and additional preclinical studies are in progress tobetter delineate the antineoplastic activity of these compounds. We are alsoconducting preclinical research on additional Quassinoid analogs. Currently, wecannot predict when or if any ofthese Quassinoids will be advanced into clinical development.

·       Peptidelinked conjugates consist of a synthetic peptide ligand chemically linked to acytotoxic agent. The new chemical entity thus created appears to positivelyalter the therapeutic index of the cytotoxic agent in certain tumor models. Wehave in-licensed intellectual property in this area. To date, we have completedseveral *in vitro* and *in vivo*preclinical studies on TPI 284, aproprietary peptide linked conjugate, which indicate that this compound hasactivity in certain cancer cell lines. We are currently conducting studies onadditional proprietary peptide linked compounds to further determine theactivity and therapeutic indexes of peptide linked cytotoxics. Currently, wecannot predict when or if any ofthese conjugates will be advanced into clinical development.

·       Huntington’sDisease is a progressive, inherited, neurological disorder resulting indegeneration of neural tissue. The disease is characterized by lethalhuntingtin protein aggregate formation in neural tissue. Eventually, thepatient suffers dementia, uncontrolled movements and death. There is no knowncure for this rare disease. Symptoms usually appear between the ages of 30 and45, although younger people can also develop the disease. In the United Statesthe disease affects approximately 1 of every 10,000 people. We are developingan oligonucleotide therapy, which may slow the progression of the disease ormay eliminate the death of the nerve cells. We are in the early stages of thisprogram and we can provide no assurance that we will be successful in thisdevelopment effort. To date, we have conducted several *in vitro* studies to determine the effectsof our oligonucleotide therapy in a model neuronal cell based assay and in a biochemicalassay that detects molecules that disrupt protein aggregation. We have alsorecently concluded an *in vivo* animalstudy of Huntington’s Disease. The data from this study indicated that theoligonucleotide therapy may have an effect on mitigating the motor deficitsseen in Huntington’s Disease. We are currently initiating an additional study,which is designed to establish the dose response for the oligonucleotidetherapy in a transgenic mouse model of Huntington’s Disease that may supportthe results of previous *in vitro*and *in vivo* studies as to the efficacy of the oligonucleotide. Weexpect to have the data from this new study by the end of the third quarter of2005.

In 2000, we entered into a 20-year technologylicense with the University of Delaware, Thomas Jefferson University and TheSamuel Roberts Noble Foundation, Inc. The license agreement grants usexclusive worldwide rights to intellectual property including patentapplications relating to the use of proprietary molecules designed to editgenes in humans, animals, plants, viruses and microbes. One of the licensedtechnologies relates to the treatment of Huntington’s Disease and otherneurological diseases. Another of the licensed technologies allows us to useproprietary oligonucleotides to make small, specifically targeted modificationsin the chromosomes of a target animal or plant. At this time, we are activelypursuing only the Huntington’s Disease technology.

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We have agreed to provide research and patent fundingto the University of Delaware and Thomas Jefferson University, as well as anongoing license fee paid in our common stock. Through December 29, 2004,we have issued an aggregate of 500,000 shares of common stock under the license.Assumingwe do not cancel the license, we will issue an additional 700,000 shares in100,000 share-per-year increments on the license anniversaries and/or in200,000 share increments upon the achievement of certain milestone events. Wemay, at our option, accelerate the issuance dates. The license is terminableat our option and, if it is terminated, no further shares will be issued. Wehave committed to fund at least $300,000 in research at the University ofDelaware during 2005. Unless we terminate the license, we are also committed tofunding at least $300,000 in research at the University of Delaware during 2006as well.

*Certain Risks 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 “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and “Risk Factors”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 and Proprietary Technology**

We own or have licensed issued patents and haveapplied for patents relating to our oncology programs as well as our Huntington’sDisease program. We (and our licensors) have applied for and will continue toapply for patents covering our technologies, processes and products as and whenwe deem appropriate. However, these applications may fail to result in issuedpatents.

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.

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Preclinical studies include the laboratory evaluationof *in vitro* pharmacology, productchemistry and formulation, as well as animal studies to assess safety. Preclinicalsafety tests must be conducted by laboratories that comply with FDA regulations.The results of some of the preclinical tests form a part of an IND, along withthe proposed clinical study, chemistry and manufacturing information.

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 and manufacturing,toxicology and pharmacology information are submitted to the FDA in the form ofan 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 all necessarysteps to comply with health information privacy and confidentiality statutesand regulations in all jurisdictions, both state and federal. However, we, orthe parties with which we do business, may not be able to maintain compliancein all jurisdictions where we do business. Failure to maintain compliance, orchanges in state or federal laws regarding privacy, could result in civiland/or criminal penalties and could have a material adverse effect on ourbusiness.

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. Companiesdeveloping or selling taxane products include American Pharmaceutical Partners,Aventis, Bristol Myers Squibb, Wyeth, Daiichi, Abbott Laboratories and Bayer.

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**Researchand Development Expense**

During the years ended in 2004, 2003 and 2002, we incurredapproximately $17.7 million, $10.8 million and $15.9 million, respectively, onresearch and development expense for our oncology and genomics productcandidates. Research and development is expected to remain a significantexpense of our business. Our research and development is expected toconcentrate on the development of novel anticancer agents. We anticipatebringing TPI 287 into clinical trials during the first half of 2005. Inaddition, we have ongoing research with a number of cytotoxic compounds thatmay advance into clinical evaluation. Subject to the outcome of ongoing *in vivo* research, we may assess the feasibility andrequirements for entering into clinical trials with our Huntington’s Diseaseoligonucleotide. We also cannot estimate the cost of the effort necessary tocomplete the programs or the timing of commencement of material net cashinflows from these programs, if ever. Continued development of these programsis dependent upon raising additional capital. We cannot be certain that we willbe able to obtain capital on acceptable terms.

**Foreign and Domestic Operations;Export Sales**

We had no material product sales during 2004. All prioryear sales related to discontinued operations and have been reported as such.

**Employees**

As of December 29, 2004, we had 64 employees, whichincluded 14 part-time employees. Of these employees, 15 held Ph.D. or M.D.degrees. We had 43 employees, including 12 part-time employees, engaged in drugdevelopment, and 21 employees, including 2 part-time employees, engaged inadministration, legal, information technology and finance. We believe that ourrelations with our employees are good. In addition, we contract with manyoutside consultants for services relating to our drug development programs.

**AvailableInformation**

We make available, free of charge, on or through ourinternet website, our annual report on Form 10-K, quarterly reportson Form 10-Q, current reports on Form 8-K and amendmentsto those reports filed or furnished pursuant to Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the Securities andExchange Commission (“SEC”). Our internet address is *www.tapestrypharma.com*.You may read and copy materials that we file with the SEC at the SEC’s PublicReference Room at 450 Fifth Street NW, Washington, DC 20549. You may alsoobtain information on the operation of the Public Reference Room bycalling the SEC at 1-800-SEC-0330. Our internet website andthe information contained therein or connected thereto are not intended to beincorporated into this Annual Report on Form 10-K.

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**Item 2Properties**

We lease10,000 square feet of administrative space and 5,600 square feet of space forresearch and development in Boulder, Colorado. We lease 1,100 square feet inAllentown, Pennsylvania for research and development, and we lease 2,100 squarefeet of office space in New York City, New York for administration. We lease13,500 square feet in Newark, Delaware, which will terminate in May 2005,and is accounted for as discontinued operations. We also own five acres ofundeveloped land in Longmont, Colorado which is accounted for as other assets. Someof our oncology research and development activities are conducted at a contractresearch laboratory leased to us by ChromaDex, Inc. ChromaDex is asupplier of phytochemical reference standards which we sold our analytical andservice group to in April 2003 in exchange for approximately 15% ofChromaDex’s then outstanding common stock. As part of this transaction,ChromaDex assumed the lease for our research facility in Boulder, Colorado, andwe sublease a portion of this facility back from ChromaDex. We believe thatthese existing facilities are adequate to meet current foreseeable requirementsor that suitable additional or substitute space will be available oncommercially reasonable terms.

**Item 3Legal Proceedings**

TL Venturesadvised us before the sale of our paclitaxel business to Mayne Pharma that itbelieved completion of such sale entitled it to have its $8.0 million ofCompany 4% convertible subordinated debentures redeemed. By their terms, thesedebentures were due on February 12, 2007. We disputed TL Ventures’position. On September 8, 2003, TL Ventures Funds reasserted its positionand informed us that, if we could not resolve this issue promptly, it intendedto pursue legal remedies. On September 11, 2003, we filed a complaint in acase captioned *NaPro BioTherapeutics, Inc.v. TL Ventures V L.P. and TL Ventures V Interfund L.P.*, Case No. 2003-CV-1812,District Court, Boulder County, Colorado. In our complaint, we sought adeclaratory judgment from the court that the asset sale to Mayne Pharma did notpermit TL Ventures to have the 4% convertible subordinated debentures redeemed.TL Ventures filed a motion to dismiss the suit, and filed an action in a casecaptioned *TL Ventures V L.P. and TL VenturesV Interfund L.P. v. NaPro BioTherapeutics, Inc.*, Case No. 110-N,Delaware Court of Chancery, alleging that TL Ventures is entitled to redeem its4% convertible subordinated debentures. The Colorado action was dismissed, andthe case proceeded in the Delaware Court of Chancery.

On February 18, 2005 we entered into an agreement withTL Ventures providing for a complete settlement of the litigation, a mutualrelease of claims and the payment of approximately $3,184,000 in cash and theissuance by the Company of promissory notes in an aggregate amount of$4,670,000 in exchange for delivery of the debentures to the Company forcancellation. The notes do not bear interest and are payable in monthlyinstallments of $50,000 beginning in February 2005, $110,000 in 2006 and$150,000 in 2007, with a final payment of $1,000,000 due on January 31,2008. Accrued interest of approximately $134,000 was included in the cashpayment made with the closing. We recorded the obligation resulting from thesettlement on our balance sheet as of December 29, 2004.

**Item 4**

Not applicable.

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**Part II**

**Item 5Market for Registrant’s Common Equity, Related Stockholder Matters** and Issuer Purchases of  EquitySecurities

**MarketInformation**

Our common stock is listed on theNasdaq SmallCap Market, where it trades under the symbol “TPPH.”  The following table sets forth, for theperiods indicated, the high and low closing sale prices for our common stockfor the fiscal years ended December 29, 2004 and December 31, 2003:
|        | ** **      | **High** | ** ** | **Low** | ** ** |
|--------|-----------------|----------|------------|---------|------------|
| 2004   | Fourth Quarter  |     | $          | 1.25    |       | $ | 0.89 |   |
|        | Third Quarter   |     | 1.74       |    | 0.80       |   |
|        | Second Quarter  |     | 2.86       |    | 1.54       |   |
|        | First Quarter   |     | 3.19       |    | 1.96       |   |
| 2003   | Fourth  Quarter |     | $          | 2.15    |       | $ | 1.63 |   |
|   | Third Quarter   |     | 1.88       |    | 1.09       |   |
|   | Second Quarter  |     | 3.08       |    | 0.54       |   |
|   | First Quarter   |     | 0.76       |    | 0.30       |   |

 

**Stockholders**

As of February 1, 2005 we had 322 stockholders ofrecord.

**Dividends**

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

**Securities Authorized for IssuanceUnder Equity Compensation Plans**

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

**Sales ofUnregistered Securities**

On November 23, 2004, we issued 77,675 shares ofcommon stock to the University of Delaware, 10,450 shares of common stock toThomas Jefferson University and 11,875 shares of common stock to The SamuelRobert Noble Foundation, Inc., all in accordance with a 20-yeartechnology license. The shares were issued in reliance upon the exemptionprovided by Section 4(2) of the Securities Act of 1933, as amended,and Regulation D thereunder.

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**Item 6Selected Financial Data**

The selected financial data presented below for each yearin the five years ended December 29, 2004, are derived from our financialstatements, which have been audited for 2004 by Grant Thornton LLP and for theother years by Ernst & Young LLP, registered public accounting firms,and are qualified by reference to such Financial Statements and Notes thereto. Thedata presented below should be read in conjunction with our consolidatedfinancial statements at December 29, 2004 and December 31, 2003 andfor each of the three years reported in the period ended December 29,2004, and the related Notes thereto, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and other financial informationincluded elsewhere in this report. The historical results are not necessarilyindicative of the operating results to be expected in the future. The resultsof our Genomics division operations, excluding the Huntington’s Diseaseprogram, and our generic paclitaxel business, which was sold on December 12,2003 to Mayne Pharma, have been reported as discontinued operations.
| ** **                                                    | ** ** | **Year Ended**                                                | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except per share data)** | ** ** |
| Statement of Operations Data:                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development                                      |       | $                                                                  | 13,504     |   | $ | 6,485 |   | $ | 6,067 |   | $ | 6,381 |   | $ | 131 | ** ** |
| General  and administrative                                   |       | 7,794                                                              |       | 8,616 |   | 8,446 |   | 7,178 | ** ** | 6,815 | ** ** |
| Operating loss                                                |       | 21,298                                                             |       | 15,101 |   | 14,513 |   | 13,559 |   | 6,946 | ** ** |
| Other  income (expense):                                      |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest  income                                              |       | 694                                                                |       | 110 |   | 267 |   | 793 | ** ** | 372 | ** ** |
| Interest  expense                                             |       | (951                                                               | )          | (865 | ) | (723 | ) | (32 | ) | (26 | ) |
| Net loss from continuing operations                           |       | (21,555                                                            | )          | (15,856 | ) | (14,969 | ) | (12,798 | ) | (6,600 | ) |
| Income  (loss) from discontinued operations                   |       | (2,619                                                             | )          | 53,984 |   | 6,304 |   | (12,970 | ) | (10,025 | ) |
| Net income (loss)                                             |       | $                                                                  | (24,174    | ) | $ | 38,128 |   | $ | (8,665 | ) | $ | (25,768 | ) | $ | (16,625 | ) |
| Basic and diluted  net income (loss) per common  share   |       | $                                                                  | (0.74      | ) | $ | 1.24 |   | $ | (0.29 | ) | $ | (0.93 | ) | $ | (0.69 | ) |
| Basic and diluted weighted  average common shares outstanding |       | 32,747                                                             |       | 30,801 |   | 29,606 |   | 27,585 |   | 23,924 |   |

 
| ** **                                                    | ** ** | **Year Ended**     | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **2004**                | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                    | ** ** | **(In thousands)** | ** ** |
| Balance Sheet Data:                                           |       |                    |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents, short-term and long-term  investments |       | $                       | 35,722     |   | $ | 50,782 |   | $ | 6,762 |   | $ | 10,144 |   | $ | 18,982 |   |
| Working capital                                               |       | 23,473                  |       | 47,053 |   | 33,595 |   | 13,582 |   | 23,168 |   |
| Total assets                                                  |       | 39,293                  |       | 57,766 |   | 45,328 |   | 37,061 |   | 38,001 |   |
| Long term debt, net of current maturities                     |       | 3,245                   |       | 41 |   | 19,861 |   | 19,846 |   | 14,953 |   |
| Deferred income, long term                                    |       | —                  |       | — |   | 5,887 |   | 6,508 |   | — |   |
| Convertible debt                                              |       | —                  |       | 5,702 |   | 5,151 |   | — |   | — |   |
| Accumulated deficit                                           |       | (89,724                 | )          | (65,550 | ) | (103,678 | ) | (95,013 | ) | (69,245 | ) |
| Stockholders’ equity                                     |       | 27,780                  |       | 45,998 |   | 6,796 |   | 1,137 |   | 18,587 |   |
|                                                               |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 7**Management’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 RegardingForward-Looking Statements” and “Risk Factors” below.

**General**

We are a pharmaceutical company focused on thedevelopment of proprietary therapies for the treatment of cancer. We believethat our compounds function by novel biological and/or chemical mechanisms and,therefore, if successful in clinical trials, may add to the amelioration oftheir specific disease targets.

We are alsoactively evaluating new therapeutic agents and/or related technologies. Ourevaluation of new products and technologies may involve the examination ofindividual molecules, classes of compounds, or platform technologies, in canceras well as other therapeutic areas. Acquisitions of new products ortechnologies may involve the purchase or licensing of such products ortechnologies, or the acquisition of, or merger with, other companies.

We haveincurred significant losses, including losses from continuing operations of$21.6 million, $15.9 million and $15.0 million for the years ended December 29,2004, December 31, 2003 and December 31, 2002, respectively. Ouraccumulated deficit was $89.7 million as of December 29, 2004. Weanticipate that losses may continue until such time, if ever, as we are able togenerate sufficient sales to support our development operations, including theresearch and development activity mentioned 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 of cancer.All of our products and technologies are in the early stages of development andwe cannot assure you that our efforts will be successful.

**Researchand Development**

Our current business is focused onresearch and development of proprietary therapies for the treatment ofcancer. In2004, 2003 and 2002, we were also engaged in development of genomictechnologies. In 2003 and 2002, we were engaged in research and developmentrelated to our paclitaxel business. Costs relating to genomic technologies,excluding the Huntington’s Disease program, and the paclitaxel business areaggregated in discontinued operations. During the last three fiscal years, wehave incurred the following expenses related to research and developmentprojects (in thousands):
| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Oncology                  |       | $        | 12,474     |     | $          | 5,580    |       | $ | 4,929 |   |
| Huntington’s Disease |       | 1,030    |       | 905      |       | 1,138    |       |
| Discontinued  operations  |       | 4,242    |       | 4,304    |       | 9,811    |       |
|                      |       | $        | 17,746     |     | $          | 10,789   |       | $ | 15,878 |   |

 

Research and development will continue to be the mostsignificant expense of our business going forward. Our research and developmentactivity is subject to change as we develop a better understanding of ourprojects and their prospects. We filed an oncology IND application in December 2004and were 

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cleared by the FDA in January 2005to proceed into clinical trials. We expect to begin clinical trials of thisoncology product during the first half of 2005. We are currently performing *in vivo*experimentation that will help us determine thefeasibility of entering into clinical trials with our Huntington’s Diseaseoligonucleotide. We cannot be sure that we will be able to achieve our goalsrelating to these programs. We also cannot estimate the cost of the effortnecessary to complete the programs or the timing of commencement of materialnet cash inflows from these programs. Continued development of these programsis dependent upon raising additional capital. We cannot be certain that we willbe able to obtain capital on acceptable terms. We have included a number of therisks and uncertainties associated with completing our product developmentplans on schedule in the ‘Special Note Regarding Forward-Looking Statements’and “Risk Factors” below.

*Year Ended December 29, 2004 Compared to Year Ended December 31,2003*

*Research and Development Expense.  *Research and developmentexpense from continuing operations for 2004 was $13.5 million as compared with$6.5 million in 2003. The $7.0 million increase was primarily due to ourpreclinical development activities consisting of higher contract manufacturingexpense ($3.6 million), higher consulting and outside services expense ($2.6million), and higher compensation and fringe benefits expense ($1.1 million),offset by lower legal expenses ($300,000).

*General and Administrative Expense.  *General and administrativeexpense from continuing operations for 2004 was $7.8 million, a decrease of$800,000 from 2003. The decrease was primarily due to costs incurred in 2003associated with terminating a lease in one of our corporate facilities inBoulder, Colorado ($1.0 million) partially offset by higher outside services expenses($200,000).

*Interest Income.  *Interest income of $700,000 for 2004 increased by $600,000from the prior year due to higher average balances of interest-bearinginvestments.

*Interest Expense.  *Interest expense for 2004 and 2003 was approximately $1.0million and $900,000, respectively. The increase was primarily due to theamortization of the discount of the $8.0 million in convertible debentures.

*Discontinued Operations.  *Loss from discontinuedoperations was $2.6 million in 2004 as compared with income of $54.0 million inthe prior year. The loss in 2004 was primarily due to the closure of theGenomics division ($5.7 million), partially offset by $3.0 million of proceedsfrom the settlement of the Mylan litigation related to the paclitaxel business.Net income in 2003 was primarily due to the gain, net of tax, on the sale ofthe paclitaxel business of $54.1 million.

Researchand development expense included in discontinued operations was $4.2 million in2004 as compared to $4.3 million in 2003. The decrease in expense was due tohaving no paclitaxel related research and development expense in 2004 as compared with$900,000 in 2003 and lower supplies expense ($700,000) in the genomicsoperations, partially offset by higher compensation and fringebenefits expense ($1.0 million), higher occupancy costs ($300,000) and higher outside services expense ($200,000)incurred in 2004 in connection with genomics operations.

General andadministrative expense included in discontinued operations was $0 in 2004compared to $3.8 million in 2003. The decrease was due to lower compensationand benefits expense ($2.5 million) due to having no employees in general andadministrative functions in either the discontinued genomics operations or thepaclitaxel business during 2004,lower depreciation expense ($500,000) resulting from the disposition of fixedassets and from charges incurred in 2003 with the shortened useful life ofleasehold improvements at the vacated Boulder, Colorado facility, lower outsideservices expense ($300,000)and lower marketing costs ($200,000).

In 2003, $1.4 million of interest expense was attributableto debt owed to Abbott Laboratories and is included in discontinued operations.

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*Year Ended December 31, 2003 Compared to Year Ended December 31,2002*

*Research and Development Expense.  *Research and developmentexpense from continuing operations for 2003 was $6.5 million, an increase of$400,000 from 2002. This increase was mainly due to higher compensation andfringe benefits expense,driven by higher executive bonuses.

*General and Administrative Expense.  *General and administrativeexpense from continuing operations for 2003 was $8.6 million, an increase of$200,000 from 2002. This increase was mainly attributable to costsassociated with terminating a lease in one of our corporate facilities inBoulder, Colorado ($1.0 million) partially offset by lower legal expense ($600,000).

*Interest Income.  *Interest income for 2003 of $100,000 decreased by $200,000from the prior year. The decrease was attributable to lower average balances ofinterest-bearing investments, as well as lower interest rates.

*Interest Expense.  *Interest expense for 2003 was $900,000, an increase of$100,000 from the prior year. The increase was primarily attributable to theamortization of the discount associated with the conversion feature of the $8.0million in convertible debentures issued in February 2002.

*Discontinued Operations.  *Income from discontinuedoperations was $54.0 million in 2003 as compared with income of $7.4 million in2002. The income in 2003 was primarily due to the gain on sale of thepaclitaxel business of $54.1 million, netof tax, andincome from operations of the paclitaxel business of $6.4 million, offset bythe loss from the Genomics division of $6.5 million. In 2002, income from thepaclitaxel business was $11.5 million, offset by the loss from the closure ofthe Genomics division of $4.1 million. Also included in discontinued operationswas license fee income of $1.0 million in 2003, a decrease of $7.9 million from2002. The decrease was attributable to our receipt of a one-time milestonepayment of $8.0 million from Abbott upon commencement of commercial sales inthe U.S. in 2002.

Researchand development expense included in discontinued operations decreased $5.5million to $4.3 million in 2003 as compared with $9.8 million in 2002. Thedecrease was primarily due to lower outside services expense ($2.3million), decreased compensation and fringe benefits expense ($1.7 million),lower legal costs associated with patent development ($800,000), andlower travel expenses ($200,000). During 2002, a significant portion of ourresearch and development expenditures were related to our semi-synthesispaclitaxel program and cost involved in obtaining regulatory approvals inEurope. Compensation and fringe benefits declined in 2003 due to the sale ofour Analytical Services group to ChromaDex, Inc. and staffing reductionsin our genomics and oncology programs.

General andadministrative expense included in discontinued operations was $3.8 million in2003 as compared with $1.7 million in 2002. The increase was primarily due to highercompensation expense ($1.0 million), higher depreciationexpense resulting from accelerated depreciation of leasehold improvements atthe Boulder, Colorado facility due to the early termination of our lease($500,000), and higher consulting and outside services expense ($300,000).

In each of the years 2003 and 2002, $1.4 million ofadditional interest expense was attributable to the Abbott debt and is includedin discontinued operations.

**Liquidityand Capital Resources**

Our capitalrequirements for research and development have been, and will continue to be,significant. As of December 29, 2004, we had a working capital balance of$23.5 million compared to a working capital balance of $47.1 million at December 31,2003. To date, we have funded our capital requirements primarily with the netproceeds of public offerings of common stock of approximately $21.1 million,with private placements of equity securities of approximately $67.5 million,with the exercise 

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of warrants and options of $8.0 million, debt of $8.0million, and with the sale of the paclitaxel business resulting in grossproceeds of $71.7 million.

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 to reflect the Company’sactual inventory as of the closing. Mayne Pharma assumed certain liabilitiesassociated with our paclitaxel business. Proceeds from the sale are being usedto fund the development of Tapestry’s proprietary oncology products and forgeneral corporate purposes. In addition, approximately $21.9 million ofthe proceeds was paid to Abbott Laboratories to retire all outstanding debt andpayables we owed to Abbott.

In February 2002,we sold privately $8.0 million of common stock issued at $9 per share and $8.0million principal of five-year 4% convertible subordinated debenturesconvertible into common stock at $15 per share to TL Ventures V, L.P. and oneof its affiliated funds. No placement agent was involved in the transaction.The net proceeds were $15.6 million. As part of this transaction, we recorded adiscount attributable to the conversion feature of the convertible debenturesin the amount of $3.1 million, which was amortized over the term of thedebentures. In connection with the February 18, 2005 settlement oflitigation with TL Ventures over whether the debentures were subject toredemption upon completion of the sale of our paclitaxel business to MaynePharma, we paid approximately $3,184,000 in cash and issued promissory notes inthe amount of $4,670,000 in exchange for the delivery of the debentures by TLVentures to the Company for cancellation. The notes do not bear interest andare payable in monthly installments of $50,000 beginning in February 2005,$110,000 in 2006 and $150,000 in 2007 with a $1,000,000 payment due on January 31,2008. Accrued interest of approximately $134,000 was included in the cashpayment made with the closing. We recorded the obligation resulting from thesettlement on our balance sheet as of December 29, 2004. We imputed an interest rate of 18.5% on the notes.No gain or loss was recognized in connection with the settlement.

In November 2000,we entered into a 20-year technology license with the University of Delawareand 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 provides for research andpatent funding commitments and payments in common stock. As of December 29,2004, we have issued 378,875 shares of common stock under the license to theUniversity of Delaware, 61,750 shares to Thomas Jefferson University and 59,375shares to The Samuel Roberts Noble Foundation, Inc., each of which has anownership interest in the licensed intellectual property. Assuming we do notcancel the license, we will issue an additional 700,000 shares in 100,000share-per-year increments on the license anniversaries and/or in 200,000 share incrementsupon the achievement of certain milestone events. We may, at our option,accelerate the issuance dates. The license is terminable at our option and, ifit is terminated, no further shares would be issued. We have committed to fundat least $300,000 in research under the license during 2005. Unless weterminate the license, we are also committed to funding at least $300,000 inresearch at the University of Delaware during 2006.

In August 2003, we filed a registration statementwith the SEC covering the issuance of up to 6.5 million shares of our commonstock and 1.0 million shares of our preferred stock. In March 2004, weissued 2.0 million shares of our common stock under this registrationstatement, for $5.2 million of gross proceeds, less $363,000 of issuance costs.At December 29, 2004, 4.5 million shares of common stock remainedavailable to be issued. Additional shares may be sold under this registrationstatement only if the Company is eligible for primary offerings on Form S-3,which requires that the aggregate market value of common equity held bynon-affiliates of the Company be $75 million or more. As of February 15,2005, such aggregate market value approximated $27.3 million.

We believeexisting capital will be adequate to fund our operations and capitalexpenditures for at least the next 12 months. However, pharmaceuticaldevelopment is a costly, risky and time intensive activity. To bring ourvarious programs to completion will require us to raise additional capital inthe near 

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future. Raising additional capital at current market pricesfor our common stock will result in substantial dilution to existingstockholders. We cannot assure you that we will be able to obtain additionalcapital on terms that will be acceptable to us or on any terms. In addition, wemay seek to in-license or purchase new products or technologies. The cost andrelated capital expenditures of acquiring and developing such resources may besignificant, and we may not be able to obtain capital for the development of theseproducts or technologies. See “Risk Factors” below.

*WorkingCapital and Cash Flow*   Cash and cash equivalents were $1.7 million at December 29,2004 and $2.3 million at December 31, 2003. Cash, cash equivalents,short-term and long-term investments decreased $15.1 million to $35.7 millionfor the year ended December 29, 2004 from $50.8 million at December 31,2003. This was primarily due to $19.3 million of net cash used in operatingactivities, which includes the receipt of $3.0 million from the settlement ofthe Mylan litigation. Net cash provided by investing activities was $14.0 millionprimarily due to the sale of investments. Net cash provided by financingoperations was primarily due to the net proceeds from the sale of common stocktotaling $4.9 million. With the sale of the paclitaxel business in December 2003,we no longer generate cash from operating activities.

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 and to fund clinical trials of our TPI 287 program.For further information regarding our product development and general andadministrative expenditures, refer to Item 1, “Tapestry Research andDevelopment Activities” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis Item 7.

*Capital Expenditures*   We spent $200,000during 2004 for capital projects.

The amount andtiming of future capital expenditures will depend upon numerous factors,including:

·       thedevelopment of new products and technologies;

·       theacquisition of new products and technologies;

·       thecost of manufacturing resources for new products and technologies;

·       thenature of our relationship with any strategic partners that we are able toattract;

·       theprogress of our research and development programs;

·       changesin manufacturing processes;

·       themagnitude and scope of these activities;

·       competingtechnological and marketing developments;

·       changesin facilities; and

·       changesin staffing levels.

Weanticipate increased capital expenditures during 2005. The primary focus ofcapital spending during 2005 is expected to be in our research and developmentareas. We may seek additional financing to fund our capital expenditures. Wecannot assure you that we will be able to obtain such financing on terms whichare acceptable to us.

*Net OperatingLoss Carryforwards*   Asof December 29, 2004, we had approximately $84.8 million of net operatingloss carryforwards to offset future taxable income. Tax law provides limits onthe utilization of net operating loss carryforwards if there has been a “changeof ownership” as described in Section 382 of the Internal Revenue Code. Sucha change of ownership may limit our utilization of our net operating 

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loss carryforwards, and could be triggered by sales ofsecurities by us or our stockholders. We have performed an analysis ofour net operating losses through December 31, 2003, and concluded therewas no limitation on the use of our net operating losses or research anddevelopment credits due to the potential limitations under Section 382. Also,we do not believe that there were any events that occurred in the fiscal yearended December 29, 2004 that resulted in limitations on the use of our netoperating losses or research and development credits due to potentiallimitations under Section 382.

*Business Development Activities*   In the normal courseof our business, we investigate, evaluate, and discuss licensing relationships,acquisitions, and other business combination opportunities in thepharmaceutical and genomics businesses. In the event we enter into any suchrelationships or transactions, we may consider using available cash, issuingequity securities or increasing our debt. Such transactions could materiallyaffect our capital structure.

**CriticalAccounting 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 isdiscussed 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.

*Use ofEstimates Policy*:   Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the U.S. requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results may differ from those estimates.

*Long-LivedAssets Policy*:   Inaccordance with Statement of Financial Accounting Standards No. 144 (“SFAS144”), “Accountingfor the Impairment of Long-Lived Assets,”we review the carrying amount of long-lived assets when facts and circumstancessuggest they may be impaired. If this review indicates long-lived assets willnot be recoverable as determined based on the undiscounted cash flow estimatedto be generated by these assets, we reduce the carrying amount of theselong-lived assets to estimated fair value or discounted cash flow, asappropriate.

In thefirst quarter of 2004, we recognized an impairment loss of $200,000 associatedwith the gene isolation and service business due to our decision to discontinueour efforts in that business and our inability to find a buyer for the assets. Inthe fourth quarter of 2004, as part of our preparation of these financialstatements, we recognized an impairment loss of $1.2 million in connection withthe closure of our Genomics division. Such impairment losses were the onlyimpairments of long-lived assets recorded in the fiscal years ended December 29,2004, December 31, 2003 and December 31, 2002.

*Stock Based Compensation*:   As permitted under Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”), the Company accounts for its stock-basedcompensation to employees and directors using the intrinsic value method inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”). Pursuant to APB 25, compensationexpense is recorded over the vesting period only if the fair value of theunderlying stock exceeds the exercise price. Ifwe were to include the cost of employee stock option compensation in thefinancial statements, our net loss for the fiscal years ended December 29,2004 and December 31, 2002 would have increased by $3.8 million and $4.2million, respectively, and our net income for the fiscal year ended December 31,2003 would have decreased by $3.9 million based on the fair value of the stockoptions granted to employees. See “Impact of Recent Accounting Pronouncement”below.

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**FutureContractual Obligations**

The table below summarizes ourfuture contractual obligations at December 29, 2004 (in thousands):
| ** **                       | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | ****1-3 years | ** ** | ****4-5 years | ** ** | **After 5 years** | ** ** |
|----------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| Notes payable                    |       | $         | 7,763      |                            |       | $                  | 3,636      |               |       |                        | $          | 3,127 |   |   |   | $ | 1,000 |   |   |   | $ | — |   |   |
| University of Delaware agreement |       | 300       |       |                            | 300        |               |       |               | —     |                        |       |   | — |   |   |   | — |   |   |
| Operating leases                 |       | 973       |       |                            | 517        |               |       |               | 456        |                        |       |   | — |   |   |   | — |   |   |
| Total                            |       | $         | 9,036      |                            |       | $                  | 4,453      |               |       |                        | $          | 3,583 |   |   |   | $ | 1,000 |   |   |   | $ | — |   |   |

 

The notes payableobligation reflects the settlement, entered into on February 18, 2005, ofthe litigation with TL Ventures. See Item 3, “Legal Proceedings.”

**Impactof Recent Accounting Pronouncement**

In December 2004, the Financial Accounting StandardsBoard issued SFAS No. 123(R), “Accounting for Stock-Based Compensation” (“SFAS123(R)”). SFAS 123(R) establishes standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods orservices. This statement focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based payment transactions. SFAS123(R) requires that the fair value of such equity instruments berecognized as an expense in the historical financial statements as services areperformed. Prior to SFAS 123(R), only certain pro forma disclosures of fairvalue were required. The provisions of this statement are effective for thefirst interim reporting period that begins after June 15, 2005. Accordingly,we will adopt SFAS 123(R) commencing with the quarter ending September 28,2005. If we had included the cost of employee stock option compensation in ourfinancial statements, our net loss for the fiscal years ended December 29,2004 and December 31, 2002 would have increased by $3,806,000 and$4,238,000, respectively, and our net income would have decreased by $3,880,000for the fiscal year ended December 31, 2003. Accordingly, the adoption ofSFAS 123(R) is expected to have a material effect on our financialstatements.

**SpecialNote Regarding Forward-Looking Information**

This Form 10-K contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act and Section 21Eof the Securities Exchange Act. In some cases, you can identify theseforward-looking statements by words such as “may,” “will,” “expect,” “intend,” “anticipate,”“believe,” “estimate,” “plan,” “could,” “should” and “continue” and othersimilar words and expressions. Although we believe that the expectationsreflected in such forward-looking statements are reasonable, we cannot assureyou that these expectations will prove to be correct. Such forward-lookingstatements involve known and unknown risks, uncertainties and other factors,which may cause our actual results, performance or achievements, or industryresults, to be materially different from any future results, performance orachievements expressed or implied by such forward-looking statements. The RiskFactors listed below could cause such differences. We undertake no obligationto update any of the forward-looking statements after the date of this Form 10-Kto conform such statements to actual results, except to the extent required bylaw.

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**RiskFactors**

*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 think are immaterial may also impair our business operations.If any of the events or circumstances described in the following risk factorsactually occurs, our business may suffer, the trading price of common stockcould decline, and you may lose all or part of your investment.*

**If wefail to obtain the capital necessary to fund our operations when needed, we maybe forced to reduce or 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:

·       thedevelopment of new products and technologies;

·       theacquisition of new products and technologies;

·       thecost of manufacturing resources for new products and technologies;

·       thenature of our relationship with any strategic partners that we are able toattract;

·       theprogress of our research and development programs;

·       changesin manufacturing processes;

·       themagnitude and scope of these activities;

·       competingtechnological and marketing developments;

·       changesin facilities; and

·       changesin 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 technologies in the future. We expect to continue to spendsubstantial amounts on research and development, including amounts spent onconducting clinical trials for our product candidates. We expect that ourmonthly cash used by operations will increase for the next several years. Further,we will not have sufficient resources to fully develop any new products ortechnologies unless we are able to raise substantial additional financing onacceptable terms. If additional funds are raised by issuing equity securities,further dilution to stockholders will result. Debt financing, if available, mayinvolve restrictive covenants that could hamper our ability to operate ourbusiness, make certain investments or strategic acquisitions or raiseadditional capital. In addition to future equity and debt financing, we mayobtain funds through arrangements with strategic partners or others that mayrequire us to relinquish rights to certain of our technologies, any one ofwhich could adversely affect our business and results of operations. We couldalso be required to seek these strategic partners at an earlier stage than wemight otherwise prefer and on less favorable terms than might be otherwiseavailable. Our failure to raise capital when needed would adversely affect ourbusiness, financial condition and results of operations, and could force us toreduce or discontinue our operations. Our inability to raise adequate capitalcould also cause us to have to relinquish, license or dispose of rights toproducts and technologies that we would otherwise attempt to develop orcommercialize ourselves on less favorable terms that otherwise might beavailable.

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**Futuresales and issuances of common stock may dilute our stockholders or cause ourstock price to fall.**

We may sell commonstock in one or more transactions at prices and in a manner we determine fromtime to time. If we sell common stock in more than one transaction,stockholders who purchase stock may be materially diluted by subsequent sales. Suchsales may also result in material dilution to our existing stockholders. Salesof a substantial number of shares of our common stock in the public market, orthe perception that these sales might occur, could depress the market price ofour common stock and could impair our ability to raise capital through the saleof additional equity securities.

**Ourproduct candidates and technologies are in an early state of development andthere is a high risk that they may never be commercialized because of the costsof continuing development or for other reasons.**

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. Continueddevelopment of these programs is therefore dependent upon raising additionalcapital. We cannot be certain that we will be able to obtain capital onacceptable terms, or at all. We do not expect any of our prospectiveproducts or technologies to be commercially available for at least severalyears and our efforts may not lead to commercially successful products for anumber a reasons including the inability to be proven safe and effective inclinical trials, the lack of regulatory approvals or obtaining regulatoryapprovals that are narrower than we seek, inadequate financial resources tocomplete the development and commercialization of our product candidates or thelack of acceptance in the marketplace. With regard to the oligonucleotidetherapy, the search for an appropriate intercranial delivery mechanism maypresent a significant obstacle to human therapy, even if the oligonucleotideitself proves to be active. Particularly with a product which is deliveredintercranialy, even if we develop a product that becomes available forcommercial sale, we cannot be certain that consumers will accept the product. We continuously reassess allof our research and development efforts, including those for the therapeuticproducts described in the “Business” section of this report. As newinformation about each technology becomes available, it may change perceptionsof previously accepted data, which could require additional periods of time toreview and interpret these data. As a result, we may find deficiencies in thedesign or application stages while developing our clinical trial studies, or inthe subsequent implementation stages of such studies, which could cause us orthe FDA to delay, suspend or terminate our trials at any time. Potentialproblems we may encounter in the implementation stages of our studies includethe chance that we may not be able to conduct clinical trials at preferredsites, obtain sufficient test subjects or begin or successfully completeclinical trials in a timely fashion, if at all. Furthermore, the FDA maysuspend clinical trials at any time if it believes the subjects participatingin trials are being exposed to unacceptable health risks or if it finds deficienciesin the clinical trial process or conduct of the investigation. At any time, we may expand,delay, terminate or dispose of all or any portion of our research anddevelopment programs and therapeutic products or we may develop or acquirerights to new product candidates.

**Ourpotential products and technologies must undergo rigorous clinical testing andregulatory approvals and compliance, which could substantially delay or preventus from marketing any products.**

The clinicaldevelopment of our product candidates has many risks of failure. Drugs must beproven safe and effective before they can be approved for human use. Theadvancement of drug candidates into human clinical trials is dependent on thepositive outcome of pending preclinical studies, decisions by the FDA,institutional review boards, and other regulatory factors. Patient recruitmentfor clinical trials can be difficult, and clinical trials may be delayed orprolonged due to inability to recruit a sufficient number of 

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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 have yet been involved inclinical tests designed to measure their safety or effectiveness in humans. Thedata obtained from preclinical and clinical activities are susceptible tovarying interpretations which could delay, limit or prevent regulatoryapprovals. Failure to comply with applicable FDA or other regulatoryrequirements may result in criminal prosecution, civil penalties and otheractions that would seriously impair our ability to conduct our business. Evenif regulatory approval is granted for a product, this approval will be limitedto those disease states and conditions for which the product is useful, asdemonstrated through clinical trials. In addition, regulatory agencies may notapprove the labeling claims that are necessary or desirable for the successfulcommercialization of our product candidates. Even if we receive regulatoryapprovals, our product candidates may later exhibit adverse effects that limitor prevent their widespread use or that force us to withdraw those productcandidates from the market. In addition, a marketed product continues to besubject to strict regulation after approval. Any unforeseen problems with anapproved product or any violation of regulations could result in restrictionson the product, including its withdrawal from the market.

Any delay in, or failure toreceive or maintain regulatory approval for, any of our products could preventus from ever generating meaningful revenues or achieving profitability. Giventhe uncertainty of drug development, it is impossible to say how long theclinical development of any of these compounds will take. We cannot be sure that wewill begin clinical testing for these programs at the times estimated in thisdocument. We also cannot be sure of the cost of the effort necessary tocomplete these programs or when, if ever, we will receive material revenuesfrom these programs. Successfully completing these programs and obtaining anapproved product for sale in the U.S. and offshore will be dependent upon ourraising additional capital. We cannot be certain that we will be able to obtaincapital on acceptable terms or at all.

**If wefail to continue to meet all applicable Nasdaq SmallCap 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 stock coulddecrease.

Our common stock is listedon the Nasdaq SmallCap Market. In order to maintain our listing, we must meetminimum financial and other requirements. If we are unable to comply withNasdaq’s listing standards, Nasdaq may determine to delist our common stockfrom the Nasdaq SmallCap Market. If Nasdaq made a determination to delist ourcommon stock, the delisting procedure would involve a process beginning withNasdaq’s notification and would include a hearing and the possibility of appeal.There is no assurance that at the end of this process our common stock wouldcontinue to be listed on the SmallCap Market. If our common stock is delistedfor any reason, it could reduce the value of our common stock and its liquidity.Delisting could also adversely affect our ability to obtain financing for thecontinuation of our operations or to use our common stock in acquisitions.Delisting could result in the loss of confidence by suppliers, customers andemployees.

**Manufacturingissues may delay or hinder development or marketing of our product candidates.**

The manufacture ofour drug 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 regulatory approval ofour products after successful clinical trials and then commercialize and sellthose products, we may be unable to manufacture enough products to maintain ourbusiness, which could have a negative impact on our financial condition. Wehave no experience in manufacturing any of our proposed product candidates on acommercial basis. We also have no laboratories or manufacturing facilities forsuch commercial manufacturing activity. If we 

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are unable to manufactureour products in a cost-effective manner, we are not likely to become profitable.We have not received a license from the FDA for any necessary manufacturingfacilities, and cannot apply for one until we submit a new potential product forcommercial approval. Even if we do receive a manufacturing license, we may failto maintain adequate compliance with the FDA’s regulations concerning currentgood manufacturing practices, in which case the license, and our authorizationto manufacture the product, would be revoked. Unless we build our ownmanufacturing facilities, we will have to rely on third parties to manufactureour products. Although we may be able find third-party manufacturers withexperience and the proper licensing requirements from the FDA, we may not beable to negotiate favorable terms regarding costs or a long-term commitment tomanufacture our products. Our dependence on third parties may reduce futureprofit margins and delay or limit our ability to develop and commercialize ourproducts on a timely and competitive basis.

**Werely on third-parties to perform certain services for us and any interruptionor termination of these**arrangements may adversely affect ourbusiness.

We rely onthird-party contractors to provide certain services related to our research anddevelopment activities. Contractors handle our U.S. and internationalregulatory affairs, provide certain manufacturing, technical and analyticalservices and manage certain aspects of our clinical development. Our outsourcingof certain functions to independent, third parties poses the following risks:

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

**·****     **someof our arrangements with contractors are not governed by long-term, writtencontracts;

**·****     **acontractor may not commit sufficient resources to the project;

**·****     **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;

**·****     **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; and

**·****     **contractswith our strategic partners may fail to provide significant protection or mayfail to be enforced if one of these partners fails to perform.

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. However, making this change might be costly and may delay our 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.

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**Wemay be required to rely on strategic partners for the development, marketingand manufacturing of future products and technologies that may delay or impairour ability to generate significant revenue and**may otherwise adversely affect ourprofitability.

We may rely on strategicpartners for the development, marketing and manufacturing of future productsand technologies. Our reliance on strategic 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 them on the same terms;

·       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 which 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 failto be enforced if one of these partners 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 or other areas ofour research and development, as the case may be;

·       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.

**Oursuccess is dependent on obtaining and defending patents and proprietarytechnology.**

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 the breadth of claims that will beallowed and issued to us for patents related to biotechnology or pharmaceuticalapplications. Before a patent is issued, its coverage can be significantlynarrowed, either in the U.S. or abroad. We also do not know whether any of ourpending or future patent applications will result in the issuance of patents. Tothe extent patents have been issued or will be issued, some of these patentsare subject to further proceedings that may limit their scope and once patentshave been issued, we cannot predict how the claims will be construed orenforced. It is not possible to determine which patents may provide significantproprietary protection or competitive advantage, or which patents may becircumvented or invalidated. Furthermore, patents already issued to us, orpatents that may be issued on our pending applications, may become subject todispute, including interference proceedings in 

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the U.S.to determine priority of invention. If our currently issued patents areinvalidated 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. Forexample, 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.

**Litigationor third party claims of intellectual property infringement could require us tospend substantial time and money and adversely affect our ability to developand 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 genomics,pharmaceutical and chemical patents being issued every week throughout theworld. Other parties have filed, and in the future are likely to file, patentapplications covering technologies we are developing. Many of those have patentclaims that are difficult to categorize and interpret. Because of this, we mayinfringe on intellectual property rights of others without being aware of theinfringement.

If ourtechnology, products or activities are deemed to infringe the other companies’rights, we could be subject to damages or be prevented from using thetechnology that is infringing other companies’ rights, or we could be requiredto obtain licenses to use that technology. If patents covering technologiesrequired by our operations are issued to others, we may have to rely onlicenses from third parties, which may not be available on commerciallyreasonable terms, or at all. Third parties may accuse us of employing theirproprietary technology without authorization. In addition, third parties mayobtain patents that relate to our technologies and claim that our use of suchtechnologies infringes their patents, even if we have received patentprotection for our technology. 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 be infringing;

·       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; and

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·       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.

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

Our oncology and Huntington’s Disease programs mayrequire the use of multiple products or technologies proprietary to otherparties. Third party suppliers may not be able to furnish us with a supply ofthese products sufficient to satisfy our requirements. In addition, we may berequired to obtain licenses to these gene sequences or proteins or othertechnology in order to manufacture, test, use or market our products. We maynot be able to obtain additional licenses we may need in the future on termsacceptable to us. Our inability to obtain any one or more of these licenses, oncommercially reasonable terms, or at all, or to circumvent the need for anysuch license, could cause significant delays and cost increases and materiallyaffect our ability to develop and commercialize our product candidates. Inconnection with our efforts to obtain rights to these proprietary technologies,we may find it necessary to convey rights to our technology to others. Some ofour products may require the use of multiple proprietary technologies. Consequently,we may be required to make cumulative royalty payments to several third parties.These cumulative royalties could become commercially prohibitive. We may not beable to successfully negotiate the amounts of these royalties on termsacceptable to us.

Currently, we rely in parton third party licenses for access to intellectual property relating to ouroncology and Huntington’s Disease programs. Such licenses obligate us toexercise diligence in pursuing the development of product candidates, to makespecified milestone payments and/or to pay royalties. Our inability or failureto meet any such diligence requirements or make any required payments wouldlikely result in a reversion to the licensor of the rights granted, which couldmaterially and adversely affect our ability to develop and market productsbased on our licensed technologies.

**Wemay not be successful in obtaining required foreign regulatory approvals, whichwould prevent us from**marketing our products internationally.

Outside the U.S., ourability to market a product is contingent upon receiving a marketing authorizationfrom the appropriate regulatory authority. This foreign regulatory approvalprocess includes many of the same steps and uncertainties associated with FDAapproval described above. Wecannot be certain that we will obtain any regulatory approvals for ourpotential products and technologies in other countries. In order to market ourproducts outside of the U.S., we also must comply with numerous and varyingforeign regulatory requirements implemented by foreign regulatory authoritiesgoverning the conduct of clinical trials, product licensing, pricing andreimbursement. The approval procedure varies among countries and can involveadditional testing. The time required to obtain approval may differ from thatrequired to obtain FDA approval and approval by the FDA does not ensureapproval by the health authorities of any other country. The process ofobtaining foreign regulatory approvals can be lengthy and require theexpenditure of substantial capital and resources. We may not be successful inobtaining the necessary approvals. Any delay or failure to demonstrate thesafety and effectiveness of a pharmaceutical product candidate underdevelopment and obtain foreign regulatory approval could have a materialadverse effect on our business.

**Competitionfrom third parties may hinder our success.**

In the event wedevelop and commercialize products and technologies 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 conductresearch, seek patent protection and establish collaborative 

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arrangementsfor product development and marketing. Most of these companies and institutionshave significantly greater financial resources and expertise than we do in thefollowing:

·       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. In the event wedevelop and commercialize products and technologies in the future, ourcompetitors may develop more effective, safer or more affordable products andtechnologies, or commercialize products earlier than we do. If our competitorsare successful in this respect, it could limit the prices that we are able tocharge for the products that we market, and prevent us from becomingprofitable. In some cases, competing products could render obsolete anyproducts we eventually develop.

**Wemay be unable to attract and retain the qualified employees we need to besuccessful.**

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. In addition, we rely on stock optionsto compensate existing employees and attract new employees. We are currentlynot required to record stock-based compensation charges if the employee’s stockoption exercise price equals or exceeds the fair value of our common stock atthe date of grant. However, in December 2004, the Financial AccountingStandards Board issued a standard relating to share-based payments, including stockoptions and other equity incentives granted to employees. This standard willrequire us to record expense for the fair value of stock options granted,modified or settled in fiscal periods beginning after June 15, 2005 andrecognize compensation cost with respect to any unvested stock optionsoutstanding on July 1, 2005. Because of this change in accounting policy,we may choose to reduce our reliance on stock options as a compensation tool,which could make it more difficult for us to attract and retain qualifiedemployees.

**Ourcurrent stock compensation expense negatively impacts our earnings, and when weare required to report the fair value of employee stock options as an expensein conjunction with a new accounting standard, our reported financialperformance will be adversely affected, which may cause our stock price todecline.**

Under our currentaccounting practice, for stock options granted to employees, stock compensationexpense is recorded if on the date of grant the current market price of theunderlying stock exceeds the exercise price. In December 2004, theFinancial Accounting Standards Board issued SFAS 123(R), “Accounting forStock-Based Compensation”. SFAS 123(R) establishes standards for the accountingfor transactions in which an entity exchanges its equity instruments for goodsor services. This statement 

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focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions. SFAS 123(R) requires that thefair value of such equity instruments be recognized as an expense in thehistorical financial statements as services are performed. Prior to SFAS 123(R),only certain pro forma disclosures of fair value were required. The provisionsof this statement are effective for the first interim reporting period thatbegins after June 15, 2005. Accordingly, we will adopt SFAS 123(R)commencing with the quarter ending September 28, 2005. If we had includedthe cost of employee stock option compensation in our financial statements, ournet loss for the fiscal years ended December 29, 2004 and December 31,2002 would have increased by $3,806,000 and $4,238,000, respectively, and ournet income for the fiscal year ended December 31, 2003 would havedecreased by $3,880,000. Accordingly, the adoption of SFAS 123(R) is expectedto have a material effect on our financial statements, which may cause ourstock price to decline and increase our anticipated net losses.

**If weacquire any other products or business operations, we will incur a variety ofcosts, and we may never**realize the anticipated benefits of theacquisition.

We may attempt to acquireproduct candidates, or other potentially beneficial technologies, throughin-licensing or the acquisition of businesses, services or products that we believeare a strategic fit with our business. Although we currently have nocommitments or agreements with respect to any acquisitions, if we undertake anacquisition, the process of integrating the acquired business, technology,service or product may result in unforeseen operating difficulties andexpenditures and may divert significant management attention from our ongoingbusiness operations. Moreover, we may fail to realize the anticipated benefitsof any acquisition for a variety of reasons, such as an acquired productcandidate proving to not be safe or effective in later clinical trials. We mayissue equity or debt securities to fund future acquisitions which would dilutethe ownership of our stockholders. In addition, we may devote resources topotential acquisitions that are never completed.

**Ouruse of hazardous materials exposes us to the risk of material environmentalliabilities, and we may incur substantial additional costs to comply withenvironmental laws in connection with the operation of our**research and manufacturing facilities.

We may use radioactive materials and other hazardousor biohazardous substances in our research and development. As a result, we arepotentially subject to material liabilities related to personal injuries orproperty damages that may be caused by the spread of radioactive contaminationor by other hazardous substance releases or exposures at, or from, ourfacilities. Decontamination costs associated with radioactivity releases, otherclean-up costs, and related damages or liabilities could be significant andcould harm our business. The cost of this liability 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 capital. These costs could decrease our abilityto conduct operations in a cost-effective manner.

**Legislativeand regulatory proposals to reduce the cost of health care could adverselyaffect 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 

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whetherany of these proposals will be adopted or the effect these proposals or managedcare efforts may have on our business. In addition, the current discussion ofdrug reimportation into the U.S. could also affect our future businessoperations. Some proposals would permit the reimportation of approved drugsthat were originally manufactured in the U.S. from other countries where thedrugs were sold at a lower price. These and other initiatives could decreasethe price we or any potential collaborators receive for our products, adverselyaffecting our profitability. The pendency or approval of such proposals couldresult in a decrease in our stock price or limit our ability to raise capitalor to obtain strategic partnerships or licenses.

**Ifproduct liability lawsuits are successfully brought against us, we may incursubstantial liabilities and may**be required to limit commercialization of our product candidates.

Our business may expose us in the future to productliability risks, which are inherent in the testing, manufacture, marketing andsale of pharmaceutical products. Product liability claims might be broughtagainst us by consumers or health care providers or by pharmaceutical companiesor others, including our strategic partners, selling our products. If wecomplete clinical testing for our product candidates and receive regulatoryapproval to market our products, we will include warnings on our products thatidentify the known potential adverse effects and the patients who should notreceive our product. We cannot assure you that these warnings will be deemedadequate, or that physicians and patients will comply with these warnings.

If we cannot successfullydefend ourselves against such claims, we may incur substantial liabilities orbe required to limit commercialization of our present products and futureproduct candidates. We cannot predict all of the possible harms or side effectsthat may result and, as a result, the amount of insurance coverage we currentlyhold, or that we may obtain, may not be adequate to protect us from anyliabilities. We may require increased liability coverage as we use our productcandidates in clinical trials and later develop and commercialize theseproducts. Further, insurance coverage is becoming increasingly expensive, andwe do not know whether we will be able to maintain insurance coverage at areasonable cost or in sufficient amounts to protect us against losses due toliability. A successful product liability claim brought against us in excess ofour insurance coverage or a product recall could adversely affect our business,results of operations and financial condition.

**Wemay be unable to effectively price our products or obtain adequatereimbursement for sales of our products, which would prevent our products frombecoming profitable.**

Our potential products, 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 payors are increasingly challengingthe prices charged for pharmaceutical products and services.

**Wehave implemented anti-takeover provisions that may reduce the market price ofour common stock.**

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 

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meeting of stockholdersmust comply with strict advance written notice provisions. Our bylaws alsoprovide that special meetings of stockholders may be called only by thechairman of our board of directors, or certain of our officers, or byresolution of our directors.

These provisions of ourcertificate of incorporation and our bylaws could discourage potentialacquisition proposals and could delay or prevent a change in control. Theseprovisions are intended to enhance the likelihood of continuity and stabilityin the composition of our board of directors and in the policies formulated byour board of directors. We also intended these provisions to discourage certaintypes of transactions that may involve an actual or threatened change ofcontrol. We designed these provisions to reduce our vulnerability tounsolicited acquisition proposals and to discourage certain tactics that may beused in proxy contests. These provisions, however, could also have the effectof discouraging others from making tender offers for our shares. As aconsequence, they also may inhibit fluctuations in the market price of ourshares that could result from actual or rumored takeover attempts. Suchprovisions also may have the effect of preventing changes in our management. Weare permitted to issue shares of our preferred stock without stockholderapproval upon such terms as our board of directors determines. Therefore, therights of the holders of our common stock are subject to, and may be adverselyaffected by, the rights of the holders of our preferred stock that may beissued in the future. In addition, the issuance of preferred stock could have adilutive effect on the holdings of our current stockholders. In November 1996,we adopted a stockholder rights plan and distributed a dividend for each shareof common stock. This dividend took the form of a right, which entitles theholders to purchase one one-hundredth of a share of a new series of juniorparticipating preferred stock, Series B. The stockholder rights plan wasamended and restated in September 2001. In certain events after the rightsbecome exercisable they will entitle each holder, other than the acquirer, topurchase, at the rights’ then current exercise price (currently set at $60), anumber of shares of common stock having market value of twice the right’sexercise price or a number of the acquiring company’s common shares having amarket value at the time of twice the rights’ exercise price. The adoption ofthe rights plan makes it more difficult for a third party to acquire control ofus without the approval of our board of directors. 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.

**Item 7A**Quantitative and QualitativeDisclosures about Market Risk

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

**Item 8**Financial Statements andSupplementary Data

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

**Item 9**Changes in and Disagreementswith Accountants on Accounting and Financial Disclosures

Not applicable.

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**Item 9A**Controls and Procedures

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the Exchange Act). Basedon this evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were effective asof the end of the period covered by this annual report.

**Management’sReport on Internal Control Over Financial Reporting**

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in ExchangeAct Rules 13a-15(f). Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofour internal control over financial reporting based on the framework in *Internal Control—Integrated Framework*issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on ourevaluation under the framework in *Internal Control—IntegratedFramework,*our management concluded that our internal control overfinancial reporting was effective as of December 29, 2004.

Our management’s assessment of theeffectiveness of our internal control over financial reporting as of December 29,2004 has been audited by Grant Thornton LLP, an independent registered publicaccounting firm, as stated in their report which is included herein.

**Item 9B**Other Information

Thefollowing information is being provided in lieu of filing a Form 8-Kto report our entry into a material definitive agreement under Item 1.01 andthe termination of a material definitive agreement under Item 1.02.

In February 2002,we sold privately $8.0 million of common stock issued at $9 per share and $8.0million principal of five-year 4% convertible subordinated debenturesconvertible into common stock at $15 per share to TL Ventures V, L.P. and oneof its affiliated funds. In anticipation of the sale of our paclitaxel businessto Mayne Pharma in 2003, TL Ventures advised us that it believed the completionof such sale entitled it to have the debentures redeemed. We disputed thatconclusion and litigation ensued.

On February 18,2005, we entered into an agreement with TL Ventures providing for a completesettlement of the litigation, a mutual release of claims and the payment ofapproximately $3,184,000 in cash and the issuance by the Company to TL Venturesof promissory notes in an aggregate amount of $4,670,000 in exchange fordelivery of the debentures by TL Ventures to the Company for cancellation. Thenotes do not bear interest and are payable in montly installments of $50,000beginning in February 2005, $110,000 in 2006 and $150,000 in 2007, with a$1,000,000 final payment due on January 31, 2008. Accrued interest ofapproximately $134,000 was included in the cash payment made with the closing. Werecorded the obligation resulting from the settlement on our balance sheet asof December 29, 2004.

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**Part III**

**Item 10**

**Directors and Executive Officers of theRegistrant**

**Directors**

At December 29, 2004, our Board ofDirectors consisted of nine members: Stephen K. Carter, M.D.; Edward L.Erickson; George M. Gould, Esq.; Arthur H. Hayes, Jr., M.D.; ElliotM. Maza; The Honorable Richard N. Perle; Patricia A. Pilia, Ph.D.; Robert E.Pollack, Ph.D.; and Leonard P. Shaykin (Chairman). Our directors are dividedinto three classes. Messrs. Gould and Maza and Dr. Carter are Class IIIdirectors with terms of office expiring at the 2005 Annual Meeting ofStockholders. Mr. Shaykin and Drs. Hayes and Pollack are Class Idirectors with terms of office expiring at the 2006 Annual Meeting ofStockholders. Dr. Pilia and Messrs. Erickson and Perle are Class IIdirectors with terms of office expiring at the 2007 Annual Meeting ofStockholders.

Our Board of Directors has determinedthat Stephen K. Carter, M.D., Edward L. Erickson, George M. Gould, Esq.,Arthur H. Hayes Jr., M.D., Elliot M. Maza, The Honorable Richard N. Perle andRobert E. Pollack, Ph. D., are “independent directors,” as defined by theNasdaq Stock Market’s listing standards.

Stephen K, Carter, M.D.**,** 67, has served as a director since March 2004.Dr. Carter has been a consultant to the pharmaceutical industry since 1997.From 1996 to 1999, Dr. Carter served as a consultant to SUGEN Inc., abiopharmaceutical company focused on the discovery and development of smallmolecule drugs which target specific cellular signal transduction pathways, andfrom 1999 to 2000 was SUGEN’s Senior Vice President of Clinical and RegulatoryAffairs. From 1995 to 1996, he was Senior Vice President, Research andDevelopment at Boehringer Ingelheim Pharmaceuticals, Inc. From 1990 to1995 Dr. Carter served as Senior Vice President, Worldwide ClinicalResearch and Development at Bristol-Myers Squibb Co. Dr. Carter isa former Deputy Director at the National Cancer Institute’s Division of CancerTreatment and is a member of the American Society of Clinical Oncology. Dr. Carterreceived his A.B. degree in American history from Columbia College and his M.D.degree from New York Medical College. Dr. Carter currently serves on theBoard of Directors of four publicly traded companies: Cytogen Corporation;Emisphere Technologies, Inc., Vion Pharmaceuticals; and AlfacellCorporation.

Edward L. Erickson, 58, has served as adirector since 2000. Since 1998, he has served as Chairman of the Board ofDirectors of Immunicon Corporation, a public medical products company withtechnology for use in diagnostics, life science research, and pharmaceuticaldevelopment applications. He has also served as Chief Executive Officer ofImmunicon since March 1999, its President since 2000, and was its interimChief Executive Officer from 1998 to 1999. From 1993 to 1998, Mr. Erickson served as President, Chief ExecutiveOfficer and as a director of DepoTech Corporation, at that time a publiclytraded pharmaceutical company in the drug delivery field. From 1991 to 1993, heserved as President, Chief Executive Officer and as a director of CholestechCorporation, a publicly traded diagnostics company in the field ofpoint-of-care cholesterol testing and screening. Prior to his employmentwith Cholestech Corporation, Mr. Erickson held senior executive positionswith The Ares-Serono Group, now Serono, and with Amersham International plc. From1995 to 1998, Mr. Erickson served as a director of MegaBios Corporation, agene therapy company. Mr. Erickson holds a B.S. in mathematics with aminor in Physics and an M.S. in mathematics fromthe Illinois Institute of Technology and an M.B.A. with high distinction fromHarvard University, where he was elected a Baker Scholar and was awarded the Loeb Rhoades Fellowship in Finance.

George M. Gould, Esq., 67, hasserved as a director since 2003. He has served as Of Counsel to the law firmGibbons, Del Deo, Dolan, Griffinger & Vecchione since 1996. Mr. Gouldis also a director of Protein Design Labs, Inc. a publicly traded biotechnology company engaged in the development ofhumanized monoclonal antibodies for the prevention and treatment of disease. Additionally,Mr. Gould is a director of Angiogenex, Inc., a privately-heldbiopharmaceutical company that develops therapeutic and 

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diagnosticapplications of Id gene and protein technologies as well as Supratek Pharma, aprivate Canadian biopharmaceuticals company developing novel block copolymertargeted drug formulations. From May 1996 to December 1996, Mr. Gouldwas a Senior Vice President of PharmaGenics, Inc. Prior to that time Mr. Gouldserved as Vice President, Licensing & Corporate Development and ChiefPatent Counsel for Hoffmann-La Roche Inc. from 1989 to 1996. Mr. Gouldreceived a Bachelor of Arts degree in organic chemistry from TheJohns Hopkins University, attended the New York University Graduate School ofChemistry, received a J.D. from Columbia University School of Law and an L.L.M.from New York University School of Law.

Arthur H. Hayes, Jr., M.D.**,**71, has served as adirector since 1996. He is currently President and Chief Operating Officer ofMediScience Associates, a pharmaceutical consulting company, where he hasserved since 1991, and is a Professor of Medicine at New York Medical Collegeand Pennsylvania State University College of Medicine. From 1981 to 1983, Dr. Hayesserved as Commissioner of the United States Food and Drug Administration. From1986 to 1991, he was President and Chief Executive Officer of EMPharmaceuticals, as well as a member of its board of directors. Dr. Hayesserved as Provost and Dean at New York Medical College from 1983 to 1986, andserved as the Director of the Institute of Human Values in Medical Ethics,International Health and Department of Biomedical Sciences, and for the latterof which he also served as Chairman. Dr. Hayes has held several posts withPennsylvania State University, which included Professor of Medicine andPharmacology from 1977 to 1981, Dean of Admissions from 1976 to 1979 andAssociate Professor of Medicine and Pharmacology and Director of the Divisionof Clinical Pharmacology from 1972 to 1977. Dr. Hayes currently serves onthe board of directors of Myriad Genetics, Inc. and Celgene Corporation.Dr. Hayes received his M.D. from Cornell University Medical College, andalso attended Cornell’s Graduate School of Medical Sciences, Department of Pharmacology. He undertook premedicalstudies, and attended medical school at Georgetown University. Dr. Hayesreceived his M.S. (philosophy, politics and economics) from Oxford University,where he was a Rhodes Scholar, and his B.A. (philosophy) from Santa ClaraUniversity.

Elliot M. Maza, 49, hasserved as a director since December 2004. Since December 2003, Mr. Mazahas served as Chief Financial Officer of Emisphere Technologies, where he isresponsible for the financial accounting, legal and investor relationsfunctions of that drug delivery company. Between 1999 and 2003, Mr. Mazawas a partner at Ernst & Young LLP. Prior thereto he was employed byGoldman Sachs & Co., J.P. Morgan Securities and the law firm ofSullivan & Cromwell. Mr. Maza holds a J.D. degree from theUniversity of Pennsylvania and is a Certified Public Accountant.

The Honorable Richard N. Perle, 63, has served as adirector since 2000. He has served as a fellow at the American EnterpriseInstitute since 1987. Mr. Perle is a director of Hollinger International, Inc.and Autonomy, plc. From 1981 to 1987, Mr. Perle was the United StatesAssistant Secretary of Defense for International Security Policy at the UnitedStates Department of Defense. Mr. Perle attended the London School of Economics with Honors Examinations, received aB.A. in international relations from the University of Southern California, anM.A. in politics from Princeton University, and completed various fellowshipsat Princeton University, the Ford Foundation and the American Council ofLearned Societies.

Patricia A. Pilia, Ph.D.,56, co-founder of Tapestry Pharmaceuticals, Inc., and one of itspredecessor companies, Pacific Biotechnology, Inc., has served as anemployee and director since inception in 1991. In 2002 she was appointed to theResearch Committee of the Board of Directors. She has served as Secretary since1991, Treasurer from 1991 through 1997, in addition to being President andOfficer in several international corporate affiliates which include our CaymanIslands, United Kingdom, and Canada subsidiaries. Internally, Dr. Piliahas served as Vice President of BioResearch and Toxicology, the head of HumanResources, Operations which included Manufacturing, Regulatory Affairs, QualityAssurance, Quality Control, Environmental Health and Clinical Affairs, andActing Head of Research and Development. She continues with administrative andtechnical responsibilities for Human Resources, Safety and Clinical management.Prior to joining the Company, Dr. Pilia served as Assistant Professor of 

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Pathologyin the Colleges of Medicine, Dental Medicine and Graduate Studies at theMedical University of South Carolina and as the Assistant Director of theImmunopathology Diagnostic and Research Laboratories from 1985 to 1991. Since1978 Dr. Pilia has designed and managed numerous laboratories, clinicalprograms in the US, China and Mexico, consulted to industry in the design anddevelopment of biomedical devices, various treatment modalities, and has beenan active clinical and preclinical researcher in the fields of pathogenesis ofdisease, oncology, autoimmune disease and diagnostic development. Dr. Piliareceived a Bachelor’s degree from Boston University, a Master’s Degree inimmunology/microbiology and a Doctoral Degree in pathology from the MedicalUniversity of South Carolina.

Robert E. Pollack, Ph.D., 64, has served as a director since 2000. He is currently Professor ofBiological Sciences, Adjunct Professor of Environmental, Ecological andEvolutionary Biology, Lecturer in Psychiatry at the Center for PsychoanalyticTraining and Research, and Director of the Center for the Study of Science andReligion at Columbia University; and Adjunct Professor of Science and Religionat Union Theological Seminary. He has been a Professor of Biological Sciencesat Columbia since 1978, and was Dean of Columbia College from 1982 to 1989. He received the Alexander Hamilton Medal fromColumbia University, and has held a Guggenheim Fellowship. He currently serveson Advisory Board of the John Templeton Foundation, and as a Senior Consultantfor the Director, Program of Dialogue on Science, Ethics and Religion, AmericanAssociation for the Advancement of Science. He is also currently a director ofNutrition 21, Inc., a publicly traded company focusing on the development and marketing of proprietarynutritional products. Dr. Pollack graduated from Columbia University witha B.A. in physics, and received a Ph.D. in biology from Brandeis University.

Leonard P. Shaykin, 61, has served as ourChairman of the Board since 1993, and our Chairman and Chief Executive Officersince 1999. In 1995, Mr. Shaykin founded Shaykin & Co., LLC, aprivate investment and management company. Prior to founding Shaykin &Co., Mr. Shaykin was a managing partner of Adler & Shaykin, aninvestment partnership organized to sponsor management leveraged buyouts. Priorto that, Mr. Shaykin was Vice President, Director and a member of theInvestment Committee of Citicorp Venture Capital, Ltd. and Citicorp CapitalInvestors, Inc., the venture capital and equity investment subsidiaries ofCiticorp and Citibank. He is currently Chairman of the Board of the AmericanFriends of Sheba Medical Center-Tel Hashomer, Israel, the largest medicalcenter in the Middle East, and a trustee of the Jackson Laboratories, anot-for-profit genetic research institute. Mr. Shaykin received a B.A. andan M.A. from the University of Chicago and an M.B.A. from the University ofChicago Graduate School of Business.

**Other Executive Officers**

As of March 1, 2005, wehave the following executive officers in addition to those who serve asdirectors:

Martin Batt, 62, has served as our Vice President,Chief Operating Officer since July 2004. Mr. Batt has also been ChiefInformation Officer since 2002. Prior to joining us, from 1986 to 2002, he wasa Partner in the consulting firm of Grisanti, Galef & Goldress whichspecializes 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,  andsteel, computer hardware,carpet, apparel, and automotive parts manufacturing. Prior to that, Mr. Battserved in various Information Technology positions at U. S. Steel Corporation.Mr. Batt received a B.S. in Computer Sciences, Cum Laude, from Point ParkCollege, Pittsburgh and has also taught Computer Science and InformationTechnology.

Kai P. Larson, 40,has served as our Vice President and General Counsel since 1999, and previouslyheld the position of Director of Legal Affairs from 1994 to 1999. Prior tojoining us, he worked as an 

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attorney in the New Yorkoffice of Kirkland & Ellis. Mr. Larson received a B.A. from BrighamYoung University, and a J.D. from Columbia University School of Law.

Gordon Link, Jr., 51, a certified publicaccountant and a certified management accountant, has served as our Senior VicePresident and Chief Financial Officer since 2002, and previously held theposition of Vice President and Chief Financial Officer from 1993 to 2002. Priorto that, Mr. Link served concurrently as Corporate Controller of Synergen, Inc.and Treasurer of the Syntex-Synergen Neuroscience Joint Venture. From1991 to 1993, Mr. Link was Treasurer of Synergen Development Corporation. From1983 to 1990, Mr. Link practiced as a certified public accountant,including the position of Audit Manager with Deloitte & Touche. Heattended the graduate school of the University of Denver and receivedundergraduate degrees in chemistry from Rensselaer Polytechnic Institute in1976 and in accounting from Metropolitan State College in 1983.

Bruce W. Fiedler, 40, joined us as CorporateController in December 2003. Mr. Fiedler has over 18 years ofaccounting and finance experience including senior financial leadership roleswith Arrow Electronics, Inc., where he served as Vice President of Financefor the North American Computer Products Group from 2001 through 2003 and asAssistant Corporate Controller from 2000 through 2001. Prior to ArrowElectronics, Mr. Fiedler worked at Corporate Express, Inc. from 1996through 2000, where he ultimately served as Vice President of Corporate Systemsand Shared Services. Mr. Fiedler began his career with BaxterInternational, Inc. where he held various accounting and finance rolesover 8 years including Site Controller for the MicroScan division, aglobal manufacturer and marketer of diagnostic systems for the Microbiologyindustry. Mr. Fiedler has a Bachelor’s degree in finance from IndianaUniversity, Bloomington, IN and an MBA in finance from DePaul University inChicago, IL.

**Section 16(a) BeneficialOwnership Reporting Compliance**

Under Section 16(a) of theSecurities Exchange Act of 1934, our directors and certain of our officers, andpersons holding more than ten percent of our common stock are required to fileforms reporting their beneficial ownership of our common stock and subsequentchanges in that ownership with the Securities and Exchange Commission. Suchpersons are also required to furnish us copies of forms so filed. Basedsolely upon a review of copies of such forms furnished to us, Martin Batt waslate in filing a Form 3. No other directors or officers were late infiling any reports on Forms 3, 4 or 5.

**Audit Committee**

Tapestry has a separately designated standing AuditCommittee as defined in Section 3(a)(58)(A) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”). The members of the AuditCommittee are Edward L. Erickson (chair), George Gould, Esq., Elliot Mazaand The Honorable Richard N. Perle.

**Audit Committee Financial Expert**

The Board of Directors of Tapestry has determined that theAudit Committee’s chairman, Edward L. Erickson, is an “auditcommittee financial expert” as defined by applicable SEC rules, and isindependent within the meaning of applicable SEC rules and applicableNasdaq Stock Market listing standards. 

**Code of Ethics**

Tapestry has adopted a code of business conduct and ethicsfor senior executives (including Tapestry’s principal executive officer,principal financial officer and controller), known as the Code of Ethics andBusiness Conduct. The Code of Ethics and Business Conduct is available onTapestry’s website at http://www.tapestrypharma.com. We intend to disclose anyamendments to our Code of Ethics and Business Conduct, and any waiver from aprovision of the Code granted to our principal executive officer, 

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principal financial officer orcontroller, on our internet website within five business days following suchamendment or waiver and in any required filings with the SEC. The informationcontained on or connected to our internet website is not incorporated byreference into this Form 10-K and should not be considered part of this orany other report that we file with or furnish to the SEC.

**Item 11**

**Executive Compensation**

**Summary Compensation Table**

The followingtable shows for the years ended December 29, 2004, December 31, 2003and December 31, 2002, compensation awarded or paid to, or earned by ourchief executive officer, our four other most highly compensated executiveofficers at December 29, 2004 and one other person who was an executiveofficer during 2004 (the “Named Executive Officers”):
|                                                | ** **   | ** ** | ** ** | ** **                   | ** ** | ** **     | ** ** | **Securities**     | ** ** | ** **     | ** ** |
|------------------------------------------------|--------------|------------|------------|------------------------------|------------|----------------|------------|--------------------|------------|----------------|------------|
| ** **                                     | *** *** | ** ** | ** ** | **Annual Compensation** | ** ** | **Underlying** | ** ** | **All Other** | ** ** |
| **Name and Principal Position** | ** **   | ** ** | ** ** | **Year**                     | ** ** | **Salary**     | ** ** | **Bonus**          | ** ** | **Options(#)** | ** ** | **Compensation(1)** | ** ** |
| Leonard  P. Shaykin                            |         | 2004       |       | $                            | 354,231    |           | $          | 140,000            |       |           | —     |   |   |   | $ | 35,841 |   |   |
| Chairman  of the Board,                        |         | 2003       |       | 270,000                      |       | 417,000        |       |               | 250,000    |           |       |   | 20,981 |   |   |
| Chief  Executive Officer                       |         | 2002       |       | 270,000                      |       | —         |       |               | —     |           |       |   | 40,000 |   |   |
| Martin M. Batt(2)                              |         | 2004       |       | 225,981                      |       | 120,000        |       |               | 80,000     |           |       |   | 35,841 |   |   |
| Vice President, Chief                          |         | 2003       |       | 190,000                      |       | 225,000        |       |               | 60,000     |           |       |   | 16,099 |   |   |
| Operating Officer                              |         | 2002       |       | 54,808                       |       | 35,000         |       |               | 75,000     |           |       |   | — |   |   |
| Patricia  A. Pilia(3)                          |         | 2004       |       | 238,835                      |       | 60,000         |       |               | 60,000     |           |       |   | 35,841 |   |   |
| Executive  Vice President,                     |         | 2003       |       | 214,412                      |       | 150,000        |       |               | 110,000    |           |       |   | 20,981 |   |   |
| Secretary                                      |         | 2002       |       | 209,577                      |       | —         |       |               | —     |           |       |   | 40,000 |   |   |
| Gordon Link(4)                                 |         | 2004       |       | 239,835                      |       | 100,000        |       |               | 80,000     |           |       |   | 35,841 |   |   |
| Senior Vice President,                         |         | 2003       |       | 247,154                      |       | 250,000        |       |               | 110,000    |           |       |   | 20,981 |   |   |
| Chief Financial Officer                        |         | 2002       |       | 208,731                      |       | 28,073         |       |               | —     |           |       |   | 40,000 |   |   |
| Anne L.  Bailey(5)                             |         | 2004       |       | 194,712                      |       | 100,000        |       |               | 80,000     |           |       |   | 37,256 |   |   |
| Vice  President, General                       |         | 2003       |       | 14,423                       |       | 40,000         |       |               | 50,000     |           |       |   | — |   |   |
| Manager  Genomics Division                     |         | 2002       |       | —                       |       | —         |       |               | —     |           |       |   | — |   |   |
| Kai P. Larson                                  |         | 2004       |       | 213,612                      |       | 75,000         |       |               | 60,000     |           |       |   | 35,841 |   |   |
| Vice President, General                        |         | 2003       |       | 180,000                      |       | 250,000        |       |               | 110,000    |           |       |   | 18,883 |   |   |
| Counsel                                        |         | 2002       |       | 179,154                      |       | 25,000         |       |               | —     |           |       |   | 40,000 |   |   |
|                                                |              |            |            |                              |            |                |            |                    |            |                |            |  |  |  |  |  |  |  |  |  |

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(1)          Representsour Employee Stock Ownership Plan (“ESOP”) contributions of common stock(valued at fair market value as of the date of the contribution) for each ofthe Named Executive Officers.

(2)          Mr. Battwas hired on September 1, 2002.

(3)          In 2003,annual compensation for Dr. Pilia included $4,412 of accrued vacation paidin cash in connection with a change in the Company’s vacation policy.

(4)          In 2003,annual compensation for Mr. Link included $37,154 of accrued vacation paidin cash in connection with a change in the Company’s vacation policy. In 2002,in light of an inadvertent expiration of certain options held by Mr. Link,the Board authorized a stock award to Mr. Link of 2,955 shares, with amarket value of $28,073, which represented the economic value of the expiredoptions as of the expiration date of the options.

(5)          Ms. Baileywas hired on November 17, 2003. In 2004, other compensation included$18,344 of moving and temporary housing costs and $18,912 for the contributionto the ESOP on her behalf. Ms. Bailey 

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serves as GeneralManager of the Company’s Genomics Division, which the Company announced in November 2004would be closed. As a result of such closure, Ms. Bailey is on longer anexecutive officer of the Company. Ms. Bailey is included as a NamedExecutive Officer based upon her service as an executive officer for part of2004 and upon the amount of her compensation for the full fiscal year.

As permitted by rules promulgatedby the SEC, no amounts are shown with respect to certain “perquisites” wherethe aggregate amount of such perquisites received by a Named Executive Officerdoes not exceed the lesser of $50,000 or 10% of his or her salary plus bonusfor the applicable year.

**Option Grants in Last Fiscal Year**

Thefollowing table reports each grant of options to purchase common stock madeduring the year ended December 29, 2004 to the Named Executive Officers:
| **Name**            | ** ** | ** ** | ** ** | **Number of  Securities  Underlying  Options  Granted  (#)(1)** | ** ** | **% of Total  Options  Granted to  Employees in  Year(2)** | ** ** | **Exercise or  Base Price Per  Share  ($/sh)** | ** ** | **Expiration  Date(3)** | ** ** | **Potential Realizable  Value at Assumed  Annual Rates of  Stock Price   Appreciation for  Option Terms ($)(4)** | ** ** |
|---------------------|------------|------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | ** ** | ** ** | ** **                                                           | ** ** | ** **                                                                     | ** ** | ** **                                                    | ** ** | **5%**                  | ** ** | **10%**                                                                                                                                                            | ** ** |
| Leonard P.  Shaykin |       |       | —     |                                                                 |       |                                                                           | —     | %                                                             |       |                    | $          | —                                                                                                                                                             |       |   | — |   | $ | — |   | $ | — |   |
| Martin M. Batt      |       |       | 80,000     |                                                                 |       |                                                                           | 6.54       | %                                                             |       |                    | $          | 1.06                                                                                                                                                               |       |   | 10/28/2014 |   | 53,398 |   | 135,359 |   |
| Patricia A. Pilia   |       |       | 60,000     |                                                                 |       |                                                                           | 4.91       | %                                                             |       |                    | $          | 1.06                                                                                                                                                               |       |   | 10/28/2014 |   | 40,048 |   | 101,519 |   |
| Gordon Link         |       |       | 80,000     |                                                                 |       |                                                                           | 6.54       | %                                                             |       |                    | $          | 1.06                                                                                                                                                               |       |   | 10/28/2014 |   | 53,398 |   | 135,359 |   |
| Anne L. Bailey      |       |       | 80,000     |                                                                 |       |                                                                           | 6.54       | %                                                             |       |                    | $          | 1.06                                                                                                                                                               |       |   | 10/28/2014 |   | 53,398 |   | 135,359 |   |
| Kai P. Larson       |       |       | 60,000     |                                                                 |       |                                                                           | 4.91       | %                                                             |       |                    | $          | 1.06                                                                                                                                                               |       |   | 10/28/2014 |   | 40,048 |   | 101,519 |   |
|                     |            |            |            |                                                                      |            |                                                                                |            |                                                               |            |                         |            |                                                                                                                                                                    |            |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Eachof the options listed on this table was granted under our 2004 Equity IncentivePlan (the “2004 Plan”). The options granted on October 28, 2004 becomeexercisable in percentages according to the closing price of our common stockon the Nasdaq SmallCap Market, in accordance with the following schedule.Vesting shall be determined by a comparison of the closing price of our commonstock on October 28, 2004 ($1.06) (the “Base Price”) compared with a rolling 20day average of the closing price of our common stock over the period fromOctober 28, 2004 to October 28, 2009 (the “Target Price”). When the TargetPrice exceeds the Base Price by 30%, then 16.67% of the shares allocated toeach individual shall vest. When the Target Price exceeds the Base Price by60%, then an additional 16.67% of the shares allocated to each individual shallvest. Similarly, an additional 16.67% of the shares shall vest when the TargetPrice exceeds the Base Price by 90%, 120%, 150%, and 200%. All such sharesshall be fully vested, regardless of our common stock price, on October 28,2009. 

(2)          Basedon the aggregate of 1,223,050 options granted to our employees, including theNamed Executive Officers, in 2004, and consisting of options granted under the1994 Long-Term Performance Incentive Plan (the “1994 Plan”), the 1998 StockIncentive Plan (the “1998 Plan”), the 2004 Equity Incentive Plan (the “2004 EIPPlan”) and the 2004 Non-Employee Directors’ Stock Option Plan (the “2004Directors’ Plan”).

(3)          Optionsgranted under the 2004 Plan have a ten-year term and are subject to earliertermination upon death, disability or termination of employment.

(4)          Thepotential realizable value is calculated based on the term of the option at itstime of grant (10 years) assuming that the stock price on the date of grantappreciates at the indicated annual rate compounded annually for the entireterm of the option and that the option is exercised and sold on the last day ofits term for the appreciated stock price less the exercise price. Stock priceappreciation 

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of 5% and 10% isassumed pursuant to rules promulgated by the SEC and does not represent ourprediction of our future stock price performance. In addition, the potentialrealizable value computation does not take into account federal or state incometax consequences of option exercises or sales of appreciated stock.

**AggregatedOptions Exercises in Last Fiscal Year and Fiscal Year-End Option Values**

The followingtable reports information, as to each of the Named Executive Officers,concerning the number of shares subject to both exercisable and unexercisablestock options held as of December 29, 2004. Also reported are values for “in-the-money”options that represent the positive spread between the respective exerciseprices of outstanding stock options and the fair market value of our commonstock as of December 29, 2004:
| ** **         | ** ** | **Shares**   | ** ** | ** **      | ** ** | **Number of Securities**        | ** ** | **Value of Unexercised** | ** ** |
|--------------------|------------|--------------|------------|-----------------|------------|-------------------------------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **Acquired** | ** ** | **Value**       | ** ** | **Underlying Unexercised **     | ** ** | **in-the-Money  Options**          | ** ** |
| ** **         | ** ** | **on**       | ** ** | **Realized**    | ** ** | **Options at Year End(#)** | ** ** | **at Year End($)**       | ** ** |
| **Name**           | ** ** | ** **   | ** ** | **Exercise(#)** | ** ** | **($)(1)**                                | ** ** | **Exercisable**                    | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Leonard P. Shaykin |       |         | —     |            |       |                                      | —     |                               |       |   | 745,862 |   |   |   | 479,138 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Martin M. Batt     |       |         | —     |            |       |                                      | —     |                               |       |   | 57,504 |   |   |   | 157,496 |   |   |   | — |   |   |   | — |   |   |
| Patricia A. Pilia  |       |         | —     |            |       |                                      | —     |                               |       |   | 431,008 |   |   |   | 299,992 |   |   |   | — |   |   |   | — |   |   |
| Gordon Link        |       |         | —     |            |       |                                      | —     |                               |       |   | 358,350 |   |   |   | 361,650 |   |   |   | — |   |   |   | — |   |   |
| Anne L. Bailey     |       |         | —     |            |       |                                      | —     |                               |       |   | 24,000 |   |   |   | 106,000 |   |   |   | — |   |   |   | — |   |   |
| Kai P. Larson      |       |         | —     |            |       |                                      | —     |                               |       |   | 200,840 |   |   |   | 233,326 |   |   |   | — |   |   |   | — |   |   |
|                    |            |              |            |                 |            |                                           |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Calculatedon the basis of the closing price per share of our common stock on the date ofexercise on the Nasdaq SmallCap Market, less the exercise price.

**Compensation of Directors**

Options to purchase 10,000 shares ofcommon stock are granted automatically under the 2004 Directors’ Plan to eachnon-employee director who (i) is elected or reelected as a director of theCompany at an annual meeting of stockholders, (ii) continues service as adirector of the Company after an annual meeting of stockholders at which thedirector is not subject to re-election, or (iii) is otherwise appointed asa director of the Company in accordance with the Company’s bylaws, in each caseon the business day date next following each such annual meeting orappointment. Options to purchase 10,000 share of common stock are grantedautomatically to each non-employee director who is appointed or continues toserve after an annual meeting of stockholders as chair of the Audit,Compensation, Nominating and Corporate Governance and Research and DevelopmentCommittees of the Board of Directors on the business day next succeeding eachsuch appointment or continuation of service, as the case may be. Inaddition,options to purchase 7,500 shares of common stock are automaticallygranted to each non-employee who isappointed to the Research and Development Committee (the “RDC”) upon initialappointment to the committee, and options to purchase 3,000 shares of commonstock are automatically granted to each non-employee director who continuesservices as a RDC member after an annual meeting of stockholders, in each caseon the business day next succeeding such appointment or continuation ofservice, as the case may be. Non-employee directors also may be granted optionsto purchase shares of common stock in 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.

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Non-employee directors are paid $3,000for each regular meeting and $500 for each special meeting attended. Inaddition, directors serving on committees of the Board are paid for attendanceat each committee meeting as follows: $1,000 for the committee chair and $500for non-chair committee members. The RDC co-chairs receive $40,000 per year. Directorsare also reimbursed for their cost incurred in attending Board and committeemeetings. In April 2004, the Board added an annual retainer of $10,000,payable quarterly, for all non-employee directors, and an additional annualretainer of $10,000 for the chair of the Audit Committee.

**EmploymentAgreements and Termination of Employment Agreements**

Effective October 1, 2001, we entered into an employment agreement (the“Shaykin Employment Agreement”), with Leonard Shaykin. In addition, effective October 1,2001, we entered into employment agreements (collectively, the “EmploymentAgreements”) with Patricia Pilia, Gordon Link, and Kai Larson (collectively,the “Executive Officers”). The Shaykin Employment Agreement and the otherEmployment Agreements are referred to together as the “Executive Agreements”,and Mr. Shaykin and the Executive Officers are referred to together as the“Executives.” 

The Shaykin Employment Agreement provides for aninitial three year employment term that expired on October 1, 2004 and isautomatically renewed on each anniversary of the date of the agreement forsuccessive one-year terms unless either party terminates. No such notice oftermination has been given by or to Mr. Shaykin.

The Shaykin Employment Agreement provides for aninitial annual base salary for Mr. Shaykin of $270,000. Under the ShaykinEmployment Agreement, in the event a change of control occurs or is anticipated(including the sale of substantially all of the assets of the Company) and Mr. Shaykin’semployment is terminated by the Company without cause (as defined in theShaykin Employment Agreement) or by Mr. Shaykin for good reason (asdefined in the Shaykin Employment Agreement), Mr. Shaykin is to be granted(i) a payment equal to the greater of 100% of his prior year’s bonus or75% of his base annual salary, (ii) a payment equal to 300% of his baseannual salary and (iii) a payment equal to accrued, unpaid salary and bonusthrough the date of termination. As defined in the Shaykin EmploymentAgreement, “good reason” includes, along with other events, the board ofdirectors’ failure to grant, in each calendar year after a change in controloccurs or is anticipated, a minimum annual bonus at least equal to the averageof the three years’ prior annual bonuses, if such a failure is in anticipationof or following a change in control. The sale of our paclitaxel business toMayne Pharma may be deemed to have been a sale of substantially all our assets.In connection with the sale, Mr. Shaykin advised the Company that he haswaived any requirement that a minimum annual bonus be paid to him insofar asthe sale of the paclitaxel business could be construed to constitute a changeof control pursuant to the Shaykin Employment agreement.

In addition, if Mr. Shaykin’s employment isterminated by the Company without cause or by Mr. Skaykin for good reason,he would be entitled to receive, subject to certain limitations, (i) alump sum of accrued, unpaid salary and bonus, if any, through the terminationdate, (ii) health and welfare benefits as in effect immediately prior totermination for a maximum of 18 months following termination, (iii) fullvesting for all outstanding Company stock options owned by Mr. Skaykinthat were granted prior to October 1, 2001, and (iv) a bonus paymentin an amount equal to a percentage of his base salary, according to the termsset forth above. The forgoing benefits would be limited by the amountdeductible for income tax purposes under the Internal Revenue Code of 1986, asamended.

Each of the Employment Agreements provides for aninitial two-year employment term that expired on October 1, 2003, and isautomatically renewed on each anniversary of the date of the agreement for anadditional one-year term unless either party gives notice of termination to theother party at least 180 days prior to the commencement of any additionalone-year term. No such notice of termination has been given 

38

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by or to any of the ExecutiveOfficers. The Employment Agreements provide for initial annual base salariesfor Dr. Pilia, Mr. Link and Mr. Larson of $210,000, $210,000 and$180,000, respectively. Under the Employment Agreements, in the event a changeof control occurs or is anticipated (including the sale of substantially all ofthe assets of the Company) and an Executive Officer’s employment is terminatedby the Company without cause or by the Executive Officer for good reason, suchExecutive Officer is to be granted (i) a payment equal to the greater of100% of his or her prior year’s bonus or 75% of his or her base annual salaryand (ii) a payment equal to 200% of the Executive Officer’s base annualsalary. As defined in these agreements, “good reason” includes, along with otherevents, the board of directors’ failure to grant, in each calendar year after achange in control occurs or is anticipated, a minimum annual bonus at leastequal to the average of the three years’ prior annual bonuses, if such afailure is in anticipation of or following a change in control. The sale of ourpaclitaxel business to Mayne Pharma, may be deemed to have been a sale ofsubstantially all of our assets. In connection with the sale, each of theExecutive Officers advised the Company that he or she has waived anyrequirement that a minimum annual bonus be paid him or her insofar as the saleof the paclitaxel business could be construed to constitute a change of controlpursuant to his or her Employment Agreement.

In addition, if the Executive Officer’s employment isterminated by the Company without cause or by the Executive Officer for goodreason, each Executive Officer would be entitled to receive, subject to certainlimitations, (i) a lump sum of accrued, unpaid salary and bonus, if any,through the termination date, (ii) health and welfare benefits as ineffect immediately prior to termination for a maximum of 18 months followingtermination, (iii) full vesting for all outstanding Company stock optionsowned by the Executive Officer that were granted prior to October 1, 2001,and (iv) a bonus payment in an amount equal to a percentage of theindividual Executive Officer’s base salary, according to the terms set forthabove for each named individual. The forgoing benefits would be limited by the amountdeductible for income tax purposes under the Internal Revenue Code of 1986, asamended. 

Under the Employment Agreements and the ShaykinEmployment Agreement, Executives may receive an annual bonus in such amount, ifany, as the Compensation Committee (or if the Board has no CompensationCommittee at the time, then the Board), in its discretion, may award toExecutives, based upon the Executive’s and the Company’s performance duringeach year of the Employment Period.

The Executive Agreementsalso contain provisions (i) prohibiting disclosure of confidentialinformation, (ii) granting to the Company rights to intellectual propertydeveloped by the Executives that relate to its business or are developed in thecourse of employment with Tapestry, and (iii) prohibiting competition withTapestry under certain circumstances during and for five years after theExecutive’s employment.

**CompensationCommittee Interlocks and Insider Participation**

During the year ended December 29,2004, our compensation committee consisted of Dr. Robert Pollack(chairman), Dr. Stephen Carter, Mr. Edward Erickson and the HonorableRichard M. Pearle. None of our executive officers serve as members of the boardof directors or compensation committee of any entity that has one or moreexecutive officers who serve on the board of directors or compensationcommittee.

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

**EquityCompensation Plan Information**

The following table sets forth certaininformation as of December 29, 2004 concerning our common stock that maybe issued upon the exercise of options or the purchases of restricted stockunder all of our equity compensation plans approved by stockholders and equitycompensation plans not approved by stockholders:
| **Plan Category**                                       | ** ** | ** ** | ** ** | **(a)  Number of securities  to be issued  upon exercise  of outstanding  options, warrants  and rights** | ** ** | **(b)  Weighted-average  exercise price  of outstanding options,  warrants and rights** | ** ** | **(c)  Number of securities  remaining available for  future issuances under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders:     |       |       |       |                                                                                                                                              |       |                                                                                                             |       |                                                                                                                                                                                                                   |       |   |   |   |   |
| 2004 Equity Incentive  Plan                                  |       |       | 1,197,500  |                                                                                                                                              |       |                                                                                                             | $          | 1.01                                                                                                                                                                                                                   |       |   |   | 802,500 |   |   |
| 2004 Non-Employee  Directors’ Stock Option Plan         |       |       | 50,000     |                                                                                                                                              |       |                                                                                                             | $          | 1.06                                                                                                                                                                                                                   |       |   |   | 350,000 |   |   |
| 1994 Long-Term  Performance Incentive Plan         |       |       | 5,705,402  |                                                                                                                                              |       |                                                                                                             | $          | 4.18                                                                                                                                                                                                                   |       |   |   | 280,018 |   |   |
| Total Approved Plans                                         |       |       | 6,952,902  |                                                                                                                                              |       |                                                                                                             | $          | 3.61                                                                                                                                                                                                                   |       |   |   | 1,432,518 |   |   |
| Equity compensation plans not approved by security  holders: |       |       |       |                                                                                                                                              |       |                                                                                                             |       |                                                                                                                                                                                                                   |       |   |   |   |   |
| Non-plan                                                     |       |       | 500        |                                                                                                                                              |       |                                                                                                             | $          | 9.50                                                                                                                                                                                                                   |       |   |   | — |   |   |
| 1998 Stock Option Plan                                       |       |       | 1,323,698  |                                                                                                                                              |       |                                                                                                             | $          | 4.35                                                                                                                                                                                                                   |       |   |   | 248,328 |   |   |
| Total Unapproved Plans                                       |       |       | 1,324,198  |                                                                                                                                              |       |                                                                                                             | $          | 4.35                                                                                                                                                                                                                   |       |   |   | 248,328 |   |   |
| Total Plans                                                  |       |       | 8,277,100  |                                                                                                                                              |       |                                                                                                             | $          | 3.73                                                                                                                                                                                                                   |       |   |   | 1,680,846 |   |   |

 

**Summary of EquityCompensation Plans Not Approved by Stockholders**

*Non-plan StockOptions*

In January 1994, theCompany granted to four outside directors 27,000 non-plan options to purchaseshares of common stock which were immediately exercisable at a price of $2.40and which expired in January 2004. In September 1997, the Companygranted to its employees 20,075 non-plan options to purchase shares of commonstock which vested over two years and which expire in September 2007. Asof December 29, 2004, 500 of these options remained outstanding.

*The 1998 StockIncentive Plan*

In 1998, the Board ofDirectors adopted the 1998 Stock Incentive Plan (formerly known as the “1998Stock Option Plan”) (the “1998 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 1998 Planprovides for option grants designated as nonqualified stock options orincentive stock options. Originally, 125,000 shares were authorized forissuance under the 1998 Plan. In 1999, 2000, 2001 and 2002 the Board ofDirectors approved increases in the number of authorized shares. There arecurrently 1,925,000 shares authorized for issuance under the 1998 Plan. Underthe terms of the 1998 Plan, stock options cannot be granted to persons who areTapestry officers subject to Section 16 of the Securities Exchange Act of1934, as amended, (unless granted to officers not previously employed byTapestry, as an inducement essential to such officers entering into employmentcontracts with the Company) or to 

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Tapestrydirectors. Options granted under the 1998 Plan typically vest 25% after eachanniversary date of the grant, and expire ten years from the date of grant. Theexercise price for stock options issued under the 1998 Plan is equal to thefair market value of the Company’s common stock on the date of grant.

**SecurityOwnership by Certain Persons**

Thefollowing table sets forth certain information as of February 1, 2005regarding the ownership of our common stock by (1) persons believed by usto be the beneficial owners of more than five percent of our outstanding commonstock; (2) by each director and by each executive officer named in theSummary Compensation Table above; and (3) by all executive officers anddirectors as a group. Except where otherwise indicated, the address for each ofthe persons listed in the table is: Tapestry Pharmaceuticals, Inc., 4840 Pearl East Circle, Suite 300W,Boulder, CO 80301.
| **Name of Director, Officer or  Beneficial Owner(1)** | ** ** | ** ** | ** ** | **Number of  Shares of  Common Stock** | ** ** | **Percent of  Class** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|-------------------------------------------------------|------------|----------------------------|------------|
| Leonard P.  Shaykin                                                            |       |       | 1,459,539  | (2)                                                   |       |                       | 4.37       | % |   |
| Stephen K. Carter, M.D.                                                        |       |       | 10,000     | (3)                                                   |       |                       |       | * |   |
| Edward L. Erickson                                                             |       |       | 70,000     | (4)                                                   |       |                       |       | * |   |
| George M. Gould                                                                |       |       | 20,000     | (5)                                                   |       |                       |       | * |   |
| Arthur H. Hayes, Jr.                                                           |       |       | 100,000    | (6)                                                   |       |                       |       | * |   |
| Elliot M. Maza                                                                 |       |       | —     |                                                  |       |                       |       | * |   |
| The Honorable Richard N. Perle                                                 |       |       | 113,000    | (7)                                                   |       |                       |       | * |   |
| Patricia A. Pilia                                                              |       |       | 700,422    | (8)                                                   |       |                       | 2.09       | % |   |
| Robert E. Pollack                                                              |       |       | 78,500     | (9)                                                   |       |                       |       | * |   |
| Anne L. Bailey                                                                 |       |       | 58,901     | (10)                                                  |       |                       |       | * |   |
| Martin M. Batt                                                                 |       |       | 120,992    | (11)                                                  |       |                       |       | * |   |
| Kai P. Larson                                                                  |       |       | 214,992    | (12)                                                  |       |                       |       | * |   |
| Gordon Link                                                                    |       |       | 507,739    | (13)                                                  |       |                       | 1.52       | % |   |
| All Directors and Executive Officers as a Group (14  persons)                  |       |       | 3,466,301  | (14)                                                  |       |                       | 10.37      | % |   |
| Mayne Pharma  (USA) Inc.                                                       |       |       | 2,000,000  | (15)                                                  |       |                       | 5.98       | % |   |

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*      Lessthan 1%

(1)         Unless otherwise noted,we believe that all persons named in the table have sole voting and investmentpower with respect to all shares of common stock beneficially owned by them. Percentageof beneficial ownership is based on 33,435,401 shares of common stockoutstanding as of February 1, 2005, as adjusted as required by the rules promulgatedby the SEC. Beneficial ownership is determined in accordance with the rules ofthe SEC and generally includes voting or investment power with respect tosecurities. Shares of stock subject to options or warrants currentlyexercisable or exercisable within 60 days of February 1, 2005 are deemedoutstanding for computing the percentage of the person or entity holding suchsecurities, and for purposes of computing the percentage of each other personor entity.

(2)         Includes 745,862 sharesof common stock issuable upon exercise of options granted to Mr. Shaykinunder the 1994 Plan and 89,060 shares of common stock beneficially ownedthrough our ESOP plans as of February 1, 2005.

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(3)         Includes 10,000 shares ofcommon stock issuable upon exercise of options granted to Dr. Carter underthe 1994 Plan.

(4)         Includes 70,000 shares ofcommon stock issuable upon exercise of options granted to Mr. Ericksonunder the 1994 Plan.

(5)         Includes 20,000 shares ofcommon stock issuable upon exercise of options granted to Mr. Gould underthe 1994 Plan.

(6)         Includes 100,000 sharesof common stock issuable upon exercise of options granted to Dr. Hayesunder the 1994 Plan.

(7)         Includes 100,000 sharesof common stock issuable upon exercise of options granted to Mr. Perleunder the 1994 Plan.

(8)         Includes 431,008 sharesof common stock issuable upon exercise of 1994 Plan options; 88,908 shares ofcommon stock beneficially owned through our ESOP plans as of February 1,2005; and 10,800 shares of common stock gifted by Dr. Pilia to relativesand certain other persons, which Dr. Pilia may be deemed to beneficiallyown by virtue of holding powers of attorney to vote and take certain otheractions with respect to such shares. Dr. Pilia disclaims beneficialownership of the gifted shares of common stock over which Dr. Pilia holdspowers of attorney. This does not include 1,438,070 shares beneficially ownedby Dr. Sterling Ainsworth, a former officer of the Company, whosetransactions in shares of Company stock are reported by Dr. Pilia under Section 16of the Securities Act of 1934, as amended, as though such shares werebeneficially owned by her. Dr. Pilia disclaims beneficial ownership of allsuch shares beneficially owned by Dr. Ainsworth.

(9)         Includes 78,500 shares ofcommon stock issuable upon exercise of options granted to Dr. Pollack underthe 1994 Plan.

(10)  Includes 50,000 shares of commonstock issuable upon the exercise of options granted to Ms. Bailey underthe 1994 Plan and 8,901 shares of common stock beneficially owned through ourESOP plan as of February 1, 2005.

(11)  Includes 57,504 shares of commonstock issuable upon the exercise of options granted to Mr. Batt under the1994 Plan and 43,368 shares of common stock beneficially owned through our ESOPplan as of February 1, 2005.

(12)  Includes 134,174 shares ofcommon stock issuable upon the exercise of options granted to Mr. Larsonunder the 1994 Plan and 80,818 shares beneficially owned through our ESOP plansas of February 1, 2005.

(13)  Includes 358,350 shares ofcommon stock issuable upon the exercise of options granted to Mr. Linkunder the 1994 Plan and 89,157 shares of common stock beneficially ownedthrough our ESOP plans as of February 1, 2005.

(14)  Includes an aggregate of2,161,648 shares of common stock issuable upon exercise of outstanding stockoptions held by such persons.

(15)  Information in the table as tobeneficial ownership of common stock by Mayne Pharma (USA) Inc. is based uponfilings on Schedule 13G made by Mayne Pharma (USA) Inc. on October 9, 2003.Mayne Pharma (USA) Inc.’s address is Mack Cali Centre II, 650 From Road, SecondFloor, Paramus, NJ 07652.

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**Item13**CertainRelationships and Related Transactions

Arthur H. Hayes, Jr., M.D., mayprovide certain consulting services to us. We are parties with MediScienceAssociates to a consulting agreement (the “MediScience Agreement”) whereby Dr. Hayes,who is President and Chief Operating Officer of MediScience, may provide uswith consulting services in a variety of areas, including clinical researchplanning, strategic positioning and regulatory guidance. We are obligated tomake quarterly payments to MediScience under the MediScience Agreement in theamount of $12,500. Dr. Hayes was paid $50,000 under this agreement during2004. Dr. Hayes is obligated to provide consulting services to us underthe MediScience Agreement indefinitely, but the MediScience Agreement isterminable by us or MediScience at any time with 90 days prior written notice.

**Item 14Principal Accountant Fees and Services**

The firm of Grant Thornton LLP(“GT”), registered public accounting firm, audited our accounts and theaccounts of our subsidiaries for the fiscal year ended December 29, 2004 andreviewed our financial statements included in our quarterly report on Form 10-Qfor the quarter ended September 29, 2004. We engaged GT as our auditor inAugust 2004. The firm of Ernst & Young LLP (“EY”), registered publicaccounting firm, audited our accounts and the accounts of our subsidiaries forthe year ended December 31, 2003, and reviewed our financial statementsincluded in our quarterly reports on Form 10-Q for 2003 and through thequarterly period ended June 30, 2004. EY had been our auditors since 1998.
| ** **            | ** ** | **Grant Thornton** | ** ** | **Ernst & Young** | ** ** | **Total** | ** ** |
|-----------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|
| ** **            | ** ** | **2004**                | ** ** | **2003**                        | ** ** | **2004**  | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Audit Fees(1)         |       | $                       | 147,000    |                            |       | $         | —     |   |   | $ | 26,000 |   | $ | 102,000 |   | $ | 173,000 |   | $ | 102,000 |   |
| Audit Related Fees(2) |       | —                  |       |                            | —     |      |       | 7,000 |   | 27,000 |   | 7,000 |   | 27,000 |   |
| Tax Fees(3)           |       | —                  |       |                            | —     |      |       | 44,000 |   | 7,000 |   | 44,000 |   | 7,000 |   |
| All Other Fees        |       | —                  |       |                            | —     |      |       | — |   | — |   | — |   | — |   |
|                  |       | $                       | 147,000    |                            |       | $         | —     |   |   | $ | 77,000 |   | $ | 136,000 |   | $ | 224,000 |   | $ | 136,000 |   |

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(1)   AuditFees consist of fees for professional services rendered for the audit of ourannual consolidated financial statements and review of the interim consolidatedfinancial statements included in quarterly reports on Form 10-Q. In 2004, auditfees also include fees for professional services rendered for the audits of (i)management’s assessment of the effectiveness of internal control over financialreporting and (ii) the effectiveness of internal control over financialreporting.

(2)         Audit-Related Feesconsist of fees for assurance a related services that are reasonably related tothe performance of the audit or review of our consolidated financial statementsand are not reported in “Audit Fees.”  In2004, this category included fees relating to registration statement filings.In 2003, this category included fees related to review of our proxy inconnection with the sale of our paclitaxel business and registration statementsfilings.

(3)         TaxFees consist of fees for professional services rendered for assistance withfederal, state and international tax compliance and tax planning.

**Pre-ApprovalPolicies and Procedures**

The engagements of GT and EY to render the above auditand tax services was approved by our Audit Committee prior to the engagement.All work relating to the audit of our financial statements for the year endedDecember 29, 2004 was performed by full-time employees of GT. Pursuant to theAudit Committee Charter, the Audit Committee shall pre-approve all auditingservices and permitted non-audit services 

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(including the fees andterms thereof) to be performed for the Company by its independent auditor(subject to the de minimis exceptions for non-audit services described inSection 10A(i)(1)(B) of the Exchange Act which shall be approved by the AuditCommittee prior to the completion of the audit). The Audit Committee may formand delegate authority to subcommittees consisting of one or more members whenappropriate, including the authority to grant pre-approvals of audit andpermitted non-audit services, provided that decisions of such subcommittee togrant pre-approvals shall be presented to the full Audit Committee at its nextscheduled meeting.

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**Part IV**

**Item 15**Exhibits and Financial Statement Schedules

**Financial Statements**

The Financial Statement Index is on Page F-1.

**Financial Statement Schedules**

All schedules are omitted because theyare not applicable or not required or because the information is included inthe consolidated financial statements or the notes thereto.

**Exhibits**
| Exhibit   Number | ** ** | ** **                                                                                                                                                   | ** ** | **Description of Exhibit** |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| 3.1              |       | Amended and Restated Certificate of Incorporation of  the Company, as amended August 2, 1996(1)                                                         |
| 3.2              |       | Certificate of Amendment dated September 21,  1998 to the Amended and Restated Certificate of Incorporation of the  Company(2)                          |
| 3.3              |       | Certificate of Amendment dated October 31, 2000  to the Amended and Restated Certificate of Incorporation of the Company(3)                             |
| 3.4              |       | Bylaws of the Company as amended through  August 25, 2003(11)                                                                                           |
| 3.5              |       | Certificate of Designation for Convertible Preferred  Stock, Series A(4)                                                                                |
| 3.6              |       | Certificate of Designation for Series B Junior  Participating Preferred Stock(5)                                                                        |
| 3.7              |       | Certificate of Designation for Series C Senior  Convertible Preferred Stock(6)                                                                          |
| 3.8              |       | Certificate of Elimination of Convertible Preferred  Stock, Series A(7)                                                                                 |
| 3.9              |       | Certificate of Elimination of Series C Senior  Convertible Preferred Stock(7)                                                                           |
| 3.10             |       | Certificate of Increase of Series B Junior  Participating Preferred Stock(7)                                                                            |
| 3.11             |       | Certificate of Amendment dated March 3, 2003 to  the Amended and Restated Certificate of Incorporation of the Company(8)                                |
| 4.1              |       | Common Stock Certificate(9)                                                                                                                                  |
| 4.2              |       | Amended and Restated Rights Agreement dated  September 25, 2001 between the Company and American Stock Transfer and  Trust Company, as Rights Agent(10) |
| 4.3              |       | The Certificate of Incorporation and Bylaws of the  Company are included as Exhibits 3.1 - 3.11                                                              |
| 4.4.             |       | Promissory Note dated February 18, 2005 payable  by the Company to TL Ventures V L.P. in the amount of $4,590,600.17*                                   |
| 4.5              |       | Promissory Note dated February 18, 2005 payable  by the Company to TL Ventures V Interfund L.P. in the amount of $79,399.53*                            |
| 10.1**           |       | Company’s 1993 Stock Option Plan(9)                                                                                                                     |
| 10.2**           |       | Amendment dated December 11, 2000 to the  Company’s 1993 Stock Option Plan(12)                                                                     |
| 10.3**           |       | Company’s Amended and Restated 1994 Long-Term  Performance Incentive Plan, as amended through March 4, 2002(11)                                    |
| 10.4             |       | Company’s Amended and Restated 1998 Stock Incentive  Plan as amended through October 15, 2002(11)                                                  |
| 10.5**           |       | Company’s 2004 Equity Incentive Plan(16)                                                                                                                |
| 10.6**           |       | Company’s 2004 Non Employee Director’s Stock Option  Plan(16)                                                                                      |
| 10.7**           |       | Employment Agreement effective October 1, 2001  between the Company and Leonard Shaykin(13)                                                             |
| 10.8**           |       | Employment Agreement effective October 1, 2001  between the Company and Patricia Pilia(13)                                                              |
| 10.9**           |       | Employment Agreement effective October 1, 2001  between the Company and Gordon Link(13)                                                                 |
| 10.10**          |       | Employment Agreement effective October 1, 2001  between the Company and Kai Larson(13)                                                                  |
| 10.11+           |       | License Agreement dated November 21, 2000 by  and between the Company and The University of Delaware and Thomas Jefferson  University(12)               |

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| 10.12** |   | Employment Agreement effective January 1, 2004  between the Company and Sterling K. Ainsworth(11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13   |   | Asset Purchase Agreement dated as of August 25,  2003 between Tapestry Pharmaceuticals, Inc. and Faulding Pharmaceutical  Co.(15)                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.14   |   | Form of Director and Officer Indemnification  Agreement signed by the Company and each of Martin M. Batt, Edward L.  Erickson, 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(8) |
| 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)(11)                                                                                                                                                                                                                                                                                                                                 |
| 10.16** |   | Form of Stock Option Agreement for certain  options granted under the Company’s 2004 Equity Incentive Plan(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17** |   | Form of Stock Option Agreement for options  granted under the Company’s 2004 Non-Employee Directors’ Stock Option  Plan(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.18   |   | Settlement Agreement and Mutual General Release  dated February 18, 2005 between the Company, on one hand, and TL  Ventures V L.P. and TL Ventures Interfund L.P., on the other hand*                                                                                                                                                                                                                                                                                                                                                                                                    |
| 21.1    |   | List of Subsidiaries(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 23.1    |   | Consent of Grant Thornton LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 23.2    |   | Consent of Ernst & Young LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 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)*                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

*                    Filed herewith

**             A managementcompensation 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

+                Portions have beenomitted pursuant to a request for confidential treatment

(1)          Incorporated herein byreference to the Company’s Annual Report on Form 10-K filed with theCommission for the year ended December 31, 1996 (File No. 0-24320)

(2)          Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the yearended December 31, 1998 (File No. 0-24320)

(3)          Incorporated herein byreference to the Company’s Quarterly Report on Form 10-Q for theperiod ending September 30, 2000 (File No. 0-24320)

(4)          Incorporated herein byreference to the Company’s Quarterly Report on Form 10-Q for thequarter ending June 20, 1995 (File No. 0-24320)

46

----

(5)          Incorporated herein byreference to the Company’s Registration Statement on Form 8-A12G/Adated November 25, 1996 (File No. 0-24320)

(6)          Incorporated herein byreference to the Company’s Registration Statement on Form S-3 filedon December 16, 1997 (File No. 333-42419)

(7)             Incorporatedherein by reference to the Company’s Registration Statement on Form S-3/Afiled on August 26, 2003 (File No. 333-107817)

(8)          Incorporated herein byreference to the Company’s Annual Report on Form 10-K/A for the yearended December 31, 2002, filed on August 8, 2003 (File No. 0-24320)

(9)          Incorporated herein byreference to the Registration Statement on Form S-1 of the Company,filed with the Commission on July 24, 1994 (File No. 33-78016)

(10)   Incorporated herein byreference to the Registration Statement on Form 8-A12G/A of theCompany, filed with the Commission on October 23, 2001 (File No. 0-24320)

(11)   Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the yearended December 31, 2003 (File No. 0-24320)

(12)   Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the yearended December 31, 2000 (File No. 0-24320)

(13)   Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the yearended December 31, 2001 (File No. 0-24320)

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

(15)   Incorporated herein byreference to the Company’s Current Report on Form 8-K filed with theCommission dated August 25, 2003 (File No. 0-24320)

(16)       Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Qfor the period ending June 30, 2004 (File No. 0-24320)

47

----

 

**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 |   | February 23, 2005 |
| Leonard P. Shaykin                    |                   |
| *Chairman of the Board of Directors,* |                   |
| *Chief Executive Officer*             |                   |
|                                       |                        |  |  |

 

Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.
| /s/ LEONARD  P. SHAYKIN         |                           | Chairman of the Board of Directors, | February 23, 2005 |
|---------------------------------|--------------------------------|-------------------------------------|------------------------|
| Leonard P. Shaykin              | Chief Executive Officer        |                                |
|                            | (Principal Executive Officer)  |                                |
| /s/ PATRICIA A. PILIA           |                           | Executive Vice  President,          | February 23, 2005 |
| Patricia A. Pilia, Ph.D.        | Director                       |                                |
| /s/ GORDON LINK                 |                           | Senior Vice President,              | February 23, 2005 |
| Gordon Link                     | Chief Financial Officer        |                                |
|                            | (Principal Financial Officer)  |                                |
| /s/ BRUCE W. FIEDLER            |                           | Controller                          | February 23, 2005 |
| Bruce W. Fiedler                | (Principal Accounting Officer) |                                |
| /s/ STEPHEN K. CARTER           |                           | Director                            | February 23, 2005 |
| Stephen K. Carter, M.D.         |                           |                                |
| /s/ EDWARD L. ERICKSON          |                           | Director                            | February 23, 2005 |
| Edward L. Erickson              |                           |                                |
| /s/ GEORGE M. GOULD             |                           | Director                            | February 23, 2005 |
| George M. Gould                 |                           |                                |
| /s/ ARTHUR H. HAYES, JR.   |                           | Director                            | February 23, 2005 |
| Arthur H. Hayes, Jr., M.D. |                           |                                |
| /s/ ELLIOT M. MAZA              |                           | Director                            | February 23, 2005 |
| Elliot M. Maza                  |                           |                                |
| /s/ RICHARD N. PERLE            |                           | Director                            | February 23, 2005 |
| The Honorable Richard N. Perle  |                           |                                |
| /s/ ROBERT E. POLLACK           |                           | Director                            | February 23, 2005 |
| Robert E. Pollack, Ph.D.        |                           |                                |

 

48

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**Tapestry Pharmaceuticals, Inc. and SubsidiariesFinancial StatementsIndex to Consolidated Financial Statements**
|                                                                                                                                                                             | ** ** | **Page** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Reports of Independent  Registered Public Accounting Firms                                                                                                                  |       | F-2      |
| Audited  Consolidated Financial Statements:                                                                                                                                 |       |     |
| Consolidated Balance Sheets as of  December 29, 2004 and December 31, 2003                                                                                        |       | F-5      |
| Consolidated Statements of  Operations for the years ended December 29, 2004, December 31, 2003  and December 31, 2002                                       |       | F-6      |
| Consolidated Statements of  Stockholders’ Equity and Comprehensive Loss for the years ended  December 29, 2004, December 31, 2003 and December 31, 2002 |       | F-7      |
| Consolidated Statements of  Cash Flows for the years ended December 29, 2004, December 31, 2003  and December 31, 2002                                       |       | F-8      |
| Notes  to Consolidated Financial Statements                                                                                                                                 |       | F-9      |

 

F-1

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**Reportof Independent Registered Public Accounting Firm**

Board of Directors andStockholders of Tapestry Pharmaceuticals, Inc.

We have audited management’s assessment, included inthe accompanying Management’s Reporton Internal Control Over Financial Reporting appearing under Item 9A, thatTapestry Pharmaceuticals, Inc. (a Delaware Corporation) maintainedeffective internal control over financial reporting as of December 29,2004, based on criteria established in*Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Tapestry Pharmaceuticals, Inc.’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company;and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

In our opinion, management’s assessment that TapestryPharmaceuticals, Inc. maintained effective internal control over financialreporting as of December 29, 2004, is fairly stated, in all materialrespects, based on criteriaestablished in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO)*.*Alsoin our opinion, Tapestry Pharmaceuticals, Inc. maintained, in all materialrespects, effective internal control over financial reporting as of December 29,2004, based on criteria established in*Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO)*.*

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheet of Tapestry Pharmaceuticals, Inc.as of December 29, 2004, and the related statements of operations,stockholders’ equity and comprehensive loss, and cash flows for the year ended December 29,2004 and our report dated February 22, 2005 expressed an unqualifiedopinion on those financial statements.

GRANT THORNTON LLP

Denver, ColoradoFebruary 22, 2005

F-2

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**Report of Independent Registered Public AccountingFirm**

Board of DirectorsandStockholders of Tapestry Pharmaceuticals, Inc.

We have audited the accompanying consolidated balancesheet of Tapestry Pharmaceuticals, Inc. (a Delaware corporation) andsubsidiaries as of December 29, 2004, and the related consolidatedstatements of operations, stockholders’ equity and comprehensive loss, and cashflows for the year then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Tapestry Pharmaceuticals, Inc. and subsidiaries as of December 29,2004, and the results of their operations and their cash flows for the yearthen ended in conformity with accounting principles generally accepted in theUnited States of America.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Tapestry Pharmaceutical, Inc.’sinternal control over financial reporting as of December 29, 2004, basedon criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO)and our report dated February 22, 2005 expressed an unqualified opinion.

GRANT THORNTONLLP

Denver, ColoradoFebruary 22, 2005

F-3

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**Report of IndependentRegistered Public Accounting Firm**

The Board of Directors andStockholdersTapestry Pharmaceuticals, Inc.

We have audited the accompanying consolidated balancesheet ofTapestry Pharmaceuticals, Inc. (formerlyNaPro BioTherapeutics, Inc.)  and subsidiaries as of December 31,2003, and the related consolidated statements of operations, stockholders’equity, and cash flows for each of the two years in the period ended December 31,2003. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Tapestry Pharmaceuticals, Inc. (formerly NaPro BioTherapeutics, Inc.)and subsidiaries as of December 31, 2003, and the results of theiroperations and their cash flows for each of the two years in the period ended December 31,2003 in conformity with U.S. generally accepted accounting principles.

ERNST & YOUNGLLP

Denver, ColoradoFebruary 27, 2004

F-4

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****

**TapestryPharmaceuticals, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

**As of December 29,2004 and December 31, 2003**

**(In thousands, except share data)**
| ** **                                                                                                                                                                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                                                                                                                            |       |     |       |     |       |
| Current assets:                                                                                                                                                                                       |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                                                             |       | $        | 1,713      |     | $          | 2,281 |   |
| Short-term investments                                                                                                                                                                                |       | 29,378   |       | 48,501   |       |
| Accounts receivable                                                                                                                                                                                   |       | —   |       | 1,495    |       |
| Prepaid expense and other current assets                                                                                                                                                              |       | 538      |       | 596      |       |
| Assets held for sale                                                                                                                                                                                  |       | 112      |       | 205      |       |
| Total current  assets                                                                                                                                                                                 |       | 31,741   |       | 53,078   |       |
| Property, plant and equipment, net                                                                                                                                                                    |       | 676      |       | 1,156    |       |
| Long-term  investments                                                                                                                                                                                |       | 4,631    |       | —   |       |
| Investment in  ChromaDex, Inc.                                                                                                                                                                   |       | 1,414    |       | 1,414    |       |
| Other assets                                                                                                                                                                                          |       | 831      |       | 2,118    |       |
| Total assets                                                                                                                                                                                          |       | $        | 39,293     |     | $          | 57,766 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                         |       |     |       |     |       |
| Current liabilities:                                                                                                                                                                                  |       |     |       |     |       |
| Accounts payable and accrued liabilities                                                                                                                                                              |       | $        | 3,119      |     | $          | 3,337 |   |
| Accrued payroll and payroll taxes                                                                                                                                                                     |       | 2,017    |       | 2,607    |       |
| Notes payable—current portion, net                                                                                                                                                               |       | 3,132    |       | 81       |       |
| Total current  liabilities                                                                                                                                                                            |       | 8,268    |       | 6,025    |       |
| Notes payable—long term, net                                                                                                                                                                     |       | 3,245    |       | 41       |       |
| Convertible  debentures                                                                                                                                                                               |       | —   |       | 5,702    |       |
| Commitments and  contingencies                                                                                                                                                                        |       |     |       |     |       |
| Stockholders’  equity:                                                                                                                                                                           |       |     |       |     |       |
| Preferred stock, $.001 par value; 2,000,000 shares  authorized; none issued                                                                                                                           |       | —   |       | —   |       |
| Common stock, $.0075 par value; 64,000,000 shares  authorized; 33,435,401 shares issued and outstanding in 2004; and 30,953,952  and 30,899,646 shares issued and outstanding,  respectively, in 2003 |       | 251      |       | 232      |       |
| Additional paid-in capital                                                                                                                                                                            |       | 117,354  |       | 111,497  |       |
| Accumulated deficit                                                                                                                                                                                   |       | (89,724  | )          | (65,550  | )          |
| Accumulated other comprehensive loss                                                                                                                                                                  |       | (101     | )          | —   |       |
| Treasury stock, 54,306 shares at cost in 2003                                                                                                                                                         |       | —   |       | (181     | )          |
| Total  stockholders’ equity                                                                                                                                                                      |       | 27,780   |       | 45,998   |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                      |       | $        | 39,293     |     | $          | 57,766 |   |

 

See accompanying notes to Consolidated Financial Statements.

F-5

----

**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements ofOperationsYears Ended December 29, 2004, December 31, 2003, December 31,2002(In thousands, except per share data)**
| ** **                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating expenses:                                              |       |     |       |     |       |     |       |
| Research and development                                         |       | $        | 13,504     |     | $          | 6,485    |       | $ | 6,067 |   |
| General and administrative                                       |       | 7,794    |       | 8,616    |       | 8,446    |       |
| Operating loss                                                   |       | 21,298   |       | 15,101   |       | 14,513   |       |
| Other income  (expense):                                         |       |     |       |     |       |     |       |
| Interest income                                                  |       | 694      |       | 110      |       | 267      |       |
| Interest expense                                                 |       | (951     | )          | (865     | )          | (723     | )          |
| Net loss from continuing  operations                             |       | (21,555  | )          | (15,856  | )          | (14,969  | )          |
| Discontinued  operations:                                        |       |     |       |     |       |     |       |
| Income (loss)  from discontinued operations, net of income taxes |       | (2,619   | )          | 53,984   |       | 6,304    |       |
| Net income (loss)                                                |       | $        | (24,174    | )        | $          | 38,128   |       | $ | (8,665 | ) |
| Income (loss) per  share, basic and diluted:                     |       |     |       |     |       |     |       |
| Continuing  operations                                           |       | $        | (0.66      | )        | $          | (0.51    | )          | $ | (0.51 | ) |
| Discontinued  operations                                         |       | $        | (0.08      | )        | $          | 1.75     |       | $ | 0.21 |   |
| Net income (loss)                                                |       | $        | (0.74      | )        | $          | 1.24     |       | $ | (0.29 | ) |
| Basic  and diluted weighted average  shares outstanding          |       | 32,747   |       | 30,801   |       | 29,606   |            |

 

See accompanying notes to Consolidated Financial Statements.

F-6

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**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements ofStockholders’ Equity and Comprehensive LossYears Ended December 29, 2004, December 31, 2003, December 31,2002(in thousands, except share data)**
| ** **                                                                                            | ** ** | **Number of  Common  Shares  Issued** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|---------------------|------------|-----------|------------|
| Balance at  December 31, 2001                                                                    |       | 28,706,195                                 |       |              | $          | 215                              |       |                     |       | $                                           | 96,776     |                |       |      | $          | (95,013 | ) |   |   | $ | — |   |   |   | $ | (841 | ) |   | $ | 1,137 |   |
| Contribution of  200,000 shares of common stock from treasury at $9.50 per share to retirement  plans |       | —                                     |       |              | —     |                             |       |                     | 1,240      |                                        |       |                | —     |      |       |   | — |   |   |   | 660 |   |   | 1,900 |   |
| Issuance of common  stock for in-licensing of genomics technology                                     |       | 200,000                                    |       |              | 2          |                             |       |                     | 961        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 963 |   |
| Issuance of stock  options in exchange for consulting services                                        |       | —                                     |       |              | —     |                             |       |                     | 93         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 93 |   |
| Issuance of common  stock for compensation                                                            |       | 19,587                                     |       |              | —     |                             |       |                     | 164        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 164 |   |
| Issuance of common  stock for payment of interest expense                                             |       | 47,973                                     |       |              | —     |                             |       |                     | 148        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 148 |   |
| Exercise of stock  options and warrants                                                               |       | 101,648                                    |       |              | 1          |                             |       |                     | 216        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 217 |   |
| Issuance of common  stock in connection with private placement, net of issuance costs                 |       | 888,889                                    |       |              | 7          |                             |       |                     | 7,775      |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 7,782 |   |
| Discount on  convertible debentures issued in connection with private placement                       |       | —                                     |       |              | —     |                             |       |                     | 3,057      |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 3,057 |   |
| Net loss                                                                                              |       | —                                     |       |              | —     |                             |       |                     | —     |                                        |       |                | (8,665     | )         |       |   | — |   |   |   | — |   |   | (8,665 | ) |
| Balance at  December 31, 2002                                                                    |       | 29,964,292                                 |       |              | 225        |                             |       |                     | 110,430    |                                        |       |                | (103,678   | )         |       |   | — |   |   |   | (181 | ) |   | 6,796 |   |
| Contribution of  750,000 shares of common stock at $0.58 per share to ESOP                            |       | 750,000                                    |       |              | 6          |                             |       |                     | 429        |                                        |       |                | —     |      |       |   | — |   |   |   |   |   |   | 435 |   |
| Issuance of common  stock for in-licensing of genomics technology                                     |       | 100,000                                    |       |              | 1          |                             |       |                     | 187        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 188 |   |
| Issuance of common  stock for payment of services                                                     |       | 45,046                                     |       |              | —     |                             |       |                     | 45         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 45 |   |
| Issuance of stock  options in exchange for consulting services                                        |       | —                                     |       |              | —     |                             |       |                     | 77         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 77 |   |
| Issuance of common  stock for compensation                                                            |       | 90,189                                     |       |              | —     |                             |       |                     | 87         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 87 |   |
| Modification of  employee stock option  terms                                                         |       | —                                     |       |              | —     |                             |       |                     | 55         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 55 |   |
| Tax provision  relating to utilization of net operating losses created by stock option  exercises     |       | —                                     |       |              | —     |                             |       |                     | 183        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 183 |   |
| Exercise of stock  options and warrants                                                               |       | 4,425                                      |       |              | —     |                             |       |                     | 4          |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 4 |   |
| Net income                                                                                            |       | —                                     |       |              | —     |                             |       |                     | —     |                                        |       |                | 38,128     |      |       |   | — |   |   |   | — |   |   | 38,128 |   |
| Balance at  December 31, 2003                                                                    |       | 30,953,952                                 |       |              | 232        |                             |       |                     | 111,497    |                                        |       |                | (65,550    | )         |       |   | — |   |   |   | (181 | ) |   | 45,998 |   |
| Issuance of common  stock in connection with private placement, net of issuance costs                 |       | 2,000,000                                  |       |              | 15         |                             |       |                     | 4,822      |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 4,837 |   |
| Contributions of  335,643 shares, including 54,306 from treasury, to the ESOP                         |       | 281,337                                    |       |              | 2          |                             |       |                     | 608        |                                        |       |                | —     |      |       |   | — |   |   |   | 181 |   |   | 791 |   |
| Issuance of common  stock for in-licensing of genomics technology                                     |       | 100,000                                    |       |              | 1          |                             |       |                     | 90         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 91 |   |
| Issuance of common  stock for payment of interest expense                                             |       | 61,425                                     |       |              | 1          |                             |       |                     | 160        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 161 |   |
| Compensation  expense related to options issued to consultants                                        |       | —                                     |       |              | —     |                             |       |                     | 141        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 141 |   |
| Exercise of stock  options and warrants                                                               |       | 38,687                                     |       |              | —     |                             |       |                     | 36         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   | 36 |   |
| Comprehensive  income (loss)                                                                          |       |                                       |       |              |       |                             |       |                     |       |                                        |       |                |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain (loss)  on investments                                                           |       | —                                     |       |              | —     |                             |       |                     | —     |                                        |       |                | —     |      |       |   | (101 | ) |   |   | — |   |   | (101 | ) |
| Net loss                                                                                              |       | —                                     |       |              | —     |                             |       |                     | —     |                                        |       |                | (24,174    | )         |       |   | — |   |   |   | — |   |   | (24,174 | ) |
| Comprehensive  income (loss)                                                                          |       |                                       |       |              |       |                             |       |                     |       |                                        |       |                |       |      |       |   |   |   |   |   |   |   |   | (24,275 | ) |
| Balance at  December 29, 2004                                                                    |       | 33,435,401                                 |       |              | $          | 251                              |       |                     |       | $                                           | 117,354    |                |       |      | $          | (89,724 | ) |   |   | $ | (101 | ) |   |   | $ | — |   |   | $ | 27,780 |   |

 

See accompanying notes to Consolidated Financial Statements.

F-7

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**Tapestry Pharmaceuticals, Inc. and SubsidiariesConsolidated Statements ofCash FlowsYears Ended December 29, 2004, December 31, 2003 andDecember 31, 2002(in thousands, except share information)**
| ** **                                                                                                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                                                            |       |     |       |     |       |     |       |
| Net income (loss)                                                                                                |       | $        | (24,174    | )        | $          | 38,128   |       | $ | (8,665 | ) |
| Adjustments to reconcile  net income (loss) to net cash (used in) provided by operating activities:              |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                                   |       | 475      |       | 2,840    |       | 2,267    |       |
| Accretion of debt  issue cost                                                                                    |       | 43       |       | 163      |       | 82       |       |
| Amortization of  debt discount                                                                                   |       | 587      |       | 509      |       | 386      |       |
| Accretion of  license fee income                                                                                 |       | —   |       | (1,027   | )          | (902     | )          |
| Amortization of  investment premium                                                                              |       | 257      |       | —   |       | —   |       |
| In-process  research and development expensed in connection with acquired assets of  Pangene                     |       | —   |       | —   |       | 151      |       |
| License fees paid  with common stock                                                                             |       | 8        |       | 16       |       | 718      |       |
| Retirement  contributions paid with common stock                                                                 |       | 791      |       | 435      |       | 1,900    |       |
| Compensation paid  with common stock and options                                                                 |       | 141      |       | 264      |       | 257      |       |
| Interest expense  paid with common stock                                                                         |       | 30       |       | —   |       | 148      |       |
| Gain on sale of  the paclitaxel business                                                                         |       | —   |       | (54,553  | )          | —   |       |
| Asset writedowns  associated with discontinued operations                                                        |       | 1,440    |       | —   |       | —   |       |
| Changes in operating  assets and liabilities:                                                                    |       |     |       |     |       |     |       |
| Accounts  receivable                                                                                             |       | 1,495    |       | 5,625    |       | (5,565   | )          |
| Inventory                                                                                                        |       | —   |       | 5,901    |       | (2,755   | )          |
| Prepaid expense  and other assets                                                                                |       | 247      |       | 382      |       | 519      |       |
| Accounts payable  and accrued liabilities                                                                        |       | (87      | )          | 190      |       | (1,139   | )          |
| Accrued payroll  and payroll taxes                                                                               |       | (589     | )          | 1,461    |       | (326     | )          |
| Net cash provided  by (used in) operating activities                                                             |       | (19,336  | )          | 334      |       | (12,924  | )          |
| Investing activities:                                                                                            |       |     |       |     |       |     |       |
| Additions to plant  and equipment                                                                                |       | (161     | )          | (1,602   | )          | (4,760   | )          |
| Proceeds from the  sale of the paclitaxel business                                                               |       | —   |       | 66,143   |       | —   |       |
| Purchases of  investments                                                                                        |       | (79,429  | )          | (46,501  | )          | (4,000   | )          |
| Proceeds from sale  of investments                                                                               |       | 93,563   |       | 2,000    |       | —   |       |
| Investment in  ChromaDex, Inc.                                                                              |       | —   |       | (468     | )          | —   |       |
| Acquisition of  assets from Pangene Corporation                                                                  |       | —   |       | (400     | )          | (1,300   | )          |
| Net cash provided  by (used in) investing activities                                                             |       | 13,973   |       | 19,172   |       | (10,060  | )          |
| Financing activities:                                                                                            |       |     |       |     |       |     |       |
| Proceeds from  convertible debentures, net of issuance cost                                                      |       | —   |       | —   |       | 7,736    |       |
| Proceeds from  notes payable                                                                                     |       | —   |       | 487      |       | 352      |       |
| Payments of notes  payable                                                                                       |       | (78      | )          | (20,478  | )          | (485     | )          |
| Proceeds from sale  of common stock and the exercise of common stock options and warrants, net of  issuance cost |       | 4,873    |       | 4        |       | 7,999    |       |
| Net cash provided  by (used in) financing activities                                                             |       | 4,795    |       | (19,987  | )          | 15,602   |       |
| Net decrease in  cash and cash equivalents                                                                       |       | (568     | )          | (481     | )          | (7,382   | )          |
| Cash and cash  equivalents at beginning of year                                                                  |       | 2,281    |       | 2,762    |       | 10,144   |       |
| Cash and cash  equivalents at end of year                                                                        |       | $        | 1,713      |     | $          | 2,281    |       | $ | 2,762 |   |
| Supplemental schedule of  non-cash investing and financing activities:                                           |       |     |       |     |       |     |       |
| Issuance of 61,435  shares of common stock for payment of accrued interest                                       |       | $        | 131        |     | $          | —   |       | $ | — |   |
| Issuance of  100,000 shares of common stock per year for prepayment of license fee                          |       | 83       |       | 172      |       | 105      |       |
| Transfer of fixed  assets for investment in ChromaDex, Inc.                                                 |       | —   |       | 946      |       | —   |       |
| Plantation cost  harvested to inventory                                                                          |       | —   |       | 719      |       | 2,399    |       |
| Insurance claim  for damaged inventory                                                                           |       | —   |       | —   |       | 100      |       |

 

See accompanying notes to Consolidated Financial Statements.

F-8

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**Tapestry Pharmaceuticals, Inc.Notes to ConsolidatedFinancial Statements**

**Note1: Summary of Significant Accounting Policies**

**Description of Business**

Tapestry Pharmaceuticals, Inc. together with itssubsidiaries (referred to herein as “Tapestry” or “Company”) is apharmaceutical company focused on the development of proprietary therapies forthe treatment of cancer. It is also actively engaged in evaluating the in-licensingor purchasing of new therapeutic agents and/or related technologies. TheCompany’s evaluation of new products and technologies may involve theexamination of individual molecules, classes of compounds, or platformtechnologies. Acquisitions of new products or technologies may involve thepurchase or licensing of such products or technologies, or the acquisition of,or merger with, other companies.

On December 12, 2003,Tapestry sold its paclitaxel business to Mayne Pharma (USA) Inc.(f/k/a/Faulding Pharmaceutical Co.) (“Mayne Pharma”), a subsidiary of MayneGroup Limited, for $71.7 million in cash, minus an inventory adjustment of $4.6million (see Note 2). Except for the sale of the paclitaxel business, theCompany has incurred net losses since inception and may incur additional lossesfor the foreseeable future. Nearly all of Tapestry’s product sales have beenfrom the paclitaxel business. Tapestry was incorporated as a Washingtoncorporation in 1991, and reincorporated to Delaware in 1993.

**Principles of Consolidation**

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.

**Cash,Cash Equivalents and Investments**

Cash and cash equivalentsincludes all highly liquid investments with maturities of 90 days or less whenpurchased. The carrying amounts of cash and cash equivalents approximate theirfair values. Short-term investments consist of investment grade commercialpaper with maturity dates between 90 days and one year. Long-term investmentsconsist of investment grade commercial paper with maturities greater than one year. Investments with maturities beyond one year may beclassified as short-term based on their highly liquid nature and because suchinvestments represent the investment of cash that isavailable for current operations. The Company’s investmentsare classified as available-for-sale, and are reported at fair value on thebalance sheet date. Interest income isrecognized when earned. The unrealized gains and losses arereported as a component of accumulated other comprehensive loss. The Company’sinvestment in ChromaDex, Inc. isaccounted for under the cost method. Under the cost method, the investment iscarried at cost and adjusted only for other-than-temporary declines in fairvalue, distributions of earnings or additional investments. See Note 12,Investment in ChromaDex, Inc., for further information on ChromaDex.

**Financial Instruments**

Cash and cash equivalents,accounts receivable, accounts payable and notes are carried at cost, whichapproximates fair value. The convertible debentures are carried at fair marketvalue.

F-9

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**AccountsReceivable and Provision for Doubtful Accounts**

The Company has no accounts receivable at present. Asa result of the sale of the paclitaxel business, the Company expects it willnot have any significant accounts receivable for the foreseeable future.

In 2003, the Companyevaluated the collectibility of its accounts receivable based on a combinationof factors. In circumstances when the Company was aware of a specific customer’sinability to meet its financial obligations, the Company recorded a specificreserve for bad debts against amounts due. For all other instances, the Companyreviewed the historical collections experience for its customers in determiningif a provision for doubtful accounts was necessary. At December 31, 2003, theCompany had not recorded a provision for doubtful accounts.

**Impairment of Long-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.

**Depreciation and Amortization**

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 consist solely of acquired intellectualproperty and are amortized using the straight-line method over their estimatedperiod of benefit, ranging from five to fifteen years. The Company annuallyevaluates the recoverability of intangible assets and takes into account eventsor circumstances that warrant revised estimates of useful lives or thatindicate that an impairment exists.

At December 29, 2004and December 31, 2003, the Company had intangible assets with a net bookvalue of $0 and $1.3 million, respectively. Accumulated amortization at December 31,2003 was $122,000. Amortization expense was $93,000, $122,000 and $0 for theyears ended December 29, 2004, December 31, 2003 and December 31,2002, respectively. In connection with the preparation of its financialstatements for 2004, the Company determined that its intangible assets relatingto acquired patents used in the Genomics division were impaired and recorded animpairment loss of $1.1 million. See Note 2.

**Stock-Based Compensation**

As permitted under Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”),the Company accounts for its stock-based compensation to employees anddirectors using the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(“APB 25”). Pursuant to APB No. 25, compensation expense is recorded overthe vesting period only if the fair value of the underlying stock on the issue date exceeds theexercise price on the issue date.Equity instruments granted to non-employees are accounted for under the fairvalue method, in accordance with SFAS 123 and related interpretations.

F-10

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Pro forma information regarding net income (loss) andearnings (loss) per share is required by SFAS 123, which also requiresthat the information be determined as if the Company had accounted for employeestock options granted subsequent to December 31, 1994 under the fair valuemethod of that statement. Tapestry estimated the fair value for these optionsat the date of grant using a Black-Scholes option pricing model with thefollowing weighted-average assumptions for 2004, 2003 and 2002,respectively: risk-free interest rate ranges of 2.51% to 3.81%, 1.98% to3.35% and 2.51% to 5.07%; no expected dividend; volatility factor of 1.028 to1.270, 1.187 to 1.228, and 1.090 to 1.167, and generally an estimated expectedlife range of three to six years.

For purposes of pro formadisclosures, the Company amortizes to expense the estimated fair value of theoptions over the options’ vesting period. Tapestry’s pro forma information isas follows (in thousands, except per share amounts):
| ** **                                                                                                                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income (loss) as reported                                                                                                  |       | $        | (24,174    | )        | $          | 38,128   |       | $ | (8,665 | ) |
| Deduct: Total stock based employee compensation  expense determined under fair value based method for all awards, net of taxes |       | (3,806   | )          | (3,880   | )          | (4,238   | )          |
| Pro forma net income (loss)                                                                                                    |       | $        | (27,980    | )        | $          | 34,248   |       | $ | (12,903 | ) |
| Basic and diluted income (loss) per  share—as reported                                                                    |       | $        | (0.74      | )        | $          | 1.24     |       | $ | (0.29 | ) |
| Pro forma basic and  diluted income (loss) per share                                                                           |       | $        | (0.85      | )        | $          | 1.11     |       | $ | (0.44 | ) |

 

Tapestry accounts foroptions issued to consultants using the provisions of SFAS 123. Expenserecognized in 2004, 2003 and 2002 was $141,000, $77,000 and $93,000,respectively.

**Revenue Recognition**

With the sale of the paclitaxel business, the Companydoes not anticipate having any significant product sales or license fee incomefor the foreseeable future. Revenue associated with the paclitaxel business isincluded in discontinued operations.

For the years ended December 31,2003 and 2002, the Company recognized revenue from product sales at the time ofshipment, as the title passed to the customer and the customer assumed therisks and rewards of ownership. Payments received in advance against futuresales were recorded as deferred revenue until earned. Prior to the secondquarter of 2002, the Company capitalized license fees and amortized them toincome over the estimated economic life of the license. During the secondquarter of 2002, the Company revised the period during which it amortizesdeferred revenue from license fees, due to the potential decline in the priceof paclitaxel in the European market. Since the second quarter of 2002, theamortization period consisted of amortizing 80% of fees to income over thefirst five years of the license, and the remaining 20% of the fees to incomeover the remaining period of the license. The effect of this change in estimatewas not material to the consolidated financial statements. The Companyrecognized income from development milestones when the milestone was achievedand the Company had no future obligation to perform additional work associatedwith the given milestone. Deferred license feeincome of $6.0 million was recognized in 2003 and included as part of the gainfrom the sale of the paclitaxelbusiness.

**Domestic and Foreign Sales, Operations and SignificantCustomers**

All sales related todiscontinued operations, see note Note 2.

F-11

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**Research and Development**

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**

Basicearnings per share is measured as the income or loss available to commonstockholders divided by the weighted average outstanding common shares for theperiod. Diluted earnings per share is similar to basic earnings per share butpresents the dilutive effect on a per share basis of potential common shares(e.g. stock options, warrants and convertible securities) as if they had beenconverted at the beginning of the periods presented. Potential common sharesthat have an antidilutive effect are excluded from diluted earnings per share. Netloss per common share is computed using the weighted average number of sharesof common stock outstanding. Potential common shares from stock options,warrants and convertible securities have been excluded from the computation ofdiluted earnings per share due to net losses from continuing operations in 2004, 2003,and 2002 as their effect is antidilutive.

Securitiesthat could potentially dilute basic earnings per share that were not includedin the computation of diluted earnings per share because to do so would beantidilutive, amounted to 8,316,962, 7,363,619 and 6,181,800 shares at December 29,2004, December 31, 2003 and December 31, 2002, respectively.

**Comprehensive Income**

Under Statement of FinancialAccounting Standard No. 130, “Reporting Comprehensive Income,” the Companyis required to display comprehensive income (loss) and its components as partof the financial statements. The Company has displayed its comprehensive income(loss) as part of the Consolidated Statements of Stockholders’ Equity andComprehensive Loss. Other comprehensive loss for 2004 includes net unrealizedlosses on available-for-sale securities that are excluded from net loss. Theactivity of other comprehensive income (loss) was as follows (in thousands):
| ** **                                               | ** ** | **December 29,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2004**              | ** ** | **2003**              | ** ** | **2002**              | ** ** |
| Net income (loss), as reported                           |       |                  | $          | (24,174               | )          |                  |       | $ | 38,128 |   |   |   | $ | (8,665 | ) |   |
| Unrealized gain (loss) on available-for-sale  securities |       |                  | (101       | )                     |       |                  | —     |   |   |   | — |   |   |
| Comprehensive net  income (loss)                         |       |                  | $          | (24,275               | )          |                  |       | $ | 38,128 |   |   |   | $ | (8,665 | ) |   |

 

**Use of Estimates**

In preparing financialstatements in conformity with generally accepted accounting principles acceptedin the United States of America the Company uses estimates and assumptions thataffect the amounts reported in the consolidated financial statements andaccompanying notes. Among the significant estimates are valuation of long-livedassets, valuation of identifiable intangible assets, estimates of accruedobligations and litigation. Actual results could vary from these estimates.

**Recent Accounting Pronouncement**

In December 2004, the Financial Accounting StandardsBoard issued Statement of Financial Accounting Standard No. 123(R) (“SFAS123(R)”), “Accounting for Stock-Based Compensation.” SFAS 123(R)establishes standards for the accounting for transactions in which an entityexchanges its 

F-12

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equity instruments for goods orservices. This statement focuses primarily on accounting for transactions inwhich an entity obtains employee services in share-based payment transactions. SFAS123(R) requires that the fair value of such equity instruments be recognized asan expense in the historical financial statements as services are performed. Priorto SFAS 123(R), only certain pro forma disclosures of fair value were required.The provisions of this statement are effective for the first interim reportingperiod that begins after June 15, 2005. Accordingly, the Company willadopt SFAS 123(R) commencing with the quarter ending September 28, 2005. Ifthe Company had included the cost of employee stock option compensation in itsfinancial statements, its net loss for the fiscal years ended December 29,2004 and December 31, 2002, would have increased by $3,806,000 and$4,238,000, respectively. Net income for the fiscal year ended December 31,2003 would have decreased by $3,880,000. Accordingly, the adoption of SFAS123(R) is expected to have a material effect on the Company’s financialposition and results of operations.

**Reclassifications**

Certain data in the prioryears consolidated financial statements has been reclassified to conform to thecurrent year presentation.

**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.

As a result of the decision to close the Genomicsdivision, the Company recorded a one-time charge of $1.7 million primarilyrelating to an impairment of intangible assets acquired in connection with the December 2002acquisition of the genomics business of Pangene Corporation ($1.1 million), acharge for fixed assets likely to be disposed of at less than their book value($150,000), severance costs ($250,000), and lease termination costs ($200,000).The charge for the impairment of the intangible assets and the fixed assets wasmade in connection with the preparation of the Company’s financial statements. Additionalexpenses related to the exit of the Genomics division will be charged todiscontinued operations as incurred. Most costs relating to the genomics exitwill be incurred by the end of January 2005, although certain lease costswill continue through May 2005.

In December 2003, the Company made a decision tosell its gene isolation and service business, which was acquired in December 2002and was accounted for as a discontinued operation. Net operating loss relatedto this business totaled $492,000 during 2003 and is included in discontinuedoperations.

Assets held for sale, at December 29,2004 and December 31, 2003, which relate to the discontinued operations ofthe Genomics business were as follows (in thousands):
| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
| Property, plant and equipment, net |       | $        | 112        |     | $          | 122 |   |
| Other assets                       |       | —   | * *   | 83       | * *   |
| Assets held for  sale, net         |       | $        | 112        |     | $          | 205 |   |

 

Net losses related to theGenomics division that are included in discontinued operations totaled $5.7million, $6.6 million and $5.2 million in 2004, 2003 and 2002, respectively. Nomaterial revenue was previously recognized in this division.

F-13

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*Sale of PaclitaxelBusiness*

On December 12, 2003, the Company sold itsworldwide generic injectable paclitaxel business to Mayne Pharma (USA) Inc.(f/k/a/ Faulding Pharmaceutical Co.), a subsidiary of Mayne Group Limited, forcash in the amount of $71.7 million minus an inventory adjustment of $4.6million to reflect the Company’s actual inventory as of the closing. The saleresulted in a gain of $54.6 million before taxes (net of a $183,000 taxprovision relating to utilization of net operating losses created by stockoption 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 received inconnection with a patent infringement lawsuit against Mylan Laboratories, Inc.This lawsuit was settled in July 2004 and the Company received $3.0million 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. Summary results of the paclitaxel business’soperations were (in thousands):
| ** **    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| Product sales |       | $        | —     |     | $          | 25,532   |       | $ | 34,193 |   |
| Net income    |       | $        | 3,088      |     | $          | 6,442    |       | $ | 11,502 |   |

 

Paclitaxel income in 2004 consisted of the $3.0million patent infringement settlement with Mylan Laboratories and a $250,000business interruption insurance claim filed and collected in 2004 for lossessustained in the third quarter of 2003 from a hurricane that disruptedoperations of a contract manufacturer employed by Tapestry, offset by taxesowed in connection with the operation of the Company’s yew plantations.

In connection with the sale of the paclitaxelbusiness in 2003, Tapestry’s Boardof Directors granted a total of 1,250,000 stock options to officers of theCompany and certain consultants under the 1994 Stock Option Plan at an exerciseprice of $1.55 per share. Consultantsreceived a total of 90,000 of these stock options. The options vest no laterthan September  2, 2008. The options may vest earlier if theCompany’s closing stock price, on a rolling 20-day average, exceeds $1.55. If the rolling 20-day average closing stock priceexceeds $1.55 by 30%, then 16.67% of the options vest. Likewise, if the20-day rolling average closing stock price exceeds $1.55 by 60%, 90%, 120% and200%, then in each case an additional 16.67% of the options vest. The Company accounted for this transaction inaccordance with APB 25 for employees and in accordance with SFAS 123 forconsultants. (see Note  8.)

MaynePharma Agreement

In 1992,the Company entered into a 20-year exclusive agreement with F.H. Faulding &  Co., Ltd. (“Faulding”), a large Australianpharmaceutical company for the clinical development, sale,marketing and distribution of paclitaxel. In October 2001, Faulding was acquired by MayneNickless Limited, an Australian based health care provider and logisticsoperator. In a separate agreement for Europe, dated March 2001, the Company wasresponsible for regulatory filings and supplied paclitaxel exclusively to Mayne Pharma to formulate and finish the product.  TheCompany shared equally the netsales of the product in Europe. Under the agreement, Mayne Pharma paid anup-front licensing fee to Tapestry of $7.5 million. The Company deferred the $7.5 million, $5.5million of which was being amortized 80% over the 

F-14

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first five years to license fee income and theremaining 20% over the remaining seven years of the license. The remaining deferred balance of $5.1 million atDecember 12, 2003 was recognized as part of the gain from the sale of thepaclitaxel businessdescribed above.

**Note 3. Property,Plant and Equipment**

In connection with the closure of the Genomicsdivision in December 2004, fixed assets with a net book value of $150,000were determined to be impaired. In connection with the sale of the paclitaxelbusiness, property, plant and equipment with a net book value at December 12,2003 of $7.8 million was sold to Mayne Pharma (see Note 2). Land, valued at$718,000, had previously been purchased and held for expansion of the Company’spaclitaxel manufacturing facilities. With the sale of the paclitaxel businessin 2003, that land was classified as other assets.

Propertyand equipment consists of the following (in thousands):
| ** **                                      | ** ** | **December 29,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Furniture,  fixtures and office equipment       |       |                        | $          | 678                         |       |   |   | $ | 528 |   |   |
| Laboratory  equipment                           |       |                        | 589        |                        |       |   | 754 |   |   |
| Leasehold  improvements                         |       |                        | 38         |                        |       |   | 38 |   |   |
| Construction in  progress                       |       |                        | 22         |                        |       |   | 391 |   |   |
|                                            |       |                        | 1,327      |                        |       |   | 1,711 |   |   |
| Less accumulated  depreciation and amortization |       |                        | (651       | )                           |       |   | (555 | ) |   |
| Property, plant and  equipment, net             |       |                        | $          | 676                         |       |   |   | $ | 1,156 |   |   |

 

**Note 4. Investments**

Short-term investmentsconsisted of investment grade commercial paper due within one year. Long-terminvestments consisted of investment grade commercial paper with maturitiesbeyond one year. All investments are classified as available-for-sale and arerecorded at market value. Unrealized gains and losses are reflected incomprehensive net income (loss). See Note 1.

**Note 5. Notes Payable**

Notespayable as of December 29, 2004 consists of the note agreement resultingfrom the February 18, 2005 settlement of litigation with TL Ventures (seeNote 6) and capital lease obligations. Notes payable as of December 31,2003 consists of capital lease obligations. Current and long-term portions ofnotes payable, excluding the discount on the TL Ventures note and debt issuancecosts, are as follows (in thousands):
| ** **                         | ** ** | **2004** | ** ** | ** 2003 ** | ** ** |
|------------------------------------|------------|----------|------------|----------------------|------------|
| Notes payable                      |       | $        | 7,763      |                 | $          | 122 |   |
| Less current  portion              |       | (3,636   | )          | (81                  | )          |
| Notes payable––long term |       | $        | 4,127      |                 | $          | 41 |   |

 

F-15

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The unamortized discount on the TL Ventures note was$1,295,000 and debt issuance costs were $91,000 at December 29, 2004. The discount and debt issuance costs reduced thecurrent portion of the note by $504,000 and the long-term portion by $882,000. Notespayable have the following minimum future payments (in thousands):
| 2005  |   | $     | 3,636  |   |
|-------|--------|-------|--------|--------|
| 2006  |   | 1,327 |   |
| 2007  |   | 1,800 |   |
| 2008  |   | 1,000 |   |
| Total |   | $     | 7,763  |   |

 

**Supplemental Cash Flow Information**

For the years ended December 29,2004, December 31, 2003 and December 31, 2002, interest paid in cashon all outstanding debt was $168,000, $1,576,000 and $1,651,000, respectively.

**Note 6. Convertible Debentures**

In February 2002, the Company sold privately $8.0million principal of five-year, 4% debentures convertible into common stock at$15 per share to TL Ventures V, L.P. and one of its affiliated funds. The netproceeds were $7.8 million. As part of this transaction, Tapestry recorded adiscount attributable to the fair value of the conversion feature of theconvertible debentures in the amount of $3.1 million, which was amortized overthe term of the debentures. The Company filed a registration statement with theSecurities and Exchange Commission to register the resale of the common stockissuable upon conversion of the debentures and common stock issuable in lieu ofcash interest on the debentures. The Company could pay the debenture interestin cash or common stock at its option. In 2002, the Company paid the interestin stock. In 2003, the Company paid the interest in cash, and in 2004 madepayments in both stock and cash.

TL Venturesadvised the Company before the sale of its paclitaxel business to Mayne Pharmathat TL Ventures believed completion of such sale entitled it to have its $8.0million of Company 4% convertible subordinated debentures redeemed. The companydisputed this position. On September 8, 2003, TL Ventures Funds reasserted itsposition and informed the Company that, if it could not resolve this issuepromptly, it intended to pursue legal remedies. On September 11, 2003, Tapestryfiled a complaint in a case captioned *NaPro BioTherapeutics,Inc. v. TL Ventures V L.P. and TL Ventures V Interfund L.P.,*CaseNo. 2003-CV-1812, District Court, Boulder County, Colorado. In Tapestry’scomplaint, the Company sought a declaratory judgment from the court that theasset sale to Mayne Pharma did not permit TL Ventures to have the 4%convertible subordinated debentures redeemed. TL Ventures filed a motion todismiss the suit, and filed an action in a case captioned *TL VenturesV L.P. and TL Ventures V Interfund L.P. v. NaPro BioTherapeutics, Inc.,*Case No. 110-N, Delaware Court of Chancery, alleging that TL Ventures isentitled to redeem its 4% convertible subordinated debentures. The Coloradoaction was dismissed, and the case proceeded in the Delaware Court of Chancery.

On February 18,2005 the Company entered into an agreement with TL Ventures providing for acomplete settlement of the litigation, a mutual release of claims and thepayment of approximately $3,184,000 in cash and the issuance by the Company ofpromissory notes in an aggregate amount of $4,670,000 in exchange for deliveryof the debentures to the Company for cancellation. The notes do not bearinterest and are payable in monthly installments of $50,000 beginning in February 2005,$110,000 in 2006 and $150,000 in 2007, with a final payment of $1,000,000 dueon January 31, 2008. Accrued interest of approximately $134,000 wasincluded in the cash payment made with the closing. The Company recorded a discount on the noteattributable to the fair value of interest in the amount of $1,295,000 and thediscount was allocated between the current and long-term portions of the note. An interest rate of 18.5% was used to impute thediscount. The Company recorded the obligation resulting fromthe settlement on its balance 

F-16

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sheet as of December 29, 2004(see Note 5). No gain or loss wasrecognized in connection with the settlement.

**Note 7. Stockholders’ Equity**

**Stockholder Rights Plan**

In November 1996, the Company adopted a StockholderRights Plan and distributed a dividend of one right to purchase one one-hundredthof a share of a new series of junior participating preferred stock, Series B,for each share of common stock. The Stockholder Rights Plan was amended andrestated in September 2001. The objective of the Stockholder Rights Planis to secure for stockholders the long term value of their investment and toprotect stockholders from coercive takeover attempts by strongly encouraginganyone seeking to acquire the Company to negotiate with its Board of Directors.The adoption of the Stockholder Rights Plan was not in response to any hostiletakeover proposal.

The Rights trade with common stock as a unit unlessthe Rights become exercisable upon the occurrence of certain triggering eventsrelating to the acquisition of 20% or more of common stock. In certain eventsafter the Rights become exercisable they will entitle each holder, other thanthe acquirer, to purchase, at the Rights’ then current exercise price(currently set at $60), a number of shares of common stock having market valueof twice the Right’s exercise price or a number of the acquiring company’scommon shares having a market value at the time of twice the Rights’ exerciseprice. For example, in the event of an acquisition of greater than 20% of theCompany’s stock without approval of its Board of Directors, the Company’sstockholders (other than the 20% acquirer) would have the right to purchase$120 worth of stock for $60. A stockholder would have one such right for eachshare of stock held at the time the rights become exercisable.

The Company may amend theRights, except in certain limited respects or redeem the Rights at $0.01 perRight, in each case at any time prior to the Rights becoming exercisable. The Rightswill expire on November 8, 2006.

**Private Placements**

In February 2002, the Company sold privately $8.0million of common stock issued at $9 per share to TL Ventures V, L.P. and oneof its affiliated funds. The net proceeds were $7.8 million. See Note 6 forinformation concerning the convertible debentures that were acquired by TLVentures at the same time as this placement transaction closed.

During 2004, the Companyissued 77,675 shares of common stock to the University of Delaware, 10,450shares of common stock to Thomas Jefferson University and 11,875 shares ofcommon stock to The Samuel Robert Noble Foundation, Inc., all in connectionwith a 20-year gene editing technology license. The shares were valued at $0.91per share, which was the closing market price on the date of the issuance. Thelicense requires the Company to provide for research and patent fundingcommitments and payments in common stock. See Note 13, Technology License, foradditional information.

**Authorized Shares**

In August 2003, the Company filed a registrationstatement with the SEC covering the issuance of up to 6.5 million shares of itscommon stock and 1.0 million shares of its preferred stock. This registrationstatement is intended to give Tapestry the flexibility to take advantage offinancing opportunities from time to time when market conditions are favorable.Tapestry may sell the stock covered by this registration statement in one ormore transactions at prices and in a manner it determines from time to time. InMarch 2004, Tapestry issued 2.0 million shares of common stock under thisregistration statement, for $5.2 million of gross proceeds, less $363,000 ofissuance costs. At December 29, 2004, 4.5 million shares of 

F-17

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common stock remainavailable to be issued. Additional shares may be sold under this registrationstatement only if the Company is eligible for primary offerings on Form S-3,which requires that the aggregate market value of common equity held bynon-affiliates of the Company is $75 million or more. As of December 29,2004, such aggregate market value was less than 43% of the required $75million.

The Company could elect topay interest on its convertible subordinated debentures in shares of Tapestrycommon stock, in lieu of cash (see Note 6). In February 2004, Tapestryissued 61,425 shares of common stock to pay interest on its convertiblesubordinated debentures.

**Stock Options**

The Company had reserved8,277,100 shares of common stock as of December 29, 2004 for futureissuance upon exercise of common stock options.

**Note8. Common Stock Options and Warrants**

Thefollowing summarizes warrant activity:
| ** **                                                        | ** ** | **Warrants** | ** ** | **Exercise  Price** | ** ** | **Expiration  Dates** | ** ** |
|-------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-----------------------|------------|
| Outstanding at December 31, 2001                             |       | 129,334      |       | $                   | 1.88       |                  | -          |   | $ | 8.75 |   |   | 2002 - 2003 |   |
| Expirations                                                       |       | (13,334      | )          |                |       |                  |       | 1.88 |   |   | 2002 |   |
| Exercised                                                         |       | (5,000       | )          |                |       |                  |       | 1.88 |   |   | 2003 |   |
| Outstanding at December 31, 2002                             |       | 111,000      |       | 1.88                |       | -                     |       | 8.75 |   |   | 2003 |   |
| Expirations                                                       |       | (111,000     | )          | 1.88                |       | -                     |       | 8.75 |   |   | 2003 |   |
| Outstanding at  December 31, 2003 and December 29, 2004 |       | —       |       | $                   |       |                  |       |   | — |   |   |   |   |
|                                                                   |            |              |            |                     |            |                       |            |  |  |  |  |  |  |  |

 

**Non-plan Stock Options**

In January 1994, theCompany granted to four outside directors options to purchase 27,000 shares ofcommon stock which were immediately exercisable and expired in January 2004.In September 1997, the Company granted to its employees options topurchase 20,075, shares of common stock which vested over a two year period andwhich expire in September 2007. As of December 29, 2004, options topurchase 500 shares remained outstanding.

**The 1993 Stock Option Plan**

During 1993, the Board ofDirectors adopted the NaPro BioTherapeutics, Inc. 1993 Stock Option Plan(the “Plan”), to provide stock options to employees and other individuals asdetermined by the Board of Directors. The Plan provided for option grantsdesignated as either nonqualified or incentive stock options. The Plan providedfor the issuance of up to 146,667 shares of common stock. The term of the Planwas ten years, which expired in September 2003, and the maximum optionexercise period was no more than ten years from the date of grant. The term ofoptions for 667 or more shares was eight years, and the term of options forfewer than 667 shares was five years. Options for 667 shares or more vest 25%after each anniversary date of the grant, and options for fewer than 667 sharesvest 50% after each anniversary date of the grant. The exercise price for stockoptions issued under the Plan was equal to the fair market value of the Company’scommon stock on the date of grant.

**1994Long-Term Performance 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 375,000 shares for issuance. 

F-18

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Stockholderssubsequently approved increases in the number of authorized shares. There arecurrently 6,600,000 shares authorized for issuance under the 1994 Plan. The1994 Plan provides for granting to employees and other key individuals whoperform services for the Company the following types of incentive awards: stockoptions, stock appreciation rights, restricted stock, performance grants andother types of awards that the Compensation Committee deems to be consistentwith the purposes of the 1994 Plan. In April 2004, in accordance with theterms of the 1994 Plan, the Company’s Board of Directors extended the terminationdate of the 1994 Plan for an additional five years through July 2009 forthe purpose of granting awards thereunder, other than incentive stock options,and suspended provisions relating to the granting of options to non-employeedirectors.

**The 1998 Stock Incentive Plan**

In 1998, the Board of Directors adopted the 1998 StockIncentive Plan (formerly known as the “1998 Stock Option Plan”) (the “1998Plan”) to provide awards of stock options, stock appreciation rights,restricted stock, performance grants, or any other type of award deemed by theBoard of Directors or its designated committee to employees and otherindividuals who perform services for the Company. The 1998 Plan provides foroption grants designated as nonqualified stock options or incentive stockoptions. Originally, 125,000 shares were authorized for issuance under the 1998Plan. The Board of Directors approved increases in the number of authorizedshares in amendments to the 1998 Plan made through 2002. There are currently1,925,000 shares authorized for issuance under the 1998 Plan. Under the termsof the 1998 Plan, stock options cannot be granted to persons who are Tapestryofficers subject to Section 16 of the Securities Exchange Act of 1934, asamended, (unless granted to officers not previously employed by Tapestry, as aninducement essential to such officers entering into employment contracts withthe Company) or to Tapestry directors. Options granted under the 1998 Plantypically vest 25% after each anniversary date of the grant, and expire tenyears from the date of grant. The exercise price for stock options issued underthe 1998 Plan is equal to the fair market value of the Company’s common stockon the date of grant.

**2004 EquityIncentive 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 2,000,000 shares forissuance thereunder. Under the terms of the 2004 EIP Plan, stock options cannotbe granted to Tapestry non-employee directors. Options granted under the 2004EIP Plan are subject to vesting, and expire ten years 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 issued under the 2004 EIP Plan is equal tothe fair market value of the Company’s common stock on the date of grant.

**2004 Non-Employee Directors’ StockOption Plan**

In 2004, shareholders adopted the 2004 Non-EmployeeDirectors’ Stock Option Plan (the “2004 Directors’ Plan”) to provide forautomatic and discretionary grants of stock options to members of the Company’sboard of directors who are not employees of the Company. Options granted underthe 2004 Directors’ Plan are intended to be nonstatutory stock options that donot qualify as incentive stock options. The 2004 Directors’ Plan authorizes400,000 shares of common stock for issuance. Options granted automaticallyunder the 2004 Directors’ Plan vest 25% after each anniversary date of thegrant, and expire ten years from the date of grant. Options may also be grantedunder the 2004 Director’s Plan at the discretion of the Board on such terms asthe Board determines, subject to limitations of the 2004 Director’s 

F-19

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Plan. The exercise pricefor stock options issued under the 2004 Directors’ Plan is equal to the fairmarket value of the Company’s common stock on the date of grant. Each personwho is not an employee and (i) who is elected or re-elected as a directorby the stockholders at any annual meeting of stockholders, (ii) who continuesas a director following an annual meeting of stockholders at which suchdirector is not subject to re-election or (iii) is appointed as a director inaccordance with Company bylaws following an annual meeting, upon such electionor appointment, will receive, as of the business day following the date of eachsuch election or appointment, a non-qualified option to purchase 10,000 sharesof common stock. The 2004 Directors’ Plan also provides for annual automaticgrants of options to purchase 10,000 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 7,500 shares ofcommon stock to members of the Research and Development committee upon theirinitial appointment to the committee, and an automatic grant of non-qualifiedstock options to purchase 3,000 shares of common stock to a Research andDevelopment committee member who continues to serve on the committee after anannual meeting of stockholders. 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.

Thefollowing summarizes stock option activity and balances:
| ** **             | ** ** | ** **   | ** ** | ** **         | ** ** | ** **         | ** ** | ** **         | ** ** | ** **              | ** ** | **2004**                              | ** ** | ** ** | ** ** |
|------------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|-------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **             | ** ** | **Non-Plan** | ** ** | **1993 Plan** | ** ** | **1994 Plan** | ** ** | **1998 Plan** | ** ** | **2004  EIP Plan** | ** ** | ** Directors’   Plan** | ** ** | **Total**  | ** ** |
| Authorized             |       | 212,235      |       | 146,667            |       | 6,600,000          |       | 1,925,000          |       | 2,000,000               |       |                                  | 400,000    |       |       | 11,283,902 |   |
| Less:                  |       |         |       |               |       |               |       |               |       |                    |       |                                  |       |       |       |   |   |
| Exercised              |       | 195,085      |       | 133,232            |       | 439,624            |       | 130,181            |       | —                  |       |                                  | —     |       |       | 898,122 |   |
| Expired                |       | 16,250       |       | 13,435             |       | —             |       | —             |       | —                  |       |                                  | —     |       |       | 29,685 |   |
| Stock grants           |       | 400          |       | —             |       | 174,956            |       | 222,793            |       | —                  |       |                                  | —     |       |       | 398,149 |   |
| Issued and unexercised |       | 500          |       | —             |       | 5,705,402          |       | 1,323,698          |       | 1,197,500               |       |                                  | 50,000     |       |       | 8,277,100 |   |
| Available to be issued |       | —       |       | —             |       | 280,018            |       | 248,328            |       | 802,500                 |       |                                  | 350,000    |       |       | 1,680,846 |   |

 
| ** **                             | ** ** | **Stock  Options** | ** ** | **Exercise  Price** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------|------------|--------------------|------------|---------------------|------------|----------------------------------------|------------|
| Outstanding at  December 31, 2001 |       | 5,025,380          |       |                | $          | 1.00                                   |       |   | - |   | $ | 11.25 |   |   |   | 5.18 |   |   |
| Granted                                |       | 765,300            |       |                | 0.72       |                                   |       | - |   | 12.10 |   |   |   | 4.85 |   |   |
| Forfeited                              |       | (139,897           | )          |                | 1.00       |                                   |       | - |   | 12.10 |   |   |   | 5.58 |   |   |
| Expired                                |       | (16,668            | )          |                | 2.40       |                                   |       | - |   | 6.00 |   |   |   | 4.56 |   |   |
| Exercised                              |       | (96,648            | )          |                | 1.00       |                                   |       | - |   | 3.65 |   |   |   | 6.37 |   |   |
| Outstanding at  December 31, 2002 |       | 5,537,467          |       |                | 0.72       |                                   |       | - |   | 12.10 |   |   |   | 5.17 |   |   |
| Granted                                |       | 1,651,000          |       |                | 0.31       |                                   |       | - |   | 2.15 |   |   |   | 1.50 |   |   |
| Forfeited                              |       | (199,584           | )          |                | 1.00       |                                   |       | - |   | 12.10 |   |   |   | 5.33 |   |   |
| Exercised                              |       | (4,425             | )          |                |       |                                   |       |   |   | 1.00 |   |   |   | 1.00 |   |   |
| Outstanding at  December 31, 2003 |       | 6,984,458          |       |                | 0.31       |                                   |       | - |   | 11.75 |   |   |   | 4.26 |   |   |
| Granted                                |       | 1,663,050          |       |                | 0.92       |                                   |       | - |   | 2.80 |   |   |   | 1.31 |   |   |
| Forfeited                              |       | (331,721           | )          |                | 0.36       |                                   |       | - |   | 9.25 |   |   |   | 3.14 |   |   |
| Exercised                              |       | (38,687            | )          |                | 0.48       |                                   |       | - |   | 2.00 |   |   |   | 0.93 |   |   |
| Outstanding at  December 29, 2004 |       | 8,277,100          |       |                | $          | 0.31                                   |       |   | - |   | $ | 11.75 |   |   |   | $ | 3.73 |   |   |
|                                        |            |                    |            |                     |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

pe

F-20

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The weighted-average fair value of optionsgranted during 2004, 2003 and 2002 was $1.05, $1.30 and $3.80, respectively.
| ** **                        | ** ** | **Outstanding Options** | ** ** | **Exercisable Options** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Range of  Exercise Price** | ** ** | ** **              | ** ** | **Number  Outstanding** | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| $0.31 - $  1.54         |       | 1,855,393               |       |                    | 8.22       |   |   |   | $ | 1.01 |   |   | 583,467 |   |   | $ | 0.97 |   |   |
| $1.55 - $  1.95         |       | 2,064,186               |       |                    | 7.04       |   |   |   | $ | 1.64 |   |   | 1,154,850 |   |   | $ | 1.70 |   |   |
| $1.98 - $  3.09         |       | 1,523,200               |       |                    | 5.94       |   |   |   | $ | 2.39 |   |   | 1,178,000 |   |   | $ | 2.40 |   |   |
| $3.25 - $  6.50         |       | 441,274                 |       |                    | 6.31       |   |   |   | $ | 5.38 |   |   | 396,274 |   |   | $ | 5.48 |   |   |
| $6.61 - $  7.88         |       | 1,257,947               |       |                    | 6.09       |   |   |   | $ | 7.11 |   |   | 790,980 |   |   | $ | 7.39 |   |   |
| $8.00 - $11.75                    |       | 1,135,100               |       |                    | 6.53       |   |   |   | $ | 9.40 |   |   | 311,787 |   |   | $ | 9.13 |   |   |
| $0.31 - $11.75                    |       | 8,277,100               |       |                    | 6.85       |   |   |   | $ | 3.73 |   |   | 4,415,358 |   |   | $ | 3.67 |   |   |
|                                   |            |                         |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**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 to Section 401(k) ofthe Internal Revenue Code. The Company may make discretionary contributions tothe 401(k) Plan on behalf of the participants in the form of cash or inshares of common stock. No discretionary contributions were made by the Companyto the 401(k) Plan in 2004, 2003 or 2002. In June 2004, Tapestrycommon stock held in the 401(k) Plan was transferred to the Employee StockOwnership Plan (“ESOP”).

The Company adopted an ESOP for its employees, inaccordance with the Internal Revenue Code. Under this plan, employees over theage of 17 are eligible to participate on the first day of the month immediatelyfollowing the completion of six months of continuous service or 1,000 hours ofservice during a 12-continuous-month period. Participants make no contributionsto the ESOP. The Company contributes common stock to the ESOP which isallocated to all eligible employees based on their allowable pay. For 2004,2003 and 2002, the Company contributed 335,643, 750,000 and 200,000, shares tothe ESOP and recorded compensation expense of $791,000, $435,000 and $1.9million, respectively. The Company’s 2004 contribution included 54,306 sharesof treasury stock. All shares held by the ESOP are treated as outstanding incomputing 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.

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**Note 10. Income Taxes**

As of December 29,2004, 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     |                  |       |   | 140 |   |   |
| 2018                                |       |                      | —     |                  |       |   | 205 |   |   |
| 2019                                |       |                      | 8,445      |                  |       |   | 230 |   |   |
| 2020                                |       |                      | 15,899     |                  |       |   | 340 |   |   |
| 2021                                |       |                      | 19,781     |                  |       |   | 449 |   |   |
| 2022                                |       |                      | 8,714      |                  |       |   | 565 |   |   |
| 2023                                |       |                      | —     |                  |       |   | 390 |   |   |
| 2024                                |       |                      | 21,121     |                  |       |   | 32 |   |   |
|                                |       |                      | $          | 84,785                |       |   |   | $ | 2,559 |   |   |
|                                     |            |                           |            |                       |            |  |  |  |  |  |  |  |  |

 

Section 382 of the Internal Revenue Code containsprovisions that limit the utilization of net operating loss and tax creditcarryforwards if there has been a “change of ownership” as described therein. Sucha change of ownership may limit the utilization of the Company’s net operatingloss and tax credit carryforwards, and could be triggered by sales ofsecurities by Tapestry or its stockholders. The Company has performed ananalysis of its Section 382 net operating losses through December 31,2003, and concluded there was no limitation on the use of its net operatinglosses or research and development credits due to the potential limitationsunder Section 382.

Of the $84.8 million of net operating losses listedabove, $3.6 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 stockholders’ equity.

Significantcomponents of the Company’s deferred tax assets for the years ended December 29,2004 and December 31, 2004 are as follows (in thousands):
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                         |       |     |       |     |       |
| Tax net operating  loss carryforward         |       | $        | 32,278     |     | $          | 23,974 |   |
| Research and  development credits            |       | 2,559    |       | 2,570    |       |
| Depreciation                                 |       | (63      | )          | (66      | )          |
| Alternative  minimum tax credit carryforward |       | 467      |       | 462      |       |
| Other                                        |       | 116      |       | 29       |       |
| Total deferred tax assets                    |       | 35,357   |       | 26,969   |       |
| Valuation  allowance                         |       | (35,357  | )          | (26,969  | )          |
| Net deferred tax  assets                     |       | $        | —     |     | $          | — |   |

 

F-22

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Variationsfrom the federal statutory rate for the years ended December 29, 2004, December 31,2003 and December 31, 2002 are as follows:
| ** **                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory  income tax rate                   |       | 35.00    | %          | 35.00    | %          | 35.00    | %          |
| Effect of  permanent differences                     |       | 0.03     |       | 0.06     |       | 0.12     |       |
| State income tax  rate net of federal benefit        |       | 3.08     |       | 3.07     |       | 3.07     |       |
| Effect of foreign  operations                        |       | (2.55    | )          | (3.58    | )          | 0.75     |       |
| Valuation  allowance                                 |       | (35.56   | )          | (34.55   | )          | (38.94   | )          |
| Effective income tax  rate for continuing operations |       | (0.00    | )%         | 0.00     | %          | 0.00     | %          |

 
| ** **                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory  income tax rate                     |       | 35.00    | %          | 35.00    | %          | 35.00    | %          |
| Net operating  loss carryforward utilized              |       | —   |       | (13.32   | )          | —   |       |
| Alternative  minimum tax                               |       | —   |       | 0.76     |       | —   |       |
| Valuation  allowance                                   |       | (41.83   | )          | (21.38   | )          | (35.00   | )          |
| Effective income tax  rate for discontinued operations |       | (6.83    | )%         | 1.06     | %          | 0.00     | %          |

 

**Note 11. Restructuring Costs**

Restructuring costs include the costs associated withactions taken by the Company in response to changes in the Company’s business. Thesecharges consist of costs that are incurred to exit an activity or cancel anexisting contractual obligation, including the closure of facilities and employeetermination related charges.

Effective January 1, 2003, the Company adopted Statement of FinancialAccounting Standard No. 146, “Accounting for Exit or Disposal Activities.”This statement addresses significant issues regarding the recognition, measurementand reporting of costs that are associated with exit and disposal activities,including restructuring activities that were previously accounted for pursuantto the guidance set forth in Emerging Issues Task Force (“EITF”) Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity.” SFAS 146 was effective for exit or disposalactivities that were initiated after December 31, 2002. The adoption ofSFAS 146 did not have a material effect on the Company’s financial position orresults of operations.

Associatedwith the restructuring of the Company’s operations, the Companyrecognized charges during 2002, 2003 and 2004 as follows:

In July 2002, Tapestry initiated a company-widerestructuring plan involving a reduction of full-time staff by 30 employees, aswell as the elimination of other operating expenses. Included in this reductionwere 16 employees in manufacturing, 10 employees in research and developmentand 4 employees in general and administrative positions. The annual payrollcost savings was approximately $1.5 million. During the third quarter of 2002,the Company incurred restructuring charges of approximately $199,000, whichwere paid by December 31, 2002.

During 2003, the Company incurred severance costs of$483,000 associated with the termination of the employment of three executiveofficers and $158,000, resulting from the involuntary termination of 11 employeesin manufacturing, 4 employees in research and development and 5 employees in generaland administrative positions.

In May 2003, the Company negotiated a voluntarytermination of the majority of its regulatory affairs personnel and theirtransfer to an independent, third party consulting company. Tapestry contractsits regulatory affairs with that company on an as needed basis.

F-23

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Facility closing costs in 2003 were associated withterminating a lease for one of the Company’s corporatefacilities in Boulder, Colorado and consisted of a lease termination fee,accelerated depreciation of leasehold improvements and site remediation costs.

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.

Thefollowing table summarizes the components of the restructuring charges, thepayments and non-cash charges, and the remaining accrual as of December 29,2004, December 31, 2003 and December 31, 2002 (in thousands):
| ** **                                          | ** ** | **Employee**    | ** ** | ** **   | ** ** | ** **        | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|--------------|------------|-------------------|------------|
| ** **                                          | ** ** | **Severance**   | ** ** | ** **   | ** ** | ** **        | ** ** |
| ** **                                          | ** ** | **and**         | ** ** | **Facility** | ** ** | **Total**         | ** ** |
| ** **                                          | ** ** | **Termination** | ** ** | **Closure**  | ** ** | **Restructuring** | ** ** |
| ** **                                          | ** ** | **Costs**       | ** ** | **Costs**    | ** ** | **Charges**       | ** ** |
| Accrual balance  December 31, 2001             |       |            | $          | —       |       |              | $          | — |   |   | $ | — |   |   |
| Third quarter  2002 restructuring charge            |       |            | 199        |         |       | —            |       |   | 199 |   |   |
| Total  restructuring charges 2002                   |       |            | 199        |         |       | —            |       |   | 199 |   |   |
| Payments in 2002                                    |       |            | (199       | )            |       | —            |       |   | (199 | ) |   |
| Accrual balance  December 31, 2002             |       |            | —     |         |       | —            |       |   | — |   |   |
| First quarter 2003 restructuring charge             |       |            | 389        |         |       | 404               |       |   | 793 |   |   |
| Second quarter  2003 restructuring charge           |       |            | 26         |         |       | 370               |       |   | 396 |   |   |
| Third quarter  2003 restructuring charge            |       |            | 17         |         |       | 430               |       |   | 447 |   |   |
| Fourth quarter  2003 restructuring charge           |       |            | 209        |         |       | 240               |       |   | 449 |   |   |
| Total  restructuring charges December 31, 2003 |       |            | 641        |         |       | 1,444             |       |   | 2,085 |   |   |
| Payments in 2003                                    |       |            | (488       | )            |       | (1,444            | )          |   | (1,932 | ) |   |
| Accrual balance  December 31, 2003             |       |            | 153        |         |       | —            |       |   | 153 |   |   |
| Fourth quarter 2004 restructuring charge            |       |            | 253        |         |       | 203               |       |   | 456 |   |   |
| Total  restructuring charges December 29, 2004 |       |            | 253        |         |       | 203               |       |   | 456 |   |   |
| Payments in 2004                                    |       |            | (200       | )            |       | —            |       |   | (200 | ) |   |
| Accrual balance  December 29, 2004             |       |            | $          | 206          |       |              | $          | 203 |   |   | $ | 409 |   |   |

 

**Note12. Investment in ChromaDex, Inc.**

In April 2003, theCompany sold its Technical and Analytical Services group to privately heldChromaDex, Inc. in exchange for approximately 15%, on a fully dilutedbasis, of the then outstanding common stock of ChromaDex. Ten Company employeestransferred to ChromaDex in April as part of this transaction. In exchangefor the common stock received, the Company sold property and equipment valuedat approximately $1.0 million, as well as provided rents and othersubsidies of $468,000, which included a payment of $300,000 in cash at theclosing. ChromaDex assumed the lease for Tapestry’s research facility inBoulder, Colorado as part of this transaction. The Company subleases a portionof this space from ChromaDex. ChromaDex is a supplier of phytochemicalreference standards for the nutraceutical, dietary supplement and functionalfood industries.

**Note 13. Technology License**

In November 2000, theCompany entered into a 20-year technology license, 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 provides for research andpatent funding commitments and payments in common stock. To date, the 

F-24

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Companyhas issued 378,875 shares of common stock under the license to the Universityof Delaware, 61,750 shares to Thomas Jefferson University and 59,375 shares toThe Samuel Roberts Noble Foundation, Inc., each of which has an ownershipinterest in the licensed intellectual property. Assuming the Company does notcancel the license, it will issue an additional 700,000 shares in 100,000share-per-year increments on the license anniversaries and/or in 200,000 shareincrements upon the achievement of certain milestone events. The Companymay, at its option, accelerate the issuance dates. The license is terminable atTapestry’s option and if it is terminated, no additional shares would be issued.Tapestry has committed to fund at least $300,000 in research under thisagreement during 2005. Unless the Company terminates the license, the Companyis also committed to funding at least $300,000 in research at the UniversityDelaware during 2006 as well.

**Note14. Commitments and Contingencies**

**Operating Leases**

TheCompany has executed noncancellable operating lease agreements for office,research and production facilities, and equipment. As of December 29,2004, future minimum lease payments under noncancellable operating leaseagreements are as follows (in thousands):
| 2005  |   | $   | 517    |   |
|-------|--------|-----|--------|--------|
| 2006  |   | 304 |   |
| 2007  |   | 141 |   |
| 2008  |   | 11  |   |
| Total |   | $   | 973    |   |

 

Tapestry has renewalclauses in some of these leases that range from one to ten years. Rent expensefor the years ended December 29, 2004, December 31, 2003 and December 31,2002 was $935,000, $1,737,000 and $1,528,000, respectively.

**Note 15. Related Party Transactions**

The Company paid ChromaDex (see Note 12) $379,000 and$142,000 during 2004 and 2003, respectively, for support services and theCompany’s share of rent, utilities, supplies and maintenance costs inconnection with its sublease of ChromaDex’s research facility. The Company hadaccounts payable balances to ChromaDex of $23,000 and $89,000, at December 29,2004 and December 31, 2003, respectively.

One of the Tapestry’s directors, ArthurH. Hayes, Jr., M.D., may provide certain consulting services to theCompany. The Company has a consulting agreement with MediScience Associates (the“MediScience Agreement”) whereby Dr. Hayes, who is President and ChiefOperating Officer of MediScience, may provide us with consulting services in avariety of areas, including clinical research planning, strategic positioningand regulatory guidance. The Company is obligated to make quarterly payments toMediScience under the MediScience Agreement in the amount of $12,500. Dr. Hayeswas paid $50,000 under this agreement during 2004 and 2003, respectively, and$37,500 during 2002. The Company had accrued liability balances for consultingservices to Dr. Hayes of $12,500 at December 29, 2004 and December 31,2003, respectively. Dr. Hayes is obligated to provide consulting servicesto the Company under the MediScience Agreement indefinitely, but the MediScienceAgreement is terminable by the Company or MediScience at any time with 90 daysprior written notice.

F-25

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**Note 16. Subsequent Event**

On February 18, 2005 the Company entered into anagreement with TL Ventures providing for a complete settlement of the litigation,a mutual release of claims and the payment of approximately $3,184,000 in cashand the issuance by the Company of promissory notes in an aggregate amount of$4,670,000 in exchange for delivery of the $8.0 million principal five-year 4%convertible subordinated debentures to the Company for cancellation. SeeNote 6, Convertible Debentures, for information regarding the settlement.

**Note17. Quarterly Data (unaudited)**(In thousands, except per share amounts)

On November 16,2004, the Company decided to discontinue research on its genomics programs,except for the Huntington’s Disease program. Costs related to the discontinuedgenomics programs are included in discontinued operations. On December 12,2003, the Company sold its generic paclitaxel business. Also in December 2003,the Company discontinued its gene isolation and service business. As a result,sales and cost of sales relating to the paclitaxel business and the geneisolation and service business are included in discontinued operations in theConsolidated Statements of Operations (see Note 2). There were no materialproduct sales during 2004.
| **Years Ended**                       | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|-----------|------------|
| ***2004***                                 |       |       |       |               |       |                |       |               |       |                |       |
| Net loss from  continuing operations       |       | $          | (3,980     | )                  | $          | (5,280              | )          | $                  | (6,957     | )                   | $          | (5,338    | )          | $ | (21,555 | ) |
| Income (loss)  discontinued operations     |       | (995       | )          | (1,107             | )          | 2,179               |       | (2,696             | )          | (2,619              | )          |
| Net loss                                   |       | (4,975     | )          | (6,387             | )          | (4,778              | )          | (8,034             | )          | (24,174             | )          |
| Basic and diluted  net loss per share      |       | (0.16      | )          | (0.19              | )          | (0.14               | )          | (0.24              | )          | (0.74               | )          |
| ***2003***                                 |       |       |       |               |       |                |       |               |       |                |       |
| Net loss from  continuing operations       |       | $          | (3,637     | )                  | $          | (3,884              | )          | $                  | (3,472     | )                   | $          | (4,863    | )          | $ | (15,856 | ) |
| Income (loss)  discontinued operations     |       | 887        |       | 1,754              |       | (2,591              | )          | 53,934             |       | 53,984              |       |
| Net income (loss)                          |       | (2,750     | )          | (2,130             | )          | (6,063              | )          | 49,071             |       | 38,128              |       |
| Basic and  diluted income (loss) per share |       | (0.09      | )          | (0.07              | )          | (0.20               | )          | 1.59               |       | 1.24                |       |

 

F-26

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**INDEX TO EXHIBITS**
|       3.1  |   | Amended and Restated  Certificate of Incorporation of the Company, as amended August 2, 1996(1)                                                         |
|-------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       3.2  |   | Certificate of Amendment  dated September 21, 1998 to the Amended and Restated Certificate of  Incorporation of the Company(2)                          |
|       3.3  |   | Certificate of Amendment  dated October 31, 2000 to the Amended and Restated Certificate of  Incorporation of the Company(3)                            |
|       3.4  |   | Bylaws of the Company as  amended through August 25, 2003(11)                                                                                           |
|       3.5  |   | Certificate of  Designation for Convertible Preferred Stock, Series A(4)                                                                                |
|       3.6  |   | Certificate of  Designation for Series B Junior Participating Preferred Stock(5)                                                                        |
|       3.7  |   | Certificate of  Designation for Series C Senior Convertible Preferred Stock(6)                                                                          |
|       3.8  |   | Certificate of  Elimination of Convertible Preferred Stock, Series A(7)                                                                                 |
|       3.9  |   | Certificate of  Elimination of Series C Senior Convertible Preferred Stock(7)                                                                           |
|       3.10 |   | Certificate of Increase  of Series B Junior Participating Preferred Stock(7)                                                                            |
|       3.11 |   | Certificate of Amendment  dated March 3, 2003 to the Amended and Restated Certificate of  Incorporation of the Company(8)                               |
|       4.1  |   | Common Stock Certificate(9)                                                                                                                                  |
|       4.2  |   | Amended and Restated  Rights Agreement dated September 25, 2001 between the Company and  American Stock Transfer and Trust Company, as Rights Agent(10) |
|       4.3  |   | The Certificate of  Incorporation and Bylaws of the Company are included as Exhibits 3.1 - 3.11                                                              |
|       4.4. |   | Promissory Note dated  February 18, 2005 payable by the Company to TL Ventures V L.P. in the  amount of $4,590,600.17*                                  |
|       4.5  |   | Promissory Note dated  February 18, 2005 payable by the Company to TL Ventures V Interfund L.P.  in the amount of $79,399.53*                           |
|    10.1                   |   | Company’s 1993 Stock  Option Plan(9)                                                                                                                    |
|    10.2                   |   | Amendment dated  December 11, 2000 to the Company’s 1993 Stock Option Plan(12)                                                                     |
|    10.3                   |   | Company’s Amended and  Restated 1994 Long-Term Performance Incentive Plan, as amended through  March 4, 2002(11)                                   |
|    10.4                   |   | Company’s Amended and  Restated 1998 Stock Incentive Plan as amended through October 15, 2002(11)                                                  |
|    10.5                   |   | Company’s 2004 Equity  Incentive Plan(16)                                                                                                               |
|    10.6                   |   | Company’s 2004 Non  Employee Director’s Stock Option Plan(16)                                                                                      |
|    10.7                   |   | Employment Agreement  effective October 1, 2001 between the Company and Leonard Shaykin(13)                                                             |
|    10.8                   |   | Employment Agreement  effective October 1, 2001 between the Company and Patricia Pilia(13)                                                              |
|    10.9                   |   | Employment Agreement  effective October 1, 2001 between the Company and Gordon Link(13)                                                                 |
|    10.10                  |   | Employment Agreement  effective October 1, 2001 between the Company and Kai Larson(13)                                                                  |
|    10.11+                 |   | License Agreement dated  November 21, 2000 by and between the Company and The University of  Delaware and Thomas Jefferson University(12)               |
|    10.12                  |   | Employment Agreement  effective January 1, 2004 between the Company and Sterling K. Ainsworth(11)                                                       |
|    10.13                  |   | Asset Purchase Agreement  dated as of August 25, 2003 between Tapestry Pharmaceuticals, Inc.  and Faulding Pharmaceutical Co.(15)                  |

 

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|    10.14 |   | Form of Director  and Officer Indemnification Agreement signed by the Company and each of  Martin M. Batt, Edward L. Erickson, 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(8) |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    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)(11)                                                                                                                                                                                                                                                                                                                            |
|    10.16 |   | Form of Stock  Option Agreement for certain options granted under the Company’s 2004 Equity  Incentive Plan(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|    10.17 |   | Form of Stock  Option Agreement for options granted under the Company’s 2004 Non-Employee  Directors’ Stock Option Plan(14)                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    10.18 |   | Settlement Agreement and  Mutual General Release dated February 18, 2005 between the Company, on  one hand, and TL Ventures V L.P. and TL Ventures Interfund L.P., on the other  hand*                                                                                                                                                                                                                                                                                                                                                                                                    |
|    21.1  |   | List of Subsidiaries(13)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|    23.1  |   | Consent of Grant  Thornton LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    23.2  |   | Consent of  Ernst & Young LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    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

#                 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

+                Portions have beenomitted pursuant to a request for confidential treatment

(1)          Incorporated herein byreference to the Company’s Annual Report on Form 10-K filed with theCommission for the year ended December 31, 1996 (File No. 0-24320)

(2)          Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the yearended December 31, 1998 (File No. 0-24320)

(3)          Incorporated herein byreference to the Company’s Quarterly Report on Form 10-Q for theperiod ending September 30, 2000 (File No. 0-24320)

(4)          Incorporated herein byreference to the Company’s Quarterly Report on Form 10-Q for thequarter ending June 20, 1995 (File No. 0-24320)

(5)          Incorporated herein byreference to the Company’s Registration Statement on Form 8-A12G/Adated November 25, 1996 (File No. 0-24320)

 

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(6)          Incorporated herein byreference to the Company’s Registration Statement on Form S-3 filedon December 16, 1997 (File No. 333-42419)

(7)             Incorporatedherein by reference to the Company’s Registration Statement on Form S-3/Afiled on August 26, 2003 (File No. 333-107817)

(8)          Incorporated herein byreference to the Company’s Annual Report on Form 10-K/A for the yearended December 31, 2002, filed on August 8, 2003 (File No. 0-24320)

(9)          Incorporated herein byreference to the Registration Statement on Form S-1 of the Company,filed with the Commission on July 24, 1994 (File No. 33-78016)

(10)   Incorporated herein byreference to the Registration Statement on Form 8-A12G/A of theCompany, filed with the Commission on October 23, 2001 (File No. 0-24320)

(11)   Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the yearended December 31, 2003 (File No. 0-24320)

(12)   Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the yearended December 31, 2000 (File No. 0-24320)

(13)   Incorporated herein byreference to the Company’s Annual Report on Form 10-K for the yearended December 31, 2001 (File No. 0-24320)

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

(15)   Incorporated herein byreference to the Company’s Current Report on Form 8-K filed with theCommission dated August 25, 2003 (File No. 0-24320)

(16)       Incorporatedherein by reference to the Company’s Quarterly Report on Form 10-Qfor the period ending June 30, 2004 (File No. 0-24320)

 

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