**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-K**

**(Mark One)**

**x**                                 ANNUAL REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**FORTHE FISCAL YEAR ENDED DECEMBER 28, 2005**

**OR**

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

**FORTHE TRANSITION PERIODFROM                     TO                     **

**CommissionFile Number 0-24320**

**TAPESTRY PHARMACEUTICALS, INC.**

(Exact name of Registrantas specified in its charter)

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

 

**4840 Pearl East Circle,Suite 300WBoulder, Colorado 80301**

(Address of principalexecutive office, including zip code)

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

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

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

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o  No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

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 a large accelerated filer, an accelerated filer, or anon-accelerated filer (See the definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act). Largeaccelerated filer o  Accelerated filer o Non-accelerated filer x

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

The aggregate market valueof the voting and non-voting common equity held by non-affiliates of theregistrant was $14,819,374 as of June 29, 2005 (the last business day ofthe registrant’s second fiscal quarter in 2005). For purposes of determiningthis number, 1,307,052 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 22,2006, the registrant had 3,485,755 shares of Common Stock outstanding. Theregistrant implemented a one-for-ten reverse split of its common stockeffective for trading on February 6, 2006. All share and per share amountsfor all periods presented have been restated to reflect this reverse stocksplit.

**DOCUMENTSINCORPORATED BY REFERENCE**

**None.**

 

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**Table of Contents**

| Part I          |   | Item 1   |   | Business                                                                                                           |   | 3  |
|----------------------|--------|----------|--------|--------------------------------------------------------------------------------------------------------------------|--------|----|
|                 |   | Item 1A  |   | Risk Factors                                                                                                       |   | 8  |
|                 |   | Item 1B  |   | Unresolved Staff Comments                                                                                          |   | 20 |
|                 |   | Item 2   |   | Properties                                                                                                         |   | 21 |
|                 |   | Item  3  |   | Legal  Proceedings                                                                                                 |   | 21 |
|                 |   | Item 4   |   | Submission of Matters to Vote of Security Holders                                                                  |   | 21 |
| Part II         |   | Item 5   |   | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 22 |
|                 |   | Item  6  |   | Selected  Financial Data                                                                                           |   | 23 |
|                 |   | Item 7   |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |   | 25 |
|                 |   | Item 7A  |   | Quantitative and Qualitative Disclosures about Market  Risk                                                        |   | 34 |
|                 |   | Item 8   |   | Financial Statements and Supplementary Data                                                                        |   | 34 |
|                 |   | Item 9   |   | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                              |   | 34 |
|                 |   | Item  9A |   | Controls  and Procedures                                                                                           |   | 34 |
|                 |   | Item  9B |   | Other  Information                                                                                                 |   | 34 |
| Part III        |   | Item 10  |   | Directors and Executive Officers of the Registrant                                                                 |   | 35 |
|                 |   | Item  11 |   | Executive  Compensation                                                                                            |   | 39 |
|                 |   | Item 12  |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |   | 44 |
|                 |   | Item 13  |   | Certain Relationships and Related Transactions                                                                     |   | 46 |
|                 |   | Item 14  |   | Principal Accountant Fees and Services                                                                             |   | 47 |
| Part IV         |   | Item 15  |   | Exhibits and Financial Statement Schedules                                                                         |   | 48 |
| Financial Statements |   | F-1      |

 

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**Part I**

**Item 1**

*This reportcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. These forward-looking statementsinclude, but are not limited to, statements concerning our plans to continuedevelopment of TPI 287 and our current product candidates; develop an oralformulation of TPI 287; conduct clinical trials with respect to TPI 287; seekregulatory approvals; close our previously announced proposed  financing; address certain markets; andevaluate additional product candidates for subsequent clinical and commercialdevelopment. In some cases, these statements may be identified by terminologysuch as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“predict,” “potential,” or “continue” or the negative of such terms and othercomparable terminology. Although we believe that the expectations reflected inthe forward-looking statements contained herein are reasonable, we cannotguarantee future results, levels of activity, performance or achievements. Thesestatements involve known and unknown risks and uncertainties that may cause ouror our industry’s results, levels of activity, performance or achievements tobe materially different from those expressed or implied by the forward-lookingstatements. Factors that may cause or contribute to such differences include,among other things, those discussed under the captions “Business,” “Risk Factors” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”  Forward-looking statements not specificallydescribed above also may be found in these and other sections of this report.*

**Business**

**General**

Tapestry Pharmaceuticals, Inc. (“we,” “Tapestry”or the “Company”) is a pharmaceutical company focused on the development ofproprietary therapies for the treatment of cancer. We are also actively engagedin 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. Acquisitionsof new products or technologies may involve the purchase or license of suchproducts or technologies, or the acquisition of, or merger with, othercompanies.

We incursubstantial research and development expense related to the development of ourproprietary anti-cancer compounds. We incurred significant losses sinceformation, including losses from continuing operations of $17.2 million for theyear ended December 28, 2005. Our accumulated deficit was $107.3 millionas of December 28, 2005. We anticipate that losses will continue untilsuch time, if ever, as we are able to generate sufficient revenue to supportour development operations, including the research and development activitydiscussed below.

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

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

On November 16, 2004, we decided to discontinueresearch on our genomics products, excluding Huntington’s Disease, and closethe Genomics division. We terminated our research agreement and patent fundingwith the University of Delaware and Thomas Jefferson University in December 2005and subsequently discontinued our research activities relating to theHuntington’s Disease program in January 2006. We also terminated ourresearch agreement with MD Anderson in December 2005 and subsequentlydiscontinued our development activities on TPI 284, our peptide linkedcytotoxic compound in January 2006.

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

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

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

**Tapestry Research 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 IV                |       | Prostate, Non-Small Cell  Lung, and Breast Cancers                             |       | Phase I                     |
| TPI 287 oral  formulation |       | Prostate,  Non-Small Cell Lung, Pancreatic,  Ovarian, Breast and Colon Cancers |       | Preclinical  Development    |
| Quassinoids               |       | Cancers                                                                        |       | Preclinical  Development    |
| Linked Cytotoxics         |       | Cancers                                                                        |       | Preclinical Development     |

 

We terminated theOligo Therapy program related to Huntington’s Disease in January 2006. Wealso terminated the development of TPI 284, a peptide linked cytotoxiccompound, in January 2006. We are continuing limited preclinical researchrelating to quassinoid analogs and linked cytotoxic agents with additionalpotential lead compounds being tested.

·       TPI287 is a proprietary third generation taxane. On December 21, 2004, wefiled an Investigational New Drug (“IND”) application, and on January 21,2005, we were cleared to proceed into clinical trials by the U.S. Food and DrugAdministration (“FDA”). In May 2005, we treated our first patient in thisQ7D Phase I clinical trial of the intravenous (“IV”) formulation of TPI 287. InJanuary 2006, we began a second Phase I clinical trial of TPI 287 IV toevaluate an alternative dosing schedule. In preclinical testing, TPI 287demonstrated the ability to inhibit tumor cell growth in a number of *in vitro* cell lines and has shown inhibition of tumors incertain animal xenograft models when tested against standard comparative agents.The *in vitro* activity was seen acrossmultiple cell lines including cell lines known to be 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 

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cancer, uterinecancer and non-small cell lung cancer. Taxane resistant cell lines in which TPI287 shows activity include lines derived from breast cancer, colon cancer,prostate cancer and pancreatic cancer. In *in vivo* animaltesting, TPI 287 demonstrated tumor growth inhibition activity in four tumorcell lines with multiple drug resistance, or MDR1. In addition to the IVformulation of TPI 287, we have initiated development of an oral formulation ofthe compound.

·       Quassinoidsare complex polyfunctional, polycyclic natural products of the plant family *Simaroubaceae*, which exhibit antitumoractivity. We have in-licensed several quassinoid compositions as well asprocesses for their isolation and synthesis. We have completed several *in vitro* and *in vivo* preclinical studies on our proprietary quassinoidanalogs, and additional preclinical studies are in progress to better delineatethe potential antitumor activity of these compounds. Currently, we cannotpredict if or when any of these quassinoids will be advanced into clinicaldevelopment.

·       Linkedcytotoxics are cytotoxic agents linked to targeting moiety designed toselectively target tumor tissues. We continue to explore linked cytotoxicapproaches to delineate more selectively active anticancer agents to improvetherapeutic index. This includes new proprietary agents and known potentcytotoxics linked to targeting molecules, which have the potential to enhanceoverall therapeutic index in a variety of cancer types. Currently, we cannotpredict when or if any of these linked cytotoxics will be advanced intoclinical development.

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

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

**Patents and Proprietary Technology**

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

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

**GovernmentRegulation and Product Approvals**

Pharmaceutical research, preclinical development,clinical trials, manufacturing and marketing activities are subject toregulation for safety, efficacy and quality by governmental authorities in theU.S. and other countries. Regulations govern, among other things, the testing,manufacture, labeling, storage, 

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record keeping, approval,advertising and promotion of our products and product candidates. Product developmentand approval within this regulatory framework take a number of years andinvolve the expenditure of substantial resources.

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

Preclinical studies include the laboratory evaluationof *in vitro* pharmacology, productchemistry and formulation, as well as animal studies to assess safety. 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 ofa NDA. The approval of a NDA permits commercial-scale manufacturing, marketing,distribution, and sale of the drug in the U.S. The FDA may deny a new drugapplication filed by us or our collaborators, if any, if the applicablescientific and regulatory criteria are not satisfied. The FDA may requireadditional testing or information, and may require post-approval testing,surveillance and reporting to monitor the products. The FDA may ultimatelydecide that a NDA does not meet the applicable agency standards, and even ifapproval is granted, it can be limited or revoked.

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

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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 and Abbott Laboratories, all ofwhich have significantly greater resources.

**Researchand Development Expense**

During the years ended in 2005, 2004 and2003, we incurred approximately $11.0 million, $17.7 million, and $10.8million, respectively, of research and development expense, which includes thecosts of our clinical trials to date. Research and development is expected to remain asignificant expense of our business and is expected to concentrate on thedevelopment and clinical trials of proprietary anti-cancer agents. In May 2005,we commenced Phase I clinical trials of TPI 287. In addition to the IVformulation of TPI 287, we are also developing an oral formulation of TPI 287. Wealso conduct ongoing research on a number of cytotoxic compounds that mayadvance into clinical evaluation. We cannot estimate the cost of the effortnecessary to complete the programs or the timing of commencement of materialnet cash inflows from these programs, if ever. Continued development of theseprograms is dependent upon raising additional capital. We cannot be certainthat we will be able to obtain capital on acceptable terms.

**Foreign andDomestic Operations; Export Sales**

We had no product sales during 2005. All prior year salesrelated to discontinued operations and have been reported as such.

**Employees**

As of December 28, 2005, we had 36 employees, whichincluded 5 part-time employees. Of these employees, 9 held Ph.D. or M.D.degrees. We had 22 employees engaged in drug development, and 14 employeesengaged in administration, legal, information technology and finance. Webelieve that our relations with our employees are good. In addition, wecontract with outside consultants for services relating to our drug developmentprograms.

**Financing**

On February 2, 2006, we entered into a PurchaseAgreement (the “Purchase Agreement”) with a number of institutional investors,led by Special Situations Funds, Tang Capital Partners, LP, and Baker BrothersInvestments, pursuant to which we will sell to the investors in a privateplacement (the “Private Placement”), subject to the approval of ourstockholders, an aggregate of 12,750,000 shares of our common stock at $2.00per share and five-year warrants immediately exercisable for an aggregate of12,750,000 shares of common stock at an exercise price of $2.40 per share(subject to anti-dilution protection) for initial gross proceeds of $25.5 million(or approximately $24 million net of transaction fees and expenses) notincluding any proceeds from exercise of the warrant. The proposed financingwill support our ongoing 

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development of TPI 287 in theUnited States and overseas. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

**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.

**Item 1ARisk Factors**

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

**If we fail to close our previously announced proposedfinancing and do not otherwise obtain the capital necessary to fund ouroperations when needed, we could be forced to discontinue our operations.**

As of January 31,2006, we had unrestricted cash, cash equivalents, and investments ofapproximately $12.7 million. Without additional capital, meeting our workingcapital needs under a continuation of our current business model would provedifficult beyond December 2006. The audit report prepared by ourindependent registered public accounting firm relating to our consolidatedfinancial statements for the year ended December 28, 2005 includes anexplanatory paragraph expressing the substantial doubt about our ability tocontinue as a going concern. During the past year we undertook a number ofactions to reduce our monthly cash requirements, including, among other things,reductions in workforce and related payroll costs, reductions in the growth ofexecutive compensation, reductions in facility costs, reductions in the numberof active programs in development, reductions in capital expenditures andreductions in charges from outside service providers. After implementing theseand other cost savings measures and further determining that our leadpharmaceutical program warranted expanded clinical development, we determinedthat we should seek the additional capital necessary to fund our ongoingoperations related to our lead pharmaceutical program.

On February 2, 2006, we entered into a purchaseagreement under which we agreed to sell and issue to certain investors anaggregate of 12,750,000 shares of our common stock, and related warrants topurchase up to an aggregate of 12,750,000 shares of our common stock for grossproceeds of $25.5 million not including any proceeds from the exercise of thewarrant (or approximately $24 million net of transaction fees and expenses). Closingof this proposed financing is subject to the satisfaction of certainconditions, including our conducting a special meeting of stockholders to beheld not later than May 2, 2006 for the purpose of securing the requiredstockholder approval of the transaction under the Nasdaq Marketplace Rules andour obtaining such approval; the adoption by our Board of Directors of a budgetfor fiscal years 2006 and 2007, including a covenant that the net proceeds fromthe transaction be used solely to fund the development of TPI 287 in accordancewith such budget; and other matters common in transactions of this kind. Pursuantto the purchase agreement, we will issue to the investors thereunder 

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alternative warrants topurchase an aggregate of 522,815 shares of our common stock (representing 15%of our issued and outstanding shares of common stock as of February 2,2006), with an exercise price of $0.01 per share. These alternative warrants willbecome exercisable only in connection with certain events, one of which is thefailure of our stockholders to approve the proposed financing.

If we do not close the proposed financing, whether asa result of the failure to receive stockholder approval or the failure of otherconditions, we would be forced to preserve our cash position through acombination of additional cost reduction measures, sales of core assets atvalues significantly below their potential worth and postponement ortermination of our program for the development of TPI 287. In addition, wewould need to augment our cash through additional and possibly repetitivedilutive financings. If we are unable to raise additional funds, we could beforced to discontinue our operations.

Even if we close theproposed financing, our business will require substantial additional investmentthat we have not yet secured. We cannot be sure how much we will need to spendin order to develop, market and manufacture new products and technologies inthe future. We expect to continue to spend substantial amounts on research anddevelopment, including amounts spent on conducting clinical trials for ourproduct candidates. Further, we will not have sufficient resources to developfully any new products or technologies unless we are able to raise substantialadditional financing on acceptable terms. We could also be required to seekstrategic partners at an earlier stage than might be preferable and on lessfavorable terms than might be otherwise available. Our failure to raise capitalwhen needed would adversely affect our business, financial condition andresults of operations, and could force us to reduce or discontinue ouroperations at some time in the future, even if the proposed financing isclosed.

**If closed, our proposed financing and the relatedgrants and repricing of stock options under expanded equity incentive planswill result in substantial dilution of the percentage ownership of ourstockholders.**

Stockholders will incur immediate and substantialdilution of their percentage of stock ownership in the Company if our recentlyproposed financing is closed. The aggregate ownership of all holders of ouroutstanding common stock immediately prior to closing of the proposed financingwill be reduced to approximately 21% of outstanding shares of our common stockafter closing, or 12% assuming exercise in full of the warrants issued as partof the proposed financing.

In addition, our Board of Directors has adopted and weintend to submit to our stockholders for approval a new equity incentive planthat will provide for an initial reservation of 6,559,056 shares of commonstock, for which options on 3,230,613 shares have been initially grantedthereunder, contingent upon stockholders approval. The shares available forissuance under the equity incentive plan may be increased by up to 1,600,000shares of common stock based upon the number of shares of common stock we issueduring the three year period after the closing of the proposed financing. Wealso intend to submit to stockholders proposals for approval of an amendment toour bylaws and the approval under our existing stock option plans to permit therepricing of 528,804 of our currently outstanding stock options.

For purposes of example only, a stockholder who ownedapproximately 15.0% of our outstanding stock as of February 21, 2006,would own approximately 3.2% of the shares outstanding immediately after theproposed financing, assuming the issuance of 12,750,000 shares of common stockto the investors, and would own 1.8% of the shares outstanding immediatelyafter the proposed financing assuming full exercise of warrants to purchase12,750,000 shares of common stock issued to the investors, and as low as 1.5%on a fully diluted basis after taking into account stock options that may begranted under our equity incentive plan proposed to be adopted.

Each of the investors inthe proposed financing has agreed, at any meeting of stockholders of theCompany called for that purpose after the date the proposed financing isclosed, to vote to approve the equity incentive plan and the amendment of ourbylaws. This agreement of the investors continues to be 

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applicableat any meeting called by the Company for such purpose, notwithstanding thatsuch matter may have previously been voted upon but not approved by the Company’sstockholders. If the proposed financing is completed, approval of proposals toadopt the new equity incentive plan and to amend our bylaws will be assuredbecause the investors will hold more than 75% of the Company’s outstandingcommon stock and they will be obligated to vote in favor of such proposals.

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

During the past 16 months we have closed our Genomicsdivision, terminated our program relating to Huntington’s Disease andterminated development of TPI 284. These actions have permitted us to focus ourdevelopment efforts primarily on the development of TPI 287, which is still inPhase I clinical trials. Our other product candidates are in preclinicaldevelopment and we have no products that are approved for commercial sale. TPI287 will require extensive additional clinical evaluation, regulatory review,marketing efforts and significant investment before we receive any revenuesfrom it, if ever. We currently do not have the capital resources necessary tobring any of our product candidates through to commercial approval, and we donot expect TPI 287 or any of our other product candidates or technologies to becommercially available for several years. We believe that our recentlyannounced proposed financing, if closed, will only be sufficient to permit usto generate preliminary Phase II efficacy data on TPI 287 in a number of majortumor types, as well as begin development of, upon continued confirmatory data,a preliminary oral form of this drug candidate.

Our efforts may not leadto commercially successful products for a number a reasons, including theinability to be proven safe and effective in clinical trials, the lack ofregulatory approvals or obtaining regulatory approvals that are narrower thanwe seek, inadequate financial resources to complete the development andcommercialization of our product candidates or the lack of acceptance in themarketplace. Given the limited focus on one product candidate, if TPI 287 doesnot prove successful in clinical trials or is not commercialized because wehave insufficient resources for continued development for any other reason, wemay be required to suspend or discontinue our operations and you could loseyour entire investment in the Company.

**If the proposed financing is consummated, theinvestors in the proposed financing will acquire shares of common stock andwarrants representing substantially more than a majority of shares of ourcommon stock.**

If the proposed financingis consummated, the investors in the proposed financing would acquire shares ofour common stock and warrants to acquire such shares representing up toapproximately 88% of our common stock, assuming the full investment of $25.5million and the exercise in full of the warrants to be issued in the proposedfinancing. Immediately following completion of the proposed financing, thoseinvestors would hold a sufficient portion of our outstanding shares so as topermit them, if they chose to act in concert, to approve all actions requiringstockholder approval, including the election of directors, without obtainingthe approval of any other stockholder.

**If our proposed financing is not closed because ourstockholders do not approve or for certain other reasons, alternative warrantsto be issued in connection with the execution of the purchase agreement willbecome exercisable and dilute the percentage ownership of our stockholders withno benefit to the Company.**

Pursuant to the purchaseagreement for our proposed financing, we will issue to the investorsalternative warrants to purchase an aggregate of 522,815 shares of our commonstock (representing 15% of our issued and outstanding shares of common stock asof February 2, 2006), with an exercise price of $0.01 

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pershare. These alternative warrants will become exercisable only in connectionwith certain events, one of which is the failure of our stockholders to approvethe proposed financing. The aggregate ownership of all holders of ouroutstanding common stock immediately prior to the full exercise of thealternative warrants would be reduced to approximately 88% of outstandingshares of our common stock.

**Future sales and issuances of our common stock orrights to purchase common stock in addition to those in our proposed financing,including pursuant to our equity incentive plans, could result in additionaldilution of the percentage ownership of our stockholders and could cause our stockprice to fall.**

We may sell common stockin one or more transactions at prices and in a manner we determine from time totime whether or not our proposed financing closes. If we sell common stock inmore than one transaction, stockholders who purchase stock may be materiallydiluted by subsequent sales. Such sales may also result in material dilution toour existing stockholders. Sales of a substantial number of shares of ourcommon stock in the public market, or the perception that these sales might occur,could depress the market price of our common stock and could impair our abilityto raise capital through the sale of additional equity securities.

**If we fail to continue to meet all applicable NasdaqCapital Market requirements and Nasdaq determines to delist our common stock,the delisting could adversely affect the market liquidity of our common stockand the**market priceof our common stock could decrease.

Our common stock is listed on the Nasdaq CapitalMarket. In order to maintain that listing, we must satisfy minimum financialand other requirements. On February 25, 2005, we received notice from theNasdaq Stock Market, Inc. that the minimum bid price of our common stockhad fallen below $1.00 per share for 30 consecutive business days and that ourcommon stock was, therefore, subject to delisting from the Nasdaq CapitalMarket. At August 24, 2005, since we did meet the Nasdaq Capital Marketinitial listing criteria (other than the minimum bid price requirement), wereceived a second and final grace period from Nasdaq ending February 21,2006. We implemented a one-for-ten reverse split of our common stock effectivefor trading on February 6, 2006, complied with the minimum bid pricerequirement for a minimum of 10 consecutive business days prior to February 21,2006, and as of February 21, 2006, the last sale price of our common stockon the Nasdaq Capital Market was $3.11 per share.

Notwithstanding that the trading price of our commonstock currently exceeds the minimum bid price required to maintain compliancewith the Nasdaq Capital Market listing requirements, it is possible that theminimum bid price of our common stock could fall below the required level orthat we would otherwise fail to satisfy another Nasdaq requirement for continuedlisting of our common stock. For example, we could fail to maintain compliancewith the Nasdaq Capital Market listing requirements if we did not maintainminimum stockholder equity of at least $2.5 million as a result of continuinglosses, whether or not our proposed financing closes.

If we fail to continue tomeet all applicable Nasdaq Capital Market requirements in the future and Nasdaqdetermines to delist our common stock, the delisting could adversely affect themarket liquidity of our common stock and the market price of our common stockcould decrease. Such delisting could also adversely affect our ability toobtain financing for the continuation of our operations and could result in theloss of confidence by investors, suppliers and employees.

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

We do not currently haveany products that have received regulatory approval for commercial sale, and weface the risk that none of our product candidates will ever receive regulatoryapproval. All of our product candidates are in early stages of development. Ourexisting product candidates will require extensive additional clinicalevaluation, regulatory review, marketing efforts and significant investment 

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beforethey result in any revenues. We currently do not have the funds to bring any ofour product candidates through to commercial approval. Therefore, advancing thedevelopment of our product candidates will require substantial additionalinvestment. 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. We continuously reassess all of our research anddevelopment efforts, including those for the therapeutic products described inthe “Business” section of this report. As new information about eachtechnology becomes available, it may change perceptions of previously accepteddata, which could require additional periods of time to review and interpretthese data. As a result, we may find deficiencies in the design or applicationstages while developing our clinical trial studies, or in the subsequentimplementation stages of such studies, which could cause us or the FDA todelay, suspend or terminate our trials at any time. Potential problems we mayencounter in the implementation stages of our studies include the chance thatwe may not be able to conduct clinical trials at preferred sites, obtainsufficient test subjects or begin or successfully complete clinical trials in atimely fashion, if at all. Furthermore, the FDA may suspend clinical trials atany time if it believes the subjects participating in trials are being exposedto unacceptable health risks or if it finds deficiencies in the clinical trialprocess or conduct of the investigation. At any time, we may expand, delay, terminate or dispose ofall or any portion of our research and development programs and therapeuticproducts or we may develop or acquire rights to new product candidates.

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

The clinical development of our product candidates hasmany risks of failure. Drugs must be proven safe and effective before they canbe approved for human use. The advancement of drug candidates into humanclinical trials is dependent on the positive outcome of pending preclinicalstudies, decisions by the FDA, institutional review boards, and otherregulatory factors. Patient recruitment for clinical trials can be difficult,and clinical trials may be delayed or prolonged due to inability to recruit asufficient number of patients. We may encounter significant delays or excessivecosts in our efforts to secure regulatory approvals. Our product candidatesrely on new and unproven technologies, and none of our proposed products ortechnologies have yet completed clinical tests designed to measure their safetyor effectiveness in humans. The data obtained from preclinical and clinicalactivities are susceptible to varying interpretations which could delay, limitor prevent regulatory approvals. Failure to comply with applicable FDA or otherregulatory requirements may result in criminal prosecution, civil penalties andother actions 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 failureto receive or maintain regulatory approval for, any of our products couldprevent us from ever generating meaningful revenues or achieving profitability.Given the uncertainty of drug development, it is impossible to say how long theclinical development of any of these compounds will 

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take. We cannot be sure that ourclinical testing for these programs will progress at the times estimated inthis document. 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.

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

The manufacture of ourdrug candidates is a complex process. Manufacturing these drugs for use inclinical trials, according to FDA guidelines, presents a number of significantrisks and challenges. The manufacture of TPI 287, in particular, is a verycomplex and difficult process. If we are unable to manufacture adequatesupplies of any of our compounds for our clinical trials, our timelines fordevelopment could be delayed significantly. If we are able to gain 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 are unable to manufacture ourproducts in a cost-effective manner, we are not likely to become profitable. Wehave not received a license from the FDA for any necessary manufacturingfacilities, and cannot apply for one until we submit a new potential productfor commercial approval. Even if we do receive a manufacturing license, we mayfail to maintain adequate compliance with the FDA’s regulations concerningcurrent good manufacturing practices, in which case the license, and ourauthorization to manufacture the product, would be revoked. Unless we build ourown manufacturing facilities, we will have to rely on third parties tomanufacture our products. Although we may be able find third-partymanufacturers with experience and the proper licensing requirements from theFDA, we may not be able to negotiate favorable terms regarding costs or along-term commitment to manufacture our products. Our dependence on thirdparties may reduce future profit margins and delay or limit our ability todevelop and commercialize our products on a timely and competitive basis.

**We rely on third-parties to perform certain servicesfor us and any interruption or 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. Ouroutsourcing of certain functions to independent, third parties poses thefollowing risks:

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

**·****     **acontractor may not commit sufficient resources to our projects;

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

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

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

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

**We may be requiredto rely on strategic partners for the development, marketing and manufacturingof future products and technologies that may delay or impair our ability togenerate significant revenue and**may otherwise adversely affect our profitability.

We may, in thefuture rely on strategic partners for the development, marketing andmanufacturing of future products and technologies because we lack the resourcesor capabilities to develop our product candidates. Our reliance on strategicpartners poses a number of risks, including the following:

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

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

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

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

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

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

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

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

**·****     **ourstrategic partners could turn their focus away from oncology;

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

**·****     **third-partymanufacturers may be unable to manufacture products in a cost-effective ortimely manner.

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

Our success in commercializing, producing andmarketing products and technologies in the future depends, in part, on ourability to obtain and maintain adequate protection of the intellectual property

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related to ourtechnologies and products, both in the U.S. and other countries, and to operatewithout infringing the proprietary rights of third parties. We will be able toprotect our proprietary rights from unauthorized use by third parties only tothe extent that our proprietary technologies are covered by valid andenforceable patents. The patent positions of biotechnology companies, includingour patent positions, are generally uncertain and involve complex legal andfactual questions.

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 the U.S. to determine priorityof invention. If our currently issued patents are invalidated or if the claimsof those patents are narrowed, our ability to prevent competitors frommarketing products that are currently protected by those patents could bereduced or eliminated. We could then face increased competition resulting inreduced market share, prices and profit.

In addition, the laws of some foreign countries do notprotect proprietary rights to the same extent as the laws of the U.S., and manycompanies have encountered significant problems in protecting and defendingtheir proprietary rights in foreign jurisdictions. For example, methods oftreating humans are not patentable in many countries outside 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 success also depends in part on ourability to avoid infringing patents and proprietary rights of third parties andnot breaching any licenses that we have entered into with regard to any futureproducts. There are many pharmaceutical and chemical patents and applicationsbeing filed, published, and issued frequently throughout the world. Some ofthese patents and applications contain disclosures and claims that are similarto technologies and products that we are using and developing. Some of thesepatents and disclosures contain claims and disclosures that are difficult tointerpret. It is possible that a third party may own or control issued patents,or patent applications or in the future may file, patent applications coveringtechnologies or products we are developing.

If our technology,products or activities are deemed to infringe the other companies’ rights, wecould be subject to damages or be prevented from using the technology orselling the product that is infringing other companies’ rights, or we could berequired to obtain licenses to use that technology or sell the product. Ifpatents covering technologies required by our operations are issued to others,we may have to rely on licenses from third parties, which may not be availableon commercially reasonable terms, if at all. Third parties may accuse us ofemploying their proprietary technology without authorization. In addition,third parties may obtain patents that relate to our technologies and claim thatour use of such technologies infringes their patents, even if we have receivedpatent protection for our technology. Such claims could 

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requireus to incur substantial costs and could have a material adverse effect on us,regardless of the merit of the claims, including the following:

·       thediversion of management and technical personnel in defending us against anysuch claims or enforcing our patents. In this regard, we may be required todefend a lawsuit or defend a proceeding in the United States Patent andTrademark Office, either of which could be expensive and time consuming;

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

·       beingprohibited from selling or licensing our products or product candidates unlessand until we obtain a license from the patent holder, who may refuse to grantus a license or who may only agree to do so on unfavorable terms. Even if weare granted a license, we may have to pay substantial royalties or grantcross-licenses to our patents;

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

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

·       assuming the proposedfinancing is consummated, incurring substantial cost in indemnifying theinvestors in the financing in the event that any intellectual propertyinfringement is deemed to be a breach of the purchase agreement for thefinancing.

**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 programs may require the use of multipleproducts or technologies proprietary to other parties. Third party suppliersmay not be able to furnish us with a supply of these products sufficient tosatisfy our requirements. We may not be able to obtain additional licenses wemay need in the future on terms acceptable to us. Our inability to obtain anyone or more of these licenses, on commercially reasonable terms, if at all, orto circumvent the need for any such license, could cause significant delays andcost increases and materially affect our ability to develop and commercializeour product candidates. In connection with our efforts to obtain rights tothese proprietary technologies, we may find it necessary to convey rights toour technology to others. Some of our products may require the use of multipleproprietary technologies. Consequently, we may be required to make cumulativeroyalty payments to several third parties. These cumulative royalties couldbecome commercially prohibitive. We may not be able to successfully negotiatethe amounts of these royalties on terms acceptable to us.

We may rely in part onthird party licenses for access to intellectual property relating to ouroncology programs. Such licenses may obligate us to exercise diligence inpursuing the development of product candidates, to make specified milestonepayments and/or to pay royalties. Our inability or failure to meet any suchdiligence requirements or make any required payments would likely result in areversion to the licensor of the rights granted, which could materially and adverselyaffect our ability to develop and market products based on our licensedtechnologies.

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

Outside the U.S., ourability to market a product is contingent upon receiving a marketingauthorization from the appropriate regulatory authority. This foreignregulatory approval process includes many of the same steps and uncertaintiesassociated with FDA approval described above. We cannot be certain that we will obtain anyregulatory approvals for our product candidates and technologies in othercountries. In order to market our products outside of the U.S., we also mustcomply with numerous and varying foreign regulatory requirements implemented byforeign regulatory authorities governing the conduct of clinical trials,product licensing, pricing and reimbursement. The approval procedure variesamong countries and can involve additional testing. The time required to obtainapproval may differ from that required to obtain FDA approval and approval bythe FDA does not ensure approval by the health authorities of any other country.The process of obtaining foreign regulatory approvals can be lengthy andrequire the expenditure of substantial capital and other resources. We may notbe successful in obtaining the necessary approvals. Any delay or failure todemonstrate the safety and effectiveness of a pharmaceutical product candidateunder development and obtain foreign regulatory approval could have a materialadverse effect on our business.

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

If we develop andcommercialize our product candidates in the future, we expect competition fromfully integrated pharmaceutical companies and more established biotechnologycompanies as well as government, universities and public and private researchinstitutions. These companies and institutions conduct research, seek patentprotection and establish collaborative arrangements for product development andmarketing. Most of these companies and institutions have significantly greaterfinancial resources and expertise than we do in the following:

·       researchand development;

·       preclinicalstudies and clinical trials;

·       obtainingregulatory approvals;

·       manufacturing;and

·       marketingand distribution.

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

**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 research 

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anddevelopment efforts and impede our ability to develop and commercialize any ofour products. In addition, we rely on other consultants and advisors to assistus in formulating our research and development strategy. Some have consultingor other advisory arrangements with other entities that may conflict or competewith their obligations to us.

**Ourstock compensation expense will negatively impact our earnings, and as wereport the fair value of employee stock options as an expense in conjunctionwith a new accounting standard, our reported financial performance will beadversely affected, which may cause our stock price to decline.**

In December 2004, theFinancial Accounting Standards Board issued SFAS 123(R), “Accounting forStock-Based Compensation”. SFAS 123(R) establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services. This statement focuses primarily on accounting fortransactions in which an entity obtains employee services in share-basedpayment transactions. SFAS 123(R) requires that the fair value of suchequity instruments be recognized as an expense in the historical financialstatements as services are performed. Prior to SFAS 123(R), only certainpro forma disclosures of fair value were required. The provisions of thisstatement will be effective for the first interim reporting period that beginsafter December 15, 2005. Accordingly, we will adopt SFAS 123(R) commencingwith the quarter ending March 29, 2006. If we had included the cost ofemployee stock option compensation in our financial statements, our net lossfor the fiscal years ended December 28, 2005 and December 29, 2004would have increased by $2,954,000 and $3,947,000, respectively, and our netincome for the fiscal year ended December 31, 2003 would have decreased by$3,957,000. Accordingly, the adoption of SFAS 123(R) is expected to have amaterial effect on our financial statements, which may cause our stock price todecline 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 the acquisition.

We may attempt to acquireproduct candidates, or other potentially beneficial technologies, throughin-licensing or the acquisition of businesses, services or products that webelieve are 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 clinical trials. We may issueequity or debt securities to fund future acquisitions which would dilute theownership 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. 

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Theselaws and regulations can impose substantial fines and criminal sanctions forviolations. Maintaining compliance with these laws and regulations with regardto our operations could require substantial additional resources. These costscould decrease our ability to 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 whether any of theseproposals will be adopted or the effect these proposals or managed care effortsmay have on our business. In addition, the current discussion of drugreciprocation into the U.S. could also affect our future business operations. Someproposals would permit the reimportation of approved drugs that were originallymanufactured in the U.S. from other countries where the drugs were sold at alower price. These and other initiatives could decrease the price we or anypotential marketing partners receive for our products, adversely affecting ourprofitability. The pendency or approval of such proposals could result in adecrease in our stock price or limit our ability to raise capital, enter intostrategic partnerships or obtain licenses.

**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 clinical trial patients, consumers or health care providers or bypharmaceutical companies or others selling our products. If we completeclinical testing for our product candidates and receive regulatory approval tomarket our products, we will include warnings on our products that identify theknown potential adverse effects and the patients who should not receive ourproduct. There can be no assurance that these warnings will be deemed adequate,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 future products. We cannotpredict all of the possible harms or side effects that may result and, as aresult, the amount of insurance coverage we currently hold, or that we mayobtain, may not be adequate to protect us from any liabilities. We may requireincreased liability coverage as our product candidates advance in clinicaltrials and later develop and commercialize these products. Further, insurancecoverage is increasingly expensive, and we do not know whether we will be ableto maintain insurance coverage at a reasonable cost or in sufficient amounts toprotect us against losses due to liability. A successful product liabilityclaim brought against us in excess of our insurance coverage or a productrecall could adversely affect our business, results of operations and financialcondition.

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

Our product candidates, ifdeveloped and commercialized, may not be considered cost-effective, andcoverage and adequate payments may not be available or may not be sufficient toallow us to sell these products on a competitive basis. In both the UnitedStates and elsewhere, sales of medical products and treatments are dependent,in part, on the availability of reimbursement from health maintenance 

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organizations,other private insurance plans, governmental programs such as Medicare, andother third-party payors. Third-party payers are increasingly challenging theprices 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 amended withoutthe vote of at least 80% of the voting power of all of our capital stockentitled to vote generally in the election of directors, voting together as asingle class. Our bylaws provide that stockholders wishing to nominate adirector at an annual meeting or at a special meeting called for the purpose ofelecting directors or to bring business before any meeting of stockholders mustcomply with strict advance written notice provisions. Our bylaws also providethat special meetings of stockholders may be called only by the chairman of ourBoard of Directors, or certain of our officers, or by resolution of ourdirectors.

These provisions of our certificate of incorporationand our bylaws could discourage potential acquisition proposals and could delayor prevent a change in control. These provisions are intended to enhance thelikelihood of continuity and stability in the composition of our Board ofDirectors and in the policies formulated by our Board of Directors. We alsointended these provisions to discourage certain types of transactions that mayinvolve an actual or threatened change of control. We designed these provisionsto reduce our vulnerability to unsolicited acquisition proposals and todiscourage certain tactics that may be used in proxy contests. Theseprovisions, however, could also have the effect of discouraging others frommaking tender offers for our shares. As a consequence, they also may inhibitfluctuations in the market price of our shares that could result from actual orrumored takeover attempts. Such provisions also may have the effect ofpreventing changes in our management. We are permitted to issue shares of ourpreferred stock without stockholder approval upon such terms as our Board ofDirectors determines. Therefore, the rights of the holders of our common stockare subject to, and may be adversely affected by, the rights of the holders ofour preferred stock that may be issued in the future. In addition, the issuanceof preferred stock could have a dilutive effect on the holdings of our currentstockholders.

In November 1996, weadopted a stockholder rights plan and distributed a dividend for each share ofcommon 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, and we intend to replace this planwith a similar rights plan in 2006. In certain events after the rights becomeexercisable they will entitle each holder, other than the acquirer, topurchase, at the rights’ then current exercise price, a number of shares ofcommon stock having market value of twice the right’s exercise price or anumber of the acquiring company’s common shares having a market value at thetime of twice the rights’ exercise price. The adoption of the rights plan makesit more difficult for a third party to acquire control of us without theapproval of our Board of Directors. We are also subject to provisions ofDelaware law that prohibit us from engaging in any business combination withany “interested stockholder,” meaning generally that a stockholder whobeneficially owns more than 15% of our stock cannot acquire us for a period ofthree years from the date this person became an interested stockholder, unlessvarious conditions are met, such as approval of the transaction by our Board ofDirectors.

**Item 1BUnresolved Staff Comments**

Not applicable.

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**Item 2Properties**

We lease 10,000 square feet of administrative space and6,000 square feet of space for research and development in Boulder, Colorado. Wealso lease 2,100 square feet of office space in New York City, New York foradministration. In addition, we own five acres of undeveloped land in Longmont,Colorado which is accounted for as other assets. Some of our oncology researchand development activities are conducted at a contract research laboratoryleased to us by ChromaDex, Inc., a supplier of phytochemical referencestandards. We sold our analytical and service group to Chromadex in April 2003in exchange for approximately 15% of ChromaDex’s then outstanding common stock.As part of this transaction, ChromaDex assumed the lease for our researchfacility in Boulder, Colorado, and we sublease a portion of this facility backfrom ChromaDex. We believe that these existing facilities are adequate to meetcurrent foreseeable requirements or that suitable additional or substitutespace will be available on commercially reasonable terms.

**Item 3Legal Proceedings**

The Company is currently in arbitration through theAmerican Arbitration Association with the licensor of certain patents andpatent applications relating to pharmaceutical formulations containing VitaminE TPGS. The arbitration was instituted in November, 2005 in Boulder, Colorado. TheCompany licensed these patent applications in 1998. The inventor/licensorclaims that the Company has failed in its obligation to develop the licensedtechnology and is demanding return of the patents. The Company denies thisclaim, and in addition alleges that the inventor/licensor committed fraud ininducing the Company to enter into the license agreement. The Company isseeking as yet unspecified damages against the inventor/licensor.

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

Notapplicable.

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**Part II**

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

**MarketInformation**

Our common stock is listed on theNasdaq Capital Market, where it trades under the symbol “TPPH.”  We implemented a one-for-ten reverse stocksplit of our common stock effective for trading on February 6, 2006. For aperiod of 20 trading days following the effective date of the reverse split,shares of our common stock will trade under the ticker symbol “TPPHD”. After 20trading days, trading will resume under the ticker “TPPH”. All share and pershare amounts for all periods presented have been restated to reflect thisreverse stock split. The following table sets forth, for the periods indicated,the high and low closing sale prices for our common stock for the fiscal yearsended December 28, 2005 and December 29, 2004:

| ** ** | ** ** | ** **      | ** ** | **High** | ** ** | **Low** | ** ** |
|------------|------------|-----------------|------------|----------|------------|---------|------------|
| 2005       |       | Fourth Quarter  |       | $        | 4.00       |    | $          | 2.60 |   |
|       |       | Third Quarter   |       | 5.50     |       | 3.50    |       |
|       |       | Second Quarter  |       | 6.60     |       | 4.50    |       |
|       |       | First Quarter   |       | 12.20    |       | 6.50    |       |
| 2004       |       | Fourth  Quarter |       | $        | 12.50      |    | $          | 8.90 |   |
|       |       | Third Quarter   |       | 17.40    |       | 8.00    |       |
|       |       | Second Quarter  |       | 28.60    |       | 15.40   |       |
|       |       | First Quarter   |       | 31.90    |       | 19.60   |       |

 

On February 21, 2006, the last sale price of ourcommon stock on the Nasdaq Capital Market was $3.11 per share.

**Stockholders**

As of February 21, 2006, we had 318 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 22, 2005, we issued 7,863 shares of commonstock to the University of Delaware, 950 shares of common stock to ThomasJefferson University and 1,187 shares of common stock to The Samuel RobertNoble Foundation, Inc., all in accordance with a 20-year technologylicense, that was terminated on December 22, 2005. On November 1,2005, we issued 4,730 shares of common stock to CEOcast, Inc. under theterms of a consulting agreement. The shares were issued in reliance upon theexemption provided by Section 4(2) of the Securities Act of 1933, asamended, and Regulation D thereunder. All share and per share amounts for allperiods have been restated to reflect the reverse stock split.

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**Item 6Selected Financial Data**

The selected financial datapresented below for each year in the five years ended December 28, 2005,are derived from our financial statements, which have been audited for 2005 and2004 by Grant Thornton LLP and for the other years by Ernst & YoungLLP, registered public accounting firms, and are qualified by reference to suchFinancial Statements and Notes thereto. The data presented below should be readin conjunction with our consolidated financial statements at December 28,2005 and December 29, 2004 and for each of the three years reported in theperiod ended December 28, 2005, and the related Notes thereto, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andother financial information included elsewhere in this report. The selectedconsolidated statement of operations data for the years ended December 31,2002 and 2001, and the consolidated balance sheet data as of December 31,2002 and 2001, were derived from audited consolidated financial statements notincluded in this Form 10-K. The historical results are notnecessarily indicative of the operating results to be expected in the future. Theresults of 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. All share and per share amounts for all periodspresented have been restated to reflect the one-for-ten reverse stock splitthat was effective February 6, 2006.

| ** **                                                    | ** ** | **Year Ended**                                                | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                    | ** ** | **(In thousands, except per share data)** | ** ** |
| Statement of Operations Data:                                 |       |                                                               |       |   |   |   |   |   |   |   |   |
| Operating expenses:                                           |       |                                                               |       |   |   |   |   |   |   |   |   |
| Research and development                                      |       | $                                                                  | 10,630     |   | $ | 13,504 |   | $ | 6,485 |   | $ | 6,067 |   | $ | 6,381 |   |
| General  and administrative                                   |       | 5,628                                                              |       | 7,794 |   | 8,616 |   | 8,446 |   | 7,178 |   |
| Operating loss                                                |       | 16,258                                                             |       | 21,298 |   | 15,101 |   | 14,513 |   | 13,559 |   |
| Other income (expense):                                       |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest  and other income                                    |       | 731                                                                |       | 694 |   | 110 |   | 267 |   | 793 |   |
| Interest  and other expense                                   |       | (557                                                               | )          | (947 | ) | (865 | ) | (723 | ) | (32 | ) |
| Impairment  charges                                           |       | (1,067                                                             | )          | — |   | — |   | — |   | — |   |
| Net loss from continuing operations before taxes              |       | (17,151                                                            | )          | (21,551 | ) | (15,856 | ) | (14,969 | ) | (12,798 | ) |
| Provision  for income tax                                     |       | (29                                                                | )          | (4 | ) | — |   | — |   | — |   |
| Net loss from continuing operations                           |       | (17,180                                                            | )          | (21,555 | ) | (15,856 | ) | (14,969 | ) | (12,798 | ) |
| Income  (loss) from discontinued  operations                  |       | (358                                                               | )          | (2,619 | ) | 53,984 |   | 6,304 |   | (12,970 | ) |
| Net income (loss)                                             |       | $                                                                  | (17,538    | ) | $ | (24,174 | ) | $ | 38,128 |   | $ | (8,665 | ) | $ | (25,768 | ) |
| Basic and  diluted net income (loss) per common share         |       | $                                                                  | (5.15      | ) | $ | (7.38 | ) | $ | 12.38 |   | $ | (2.93 | ) | $ | (9.34 | ) |
| Basic and diluted weighted average common shares  outstanding |       | 3,408                                                              |       | 3,274 |   | 3,080 |   | 2,960 |   | 2,758 |   |

 

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| ** **                                                    | ** ** | **Year Ended**     | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **2005**                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                    | ** ** | **(In thousands)** | ** ** |
| Balance Sheet Data:                                           |       |                    |       |   |   |   |   |   |   |   |   |
| Cash, cash equivalents, short-term and long-term  investments |       | $                       | 14,086     |   | $ | 35,722 |   | $ | 50,782 |   | $ | 6,762 |   | $ | 10,144 |   |
| Working capital                                               |       | 11,627                  |       | 23,473 |   | 47,053 |   | 33,595 |   | 13,582 |   |
| Total assets                                                  |       | 16,474                  |       | 39,293 |   | 57,766 |   | 45,328 |   | 37,061 |   |
| Long term debt, net of current maturities                     |       | 2,483                   |       | 3,245 |   | 41 |   | 19,861 |   | 19,846 |   |
| Deferred income, long term                                    |       | —                  |       | — |   | — |   | 5,887 |   | 6,508 |   |
| Convertible debt                                              |       | —                  |       | — |   | 5,702 |   | 5,151 |   | — |   |
| Accumulated deficit                                           |       | (107,262                | )          | (89,724 | ) | (65,550 | ) | (103,678 | ) | (95,013 | ) |
| Stockholders’ equity                                     |       | 10,886                  |       | 27,780 |   | 45,998 |   | 6,796 |   | 1,137 |   |
|                                                               |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

**General**

We are a pharmaceutical company focused on thedevelopment of proprietary therapies for the treatment of cancer. We believethat our compounds function by proprietary biological and/or chemicalmechanisms and, therefore, if successful in clinical trials, may add to theamelioration of their 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$17.2 million, $21.6 million and $15.9 million for the years ended December 28,2005, December 29, 2004 and December 31, 2003, respectively. Ouraccumulated deficit was $107.3 million as of December 28, 2005. 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.

**ProposedFinancing**

On February 2, 2006, we entered into a PurchaseAgreement (the “Purchase Agreement”) with certain investors that provides forthe sale of common stock and warrants to purchase common stock to the investorsfor gross proceeds to the Company of $25.5 million not including any proceedsfrom exercise of the warrant. Pursuant to the terms of the Purchase Agreement,we will issue to the investors, subject to the approval of our stockholders, (i) anaggregate of 12,750,000 shares of the Company’s common stock at a purchaseprice per share equal to $2.00, and (ii) warrants to purchase an aggregateof 12,750,000 shares of our common stock (subject to adjustment in accordancewith the terms thereof) at an exercise price of $2.40 per share (subject tocertain anti-dilution protections set forth therein) (the “Warrants”). Theissuance of the shares of our common stock and the Warrants and the other actionscontemplated by the Purchase Agreement are collectively referred to as the “Transaction.”

The Transaction is subject to stockholder approval andother customary closing conditions. We intend to hold a special meeting ofstockholders in order to approve the Transaction and certain related matters. Inconnection with that special meeting, we intend to mail a definitive proxystatement and proxy card to all stockholders of record, along with detailedvoting instructions. The Purchase Agreement provides that, following theclosing of the Transaction, one of the investors, Special Situations Fund III,L.P. (“SSF”) will 

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have the right todesignate two members for election to our Board of Directors, so long as SSFand/or one or more of its affiliates continues to beneficially own at least 25%of the number of shares of common stock and shares of common stock underlyingthe Warrants it acquired under the Purchase Agreement. Upon such designation,we would be obligated to use our commercially reasonable efforts to cause thedesignated directors to be elected to our Board of Directors.

Pursuant to the Purchase Agreement, we will berequired to use the net proceeds from the Transaction solely to fund thedevelopment of our TPI 287 compound in accordance with a budget for calendaryears 2006 and 2007 to be adopted by our Board of Directors prior to theclosing of the Transaction. Any amendment or variance with respect to suchaspect of the budget will require the prior written approval of a majority ofthe independent members of the Board of Directors.

Pursuant to the Purchase Agreement, from and after theclosing, each investor that owns at least 50% of the shares of common stock itacquired under the Purchase Agreement would have preemptive subscription rightsin respect of any future issuance of our equity securities, subject to certainexceptions. If we decided to issue any equity securities not subject to suchexceptions, then we would be required to provide notice to such investors andoffer to sell a pro rata amount of such securities to such investors, on thesame terms it proposes to sell such securities to other parties, based on eachinvestor’s pro rata ownership of our outstanding common stock acquired underthe Purchase Agreement or upon exercise of the Warrant held by such investor.

We will issue to the investors for no additionalconsideration, warrants to purchase an aggregate of 522,815 shares of commonstock (subject to adjustment as set forth therein) (the “Alternative Warrants”).The Alternative Warrants become exercisable only if one of the events specifiedin the following clauses (i) through (iv) (each a “Trigger Event”)occurs: (i) our stockholders fail to approve the Transaction, (ii) weterminate our obligations to effect the closing pursuant to the terms of thePurchase Agreement and we have received an alternative investment proposalprior to such time which has not been withdrawn, (iii) we enter into anagreement governing the consummation of an alternative investment with anyperson other than the investors prior to the termination of the PurchaseAgreement in accordance with the terms of the Purchase Agreement or (iv) webreach our obligations under the Purchase Agreement by the stockholder’smeeting not having occurred prior to May 2, 2006. In the event that aTrigger Event has not occurred prior to or in connection with the terminationof the Purchase Agreement (in whole or with respect to any particular investor)or the closing shall occur, then all outstanding Alternative Warrants held by allinvestors or, in the case of a termination with respect a particular investor,that investor, shall terminate and be of no further force and effect. TheAlternative Warrants in the aggregate will represent the right to acquireshares of common stock representing 15% of our issued and outstanding shares ofcommon stock determined as of February 2, 2006. The Alternative Warrantswill be immediately exercisable following the occurrence of a Trigger Event,have a per share exercise price equal to $0.01 (subject to adjustment as setforth in such warrants) and will remain exercisable for five years followingthe Closing.

The Warrants to be issued at the closing will beimmediately exercisable when issued, will have an exercise price per share of$2.40 and will remain exercisable for five years following the closing. One-halfof such Warrants will be exercisable on a cashless basis. We have agreed toenter into a Registration Rights Agreement with the investors at closing,pursuant to which we would be required to file with the Securities and ExchangeCommission a registration statement for the resale of the shares of commonstock and the shares of common stock underlying the Warrants within thirty daysfollowing the closing. We will enter into a substantially similar registrationrights agreement with the investors at the time of the issuance of theAlternative Warrants requiring us to file a registration statement for theresale of the shares of common stock issuable upon exercise of the AlternativeWarrants.

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In order to induce the investors to enter into thePurchase Agreement, certain of our officers and directors have entered into aLock-Up Agreement (the “Lock-Up Agreement”) pursuant to which they have agreed,among other things, to refrain from engaging in trading activity in our commonstock until the earliest to occur of (i) the first date followingtermination of the Purchase Agreement, (ii) 90 days after the effectivedate of a registration statement filed in accordance with the RegistrationRights Agreement or (iii) with respect to any such officer or director,the first date following termination of such individual’s employment by ordirectorship with us that is six months following the last opposite-waytransaction that occurred prior to such termination of employment ordirectorship.

The foregoing is a summaryof the terms of the Transaction. For additional details refer the the PurchaseAgreement, the form of the Registration Rights Agreement, the form of Warrantand Alternative Warrant and the Lock-Up Agreement. The Purchase Agreement, theform of Registration Rights Agreement, the form of Warrant and AlternativeWarrant and the Lock-Up Agreement are included as exhibits to the Company’speriodic reports filed with the SEC.

**Researchand Development**

Our current business is focused onresearch and development of proprietary therapies for the treatment ofcancer. In2005, 2004 and 2003, 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):

| ** **                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| Oncology                  |       | $        | 9,818      |     | $          | 12,474   |       | $ | 5,580 |   |
| Huntington’s Disease |       | 812      |       | 1,030    |       | 905      |       |
| Discontinued  operations  |       | 393      |       | 4,242    |       | 4,304    |       |
|                      |       | $        | 11,023     |     | $          | 17,746   |       | $ | 10,789 |   |

 

Research and development, which includes the cost of ourclinical programs, will continue to be the most significant expense of ourbusiness going forward. Our research and development activity is subject tochange as we develop a better understanding of our projects and their prospects.We filed an oncology IND application in December 2004 and were cleared bythe FDA in January 2005 to proceed into clinical trials. We commencedPhase I clinical trials in May 2005 with a Q7D dosing regimen. In January 2006,we commenced a second Phase I study with an alternative Q21D dosing regiment. Wecannot be sure that we will be able to achieve our goals relating to theseprograms. We also cannot estimate the cost of the effort necessary to completethe programs or the timing of commencement of material net cash inflows fromthese programs. Continued development of these programs is dependent uponraising additional capital. We cannot be certain that we will be able to obtaincapital on acceptable terms. We have included a number of the risks anduncertainties associated with completing our product development plans onschedule in the “Special Note Regarding Forward-Looking Statements” and “RiskFactors” described in this document.

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

*Research and Development Expense.**  *Research and developmentexpense from continuing operations for 2005 was $10.6 million compared to $13.5million in 2004. The $2.9 million decrease was primarily due to our preclinicaldevelopment activities which consisted of lower outside toxicology expense($1.2 million) and lower contract manufacturing expense ($1.8 million). Reductionsin compensation and consulting expense, which were mostly due to the reductionin operations in July 2005, were partially offset by the 

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payout of the employment agreement between the Company andSterling Ainsworth to his estate upon his death in August 2005.

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

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

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

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

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

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

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

*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($2.6 million), and higher compensation and fringe benefits expense ($1.1million), 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 servicesexpenses ($200,000).

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

*Interest Expense.**  *Interest expense for 2004and 2003 was $900,000.

*Discontinued Operations.**  *Loss from discontinuedoperations was $2.6 million in 2004 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 

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Mylan litigation related to the paclitaxel business. Netincome in 2003 was primarily due to the gain, net of tax, on the sale of thepaclitaxel 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 comparedwith $900,000 in 2003 and lower supplies expense ($700,000) in the genomicsoperations, partially offset by higher compensation and fringe benefits expense($1.0 million), higher occupancy costs ($300,000) and higher outsideservices expense ($200,000) incurred in 2004 in connection with the genomicsoperations.

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 fixed assets and from charges incurred in2003 with the shortened useful life of leasehold improvements at the vacated Boulder,Colorado facility, lower outside services expense ($300,000) and lowermarketing costs ($200,000).

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

**Liquidity andCapital Resources**

Our capitalrequirements for research and development, including the cost of our clinicaltrials, have been, and will continue to be, significant. As of December 28,2005, we had a working capital balance of $11.6 million compared to a workingcapital balance of $23.5 million at December 29, 2004. Through December 28,2005, we have funded our capital requirements primarily with the net proceedsof public offerings of common stock of approximately $21.1 million, withprivate placements of equity securities of approximately $67.5 million, withthe exercise of warrants and options of $8.0 million, net debt of $3.3 million,and with the sale of the paclitaxel business resulting in gross proceeds 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. Mayne Pharma assumedcertain liabilities associated with our paclitaxel business. Proceeds from thesale are being used to fund the development of Tapestry’s proprietary oncologyproducts and for general corporate purposes. In addition, approximately$21.9 million of the proceeds was paid to Abbott Laboratories to retireall outstanding debt and payables we owed to Abbott.

All share and per share amounts for all periodspresented have been restated to reflect the one-for-ten reverse stock split ofour common stock that was effective February 6, 2006.

In February 2002,we sold privately $8.0 million of common stock issued at $90 per share and $8.0 millionprincipal of five-year, 4% convertible subordinated debentures convertible intocommon stock at $150 per share to TL Ventures V, L.P. and one of its affiliatedfunds. The net proceeds were $15.6 million. In connection with the February 18,2005 settlement of litigation with TL Ventures over whether the debentures weresubject to redemption upon completion of the sale of our paclitaxel business toMayne Pharma, we paid approximately $3,184,000 in cash and issued promissorynotes in the amount of $4,670,000 in exchange for the delivery of thedebentures by TL Ventures to the Company for cancellation. The notes do notbear interest and are payable in monthly installments of $110,000 in 2006 and$150,000 in 2007 with a $1,000,000 payment due on January 31, 2008. Accruedinterest of approximately $134,000 was included in the cash payment made withthe settlement. We recorded the obligation resulting from the settlement on ourbalance sheet as of December 29, 2004. We imputed an interest rate of18.0% on the notes. No gain or loss was recognized in connection with thesettlement.

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On March 26, 2004, the Company sold 200,000shares of common stock at $26.00 per share to two investors. Advisory fees andlegal fees were paid in connection with the transaction. The net proceeds fromthe transaction were $4.9 million.

In December of2005, we terminated our technology license agreement with the University ofDelaware and Thomas Jefferson University relating to the use of proprietaryoligonucleotides (DNA fragments) designed to precisely alter genes in humans,animals, plants, viruses and microbes. The license provided for research andpatent funding commitments and payments in common stock. As of December 28,2005, we had issued 45,750 shares of common stock under the license to theUniversity of Delaware, 7,125 shares to Thomas Jefferson University and 7,125shares to The Samuel Roberts Noble Foundation, Inc., each of which had anownership interest in the licensed intellectual property.

As discussed above under “Proposed Financing” on February 2,2006, we entered into a purchase agreement with a number of investors thatprovides for the sale of common stock and warrants to purchase common stock forgross proceeds to us of $25.5 million not including any proceeds from exerciseof the warrant. The proposed financing is subject to stockholder approval andother customary closing conditions. In the event that the proposed financingdoes not close, and without implementing further cost reductions, raisingadditional capital from other sources or obtaining substantial cash inflowsfrom potential partners for our product candidates, we anticipate that ourexisting capital resources will enable us to continue operations through theend of the fourth quarter of 2006. Should we be unable to raise the neededcapital, we may be required to discontinue, shutdown or cease operations. Accordingly,the audit report prepared by our independent registered public accounting firmrelating to our consolidated financial statements for the year ended December 28,2005 includes an explanatory paragraph expressing the substantial doubt aboutour ability to continue as a going concern.

Our common stock is listed on the Nasdaq CapitalMarket. In order to maintain that listing, we must satisfy minimum financialand other requirements. On February 25, 2005, we received notice from theNasdaq Stock Market, Inc. that the minimum bid price of our common stockhad fallen below $1.00 per share for 30 consecutive business days and that ourcommon stock was, therefore, subject to delisting from the Nasdaq CapitalMarket. At August 24, 2005, since we did meet the Nasdaq Capital Marketinitial listing criteria (other than the minimum bid price requirement), wereceived a second and final grace period from Nasdaq ending February 21,2006. We implemented a one-for-ten reverse split of our common stock effectivefor trading on February 6, 2006, complied with the minimum bid pricerequirement for a minimum of 10 consecutive business days prior to February 21,2006, and as of February 21, 2006, the last sale price of our common stockon the Nasdaq Capital Market was $ 3.11 per share.

Notwithstanding that the trading price of our commonstock currently exceeds the minimum bid price required to maintain compliancewith the Nasdaq Capital Market listing requirements, it is possible that theminimum bid price of our common stock would fall below the required level orthat we could otherwise fail to satisfy another Nasdaq requirement forcontinued listing of our common stock. For example, we could fail to maintaincompliance with the Nasdaq Capital Market listing requirements if we did notmaintain minimum stockholder equity of at least $2.5 million as a result ofcontinuing losses, whether or not our proposed financing closes.

If we fail to continue to meet all applicable NasdaqCapital Market requirements in the future and Nasdaq determines to delist ourcommon stock, the delisting could adversely affect the market liquidity of ourcommon stock and the market price of our common stock could decrease. Suchdelisting could also adversely affect our ability to obtain financing for thecontinuation of our operations and/or result in the loss of confidence byinvestors, suppliers and employees.

Pharmaceuticaldevelopment is a costly, risky and time intensive activity. To bring ourvarious programs to completion will require us to raise additional capital inthe near future. 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 

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addition, we may seek to in-license or purchase newproducts or technologies. The cost and related capital expenditures ofacquiring and developing such resources may be significant, and we may not beable to obtain capital for the development of these products or technologies. See“Risk Factors” under Item 1A above.

*Working Capital and Cash Flow.*   Cash and cashequivalents were $534,000 at December 28, 2005 and $1.7 million at December 29,2004. Cash, cash equivalents, and short-term and long-term investmentsdecreased $21.6 million to $14.1 million for the year ended December 28,2005 from $35.7 million at December 29, 2004. This was primarily due to$17.8 million of net cash used in operating activities. Net cash provided byinvesting activities was $20.2 million for the year ended December 28,2005 primarily due to the sale of investments. Net cash used by financingoperations during the fiscal 2005 year was $3.6 million due to the payment ofnotes payable in conjunction with the restructuring of TL Ventures debt. Withthe sale of the paclitaxel business in December 2003, we no longergenerate 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” in thisItem 7.

*Capital Expenditures.*   We spent $240,000during 2005 for capital projects.

We expectcapital expenditures to decrease during 2006. The primary focus of capitalspending during 2006 is expected to be in support of our research anddevelopment activities. We may seek additional financing to fund our capitalexpenditures. We cannot assure you that we will be able to obtain suchfinancing on terms that are acceptable to us.

*Net Operating Loss Carryforwards.*   As of December 28,2005, we had approximately $100.8 million of net operating loss carryforwardsto offset future taxable income. Tax law provides limits on the utilization ofnet operating loss carryforwards if there has been a “change of ownership” asdescribed in Section 382 of the Internal Revenue Code. Such a change ofownership may limit our utilization of our net operating loss carryforwards andwould be triggered by our proposed financing described under Proposed Financingabove. A change of ownership could be triggered by other sales of securities byus or our stockholders. We have performed an analysis of our netoperating losses through December 31, 2003, and concluded there was nolimitation on the use of our net operating losses or research and developmentcredits due to the potential limitations under Section 382 through thatperiod. Also, we do not believe that there were any events that occurred in thefiscal years ended December 28, 2005 and December 29, 2004 thatresulted in limitations on the use of our net operating losses or research anddevelopment credits due to potential limitations 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 the event we enterinto any such relationships or transactions, we may consider using availablecash, issuing equity securities or increasing our debt. Such transactions couldmaterially affect 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 arediscussed throughout this Item 7 where such policies affect our reported and 

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expected financial results. For a detailed discussion onthe application of these and other accounting policies, see Note 1 in the Notesto our Consolidated Financial Statements.

*Use of Estimates Policy:*   The preparation offinancial statements in conformity with accounting principles generallyaccepted in the U.S. requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results may differ from those estimates.

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

In thesecond quarter of 2005, we recognized an impairment on the value of land of$104,000 and in the third quarter recognized an impairment of $963,000 on thevalue of our investment in ChromaDex. In 2004, we recognized an impairment lossof $205,000 associated with the gene isolation and service business due to ourdecision to discontinue our efforts in that business and our inability to finda buyer for the assets. Also in 2004, as part of our preparation of thefinancial statements, we recognized an impairment loss of $1.2 million inconnection with the closure of our Genomics division. These 2004 impairmentsare included in discontinued operations. Such impairment losses were the onlyimpairment charges of long-lived assets recorded in the fiscal years ended December 28,2005, December 29, 2004 and December 31, 2003.

*Stock Based Compensation:*   As permittedunder Statement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”), the Company accounts for itsstock-based compensation to employees and directors using the intrinsic valuemethod in accordance 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. If we were to include the cost of employee stock optioncompensation in the financial statements, our net loss for the fiscal yearsended December 28, 2005 and December 29, 2004 would have increased by$3.0 and $3.9 million, respectively, and our net income for the fiscal yearended December 31, 2003 would have decreased by $4.0 million based on thefair value of the stock options granted to employees. See “Impact of RecentAccounting Pronouncement” below.

**FutureContractual Obligations**

The table below summarizes ourfuture contractual obligations at December 28, 2005 (in thousands):

| ** **       | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **After 5 years** | ** ** |
|------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| Notes payable    |       | $         | 4,131      |                            |       | $                  | 1,331      |               |       |                        | $          | 2,800 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating leases |       | 456       |       |                            | 303        |               |       |               | 153        |                        |       |   | — |   |   |   | — |   |   |
| Total            |       | $         | 4,587      |                            |       | $                  | 1,634      |               |       |                        | $          | 2,953 |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

**Impactof Recent Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) reissued Statement of Financial Accounting Standard (“SFAS”)No. 123, *Accounting for Stock-Based Compensation*as SFAS No. 123(R), *Share Based Compensation*.This statement replaces SFAS No. 123, amends SFAS No. 95, *Statement of Cash Flows*, and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*. SFAS No. 123(R) requirescompanies to apply a fair-value based 

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measurement method inaccounting for share-based payment transactions with employees and to recordcompensation expense for all share-based awards granted, and to awardsmodified, repurchased or cancelled after the required effective date. Compensationexpense for outstanding awards for which the requisite service had not been renderedas of the effective date will be recognized over the remaining service periodusing the compensation cost calculated for pro forma disclosure purposes underSFAS No. 123, adjusted for expected forfeitures. Additionally, SFAS No. 123(R) willrequire entities to record compensation expense for employee stock purchaseplans that may not have previously been considered compensatory under theexisting rules. SFAS No. 123(R) will be effective for the firstinterim or annual period beginning after December 15, 2005, which is theCompany’s fiscal year beginning December 29, 2005. The Company will beadopting the provisions of SFAS No. 123(R) using a modifiedprospective application. If we had included the cost of employee stock optioncompensation in our financial statements, our net loss for the fiscal yearsended December 28, 2005 and December 29, 2004 would have increased by$2,954,000 and $3,947,000, respectively, and our net income would havedecreased by $3,957,000 for the fiscal year ended December 31, 2003. Accordingly,the adoption of SFAS 123(R) is expected to have a material effect on ourfinancial statements.

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

**Special Note 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 in this document could cause such differences. We undertake noobligation to update any of the forward-looking statements after the date ofthis Form 10-K to conform such statements to actual results, exceptto the extent required by law.

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**Item 7AQuantitative and Qualitative Disclosures 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 8Financial Statements and Supplementary Data**

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

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

Not applicable.

**Item 9AControls 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 forestablishing and maintaining adequate internal control over financialreporting, as such term is defined in Exchange Act Rules 13a-15(f). Underthe supervision and with the participation of our management, including ourPrincipal Executive Officer and Principal Financial Officer, we conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission. Based on our evaluation under the framework in *Internal Control—Integrated Framework,*our managementconcluded that our internal control over financial reporting was effective asof December 28, 2005.

Our management’s assessment of theeffectiveness of our internal control over financial reporting as of December 28,2005 has been audited by Grant Thornton LLP, an independent registered publicaccounting firm, as stated in their report which appears on page F-3of this Report.

There have been no changes to ourinternal controls over financial reporting during the fourth fiscal quarterended December 28, 2005 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

**Item 9BOther Information**

Not applicable.

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**Part III**

**Item 10Directors and Executive Officers of the Registrant**

**Directors**

At December 28, 2004, our Board of Directors consisted of eightmembers: Stephen K. Carter, M.D.; George M. Gould, Esq.; Arthur H. Hayes, Jr.,M.D.; Elliot M. Maza; The Honorable Richard N. Perle; Patricia A. Pilia, Ph.D.;Robert E. Pollack, Ph.D.; and Leonard P. Shaykin (Chairman). Our directors aredivided into three classes. Mr. Shaykin and Drs. Hayes and Pollackare Class I directors with terms of office expiring at the 2006 AnnualMeeting of Stockholders. Dr. Pilia and Mr. Perle are Class IIdirectors with terms of office expiring at the 2007 Annual Meeting ofStockholders. Messrs. Gould and Maza and Dr. Carter are Class IIIdirectors with terms of office expiring at the 2008 Annual Meeting ofStockholders.

Our Board of Directors has determined that Stephen K. Carter, M.D., GeorgeM. Gould, Esq., Arthur H. Hayes, Jr., M.D., Elliot M. Maza, TheHonorable Richard N. Perle and Robert E. Pollack, Ph.D., are “independentdirectors,” as defined by the Nasdaq Stock Market’s listing standards.

Stephen K. Carter, M.D., 67,has served as a director since March 2004. Dr. Carter has been aconsultant to the pharmaceutical industry since 1997. From 1996 to 1999, Dr. Carterserved as a consultant to SUGEN Inc., a biopharmaceutical company focused onthe discovery and development of small molecule drugs which target specificcellular signal transduction pathways, and from 1999 to 2000 was SUGEN’s SeniorVice President of Clinical and Regulatory Affairs. From 1995 to 1996, he wasSenior Vice President, Research and Development at Boehringer IngelheimPharmaceuticals, Inc. From 1990 to 1995 Dr. Carter served as SeniorVice President, Worldwide Clinical Research and Development at Bristol-MyersSquibb Co. Dr. Carter is a former Deputy Director at the NationalCancer Institute’s Division of Cancer Treatment and is a member of the AmericanSociety of Clinical Oncology. Dr. Carter received his A.B. degree in American historyfrom Columbia College and his M.D. degree from New York Medical College.Dr. Carter currently serves on the Board of Directors of CytogenCorporation, Emisphere Technologies, Inc., Celator Technologies, VionPharmaceuticals; and Alfacell Corporation.

George M. Gould, Esq., 67, has served as a director since 2003. He hasserved as Of Counsel to the law firm Gibbons, Del Deo, Dolan, Griffinger &Vecchione since 1996. Mr. Gould is a director of Angiogenex, Inc., aswell as Supratek Pharma. 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, and received a J.D. from Columbia University School of Law and anL.L.M. from New York University School of Law.

Arthur H. Hayes, Jr., M.D.,71, has served as a director since 1996. He is currentlyPresident and Chief Operating Officer of MediScience Associates, apharmaceutical consulting company, where he has served since 1991, and is aProfessor of Medicine at New York Medical College and Pennsylvania StateUniversity College of Medicine. From 1981 to 1983, Dr. Hayes served asCommissioner of the United States Food and Drug Administration. From 1986 to1991, 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 

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Genetics, Inc. and Celgene Corporation. Dr. Hayesreceived his M.D. from Cornell University Medical College, and also attendedCornell’s Graduate School of Medical Sciences,Department of Pharmacology. He undertook premedical studies, and attendedmedical school at Georgetown University. Dr. Hayes received his M.S.(philosophy, politics and economics) from Oxford University, where he was aRhodes Scholar, and his B.A. (philosophy) from Santa Clara University.

Elliot M. Maza, 50, has served as a director since December 2004.Since December 2003, Mr. Maza has served as Chief Financial Officerof Emisphere Technologies, where he is responsible for the financialaccounting, legal and investor relations functions of that drug deliverycompany. Between 1999 and 2003, Mr. Maza was a partner at Ernst &Young LLP. Prior thereto he was employed by Goldman Sachs & Co., J.P.Morgan Securities and the law firm of Sullivan & Cromwell. Mr. Mazaholds a J.D. degree from the University of Pennsylvania and is a CertifiedPublic Accountant.

TheHonorable Richard N. Perle, 63, has served as a director since 2000. He hasserved as a fellow at the American Enterprise Institute since 1987. Mr. Perleis a director of Autonomy, plc. From 1981 to 1987, Mr. Perle was theUnited States Assistant Secretary of Defense for International Security Policyat the United States Department of Defense. Mr. Perle attended the LondonSchool of Economics with Honors Examinations,received a B.A. in international relations from the University of SouthernCalifornia, an M.A. in politics from Princeton University, and completedvarious fellowships at Princeton University, the Ford Foundation and theAmerican Council of Learned Societies.

Patricia A. Pilia, Ph.D., 57, is a co-founder ofTapestry Pharmaceuticals, Inc. and one of its predecessor companies,Pacific Biotechnology, Inc. She has served as an employee and directorsince the Company’s inception in 1991. Also since 1991, she has served asSecretary and was appointed to the Research Committee of the Board of Directorsin 2002. In addition, Dr. Pilia has served as an Officer of several of ourinternational corporate affiliates, including our Cayman Islands, UnitedKingdom, and Canadian subsidiaries. Additionally, Dr. Pilia has served asVice President of BioResearch and Toxicology, the head of Human Resources,Operations, including Manufacturing, Regulatory Affairs, Quality Assurance,Quality Control, Environmental Health and Clinical Affairs and has served asacting 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 ofPathology in the Colleges of Medicine, Dental Medicine and Graduate Studies atthe Medical 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 andclinical programs in the U.S., China and Mexico and consulted in the design anddevelopment of biomedical devices and various treatment modalities. She hasalso been an active clinical and preclinical researcher in the fields ofpathogenesis of disease, oncology, autoimmune disease and diagnosticdevelopment. Dr. Pilia holds a Bachelor’s degree from Boston Universityand a Master’s Degree in immunology/microbiology and a Doctoral Degree inpathology from the Medical University of South Carolina.

Robert E. Pollack, Ph.D., 64, has served as adirector since 2000. He is currently Professor of Biological Sciences, AdjunctProfessor of Environmental, Ecological and Evolutionary Biology, Lecturer inPsychiatry at the Center for Psychoanalytic Training and Research, and Directorof the Center for the Study of Science and Religion at Columbia University; andAdjunct Professor of Science and Religion at Union Theological Seminary. He hasbeen a Professor of Biological Sciences at Columbia since 1978, and was Dean ofColumbia College from 1982 to 1989. Hereceived the Alexander Hamilton Medal from Columbia University, and has held aGuggenheim Fellowship. He currently serves on the Advisory Board of the JohnTempleton Foundation, and as a Senior Consultant for the Director, Program ofDialogue on Science, Ethics and Religion, American Association for theAdvancement of Science. He is also currently a director of Nutrition 21, Inc.,a publicly traded company focusing onthe development and marketing of 

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proprietary nutritional products.Dr. Pollack graduated from Columbia University with a B.A. in physics, andreceived a Ph.D. in biology from Brandeis University.

Leonard P. Shaykin, 62, 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 medical centerin the Middle East; a trustee of The Jackson Laboratory, a not-for-profitgenetic research institute; a member of the board of Trireme Systems, Ltd., aprivate company that provides integrated tracking and surveillance technologysolutions for the commercial and security needs of businesses and governmentagencies; and a member of the Board of the American Friends of the Universityof Sussex, Brighton, UK. Mr. Shaykin received a B.A. and an M.A. from theUniversity of Chicago and an M.B.A. from the University of Chicago GraduateSchool of Business.

**Other Executive Officers**

As of January 23, 2005, we have the followingexecutive officers in addition to those who serve as directors:

Martin Batt, 63, has served as our Senior VicePresident, Chief Operating Officer since April 2005. Mr. Batt hasalso been Vice President, Chief Operating Officer since July 2004 andChief Information Officer since 2002. Prior to joining us, from 1986 to 2002,he was a Partner in the consulting firm of Grisanti, Galef & Goldresswhich specializes in operating and fixing distressed companies by providingleadership in senior executive positions. Mr. Batt has assumed variouspositions including CEO, President and Vice President in many industriesincluding retailing, aerospace, communications, computer software, steel,computer hardware, carpet, apparel, and automotive parts manufacturing. Priorto that, Mr. Batt served in various Information Technology positions at U.S. Steel Corporation. Mr. Batt received a B.S. in Computer Sciences, CumLaude, from Point Park College, Pittsburgh and has also taught Computer Scienceand Information Technology.

Kai P. Larson, 41, has served as our Vice Presidentand General Counsel since 1999, and previously held the position of Director ofLegal Affairs from 1994 to 1999. Prior to joining us, he worked as an attorneyin the New York office of Kirkland & Ellis. Mr. Larson received aB.A. from Brigham Young University, and a J.D. from Columbia University Schoolof Law.

Gordon Link, Jr., 52, a certified publicaccountant (inactive) and a certified management accountant, has served as ourSenior Vice President and Chief Financial Officer since 2002, and previouslyheld the position of Vice President and Chief Financial Officer from 1993 to2002. Prior to that, Mr. Link served concurrently as Corporate Controllerof Synergen, Inc. and Treasurer of the Syntex-Synergen NeuroscienceJoint Venture. From 1991 to 1993, Mr. Link was Treasurer of SynergenDevelopment Corporation. From 1983 to 1990, Mr. Link practiced as acertified public accountant, including the position of Audit Manager withDeloitte & Touche. He attended the graduate school of the Universityof Denver and received undergraduate degrees in chemistry from RensselaerPolytechnic Institute in 1976 and in accounting from Metropolitan State Collegein 1983.

Bruce W. Fiedler, 41, isVice President, Corporate Controller and has been with Tapestry since December 2003.Mr. Fiedler has over 19 years of accounting and finance experienceincluding senior financial leadership roles with Arrow Electronics, Inc.,where he served as Vice President of Finance for the North American ComputerProducts Group from 2001 through 2003 and as Assistant Corporate 

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Controllerfrom 2000 through 2001. Prior to Arrow Electronics, Mr. Fiedler worked atCorporate Express, Inc. from 1996 through 2000, where he ultimately servedas Vice President of Corporate Systems and Shared Services. Mr. Fiedlerbegan his career with Baxter International, Inc. where he held variousaccounting and finance roles over 8 years including Site Controller forthe MicroScan division, a global manufacturer and marketer of diagnosticsystems for the Microbiology industry. Mr. Fiedler has a Bachelor’s degreein finance from Indiana University, Bloomington, IN and an M.B.A. in financefrom DePaul University in Chicago, IL. Mr. Fiedler has resigned hisemployment by Tapestry to be effective immediately following the filing of thisReport.

**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 subsequent changesin that ownership with the Securities and Exchange Commission. Such persons arealso required to furnish us copies of forms so filed. Based solely upona review of copies of such forms furnished to us, Elliot Maza was late infiling a Form 4. No other directors or officers were late in filing anyreports on Forms 3, 4 or 5.

**AuditCommittee**

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 Elliot Maza (chair), George Gould, Esq., and The HonorableRichard N. Perle.

**AuditCommittee Financial Expert**

The Board of Directors of Tapestry has determined that theAudit Committee’s chairman, Elliot Maza, is an “audit committee financialexpert” as defined by applicable SEC rules, and is independent within themeaning of applicable SEC rules and applicable Nasdaq Stock Market listingstandards.

**Code ofEthics**

Tapestryhas adopted a code of business conduct and ethics for senior executives(including Tapestry’s Principal Executive Officer, Principal Financial Officerand Controller), known as the Code of Ethics and Business Conduct. The Code ofEthics and Business Conduct is available on Tapestry’s website at *www.tapestrypharma.com*. We intend to disclose any amendmentsto our Code of Ethics and Business Conduct, and any waiver from a provision ofthe Code granted to our Principal Executive Officer, Principal FinancialOfficer or Principal Accounting Officer, on our internet website within fivebusiness days following such amendment or waiver and in any required filingswith the SEC. The information contained on or connected to our internet websiteis not incorporated by reference into this Form 10-K and should notbe considered part of this or any other report that we file with or furnish tothe SEC.

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**Item 11**Executive Compensation

**SummaryCompensation Table**

The followingtable shows for the years ended December 28, 2005, December 29, 2004,and December 31, 2003, compensation awarded or paid to, or earned by ourChief Executive Officer, and our four other most highly compensated executiveofficers at December 28, 2005 (the “Named Executive Officers”):

|                                                | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **     | ** ** | **Securities**     | ** ** | ** **     | ** ** |
|------------------------------------------------|------------|------------|------------|------------------------------|------------|----------------|------------|--------------------|------------|----------------|------------|
| ** **                                     | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Underlying** | ** ** | **All Other** | ** ** |
| **Name and Principal Position** | ** ** | ** ** | ** ** | **Year**                     | ** ** | **Salary**     | ** ** | **Bonus**          | ** ** | **Options(#)** | ** ** | **Compensation(1)** | ** ** |
| Leonard  P. Shaykin                            |       | 2005       |       | $                            | 370,350    |           | $          | 100,000            |       |           | —     |   |   |   | $ | 31,939 |   |   |
| Chairman  of the Board, Chief Executive        |       | 2004       |       | 354,231                      |       | 140,000        |       |               | —     |           |       |   | 35,841 |   |   |
| Officer                                        |       | 2003       |       | 270,000                      |       | 417,000        |       |               | 25,000     |           |       |   | 20,981 |   |   |
| Martin M. Batt                                 |       | 2005       |       | 270,000                      |       | 20,000         |       |               | —     |           |       |   | 31,939 |   |   |
| Senior Vice President, Chief Operating         |       | 2004       |       | 225,981                      |       | 120,000        |       |               | 8,000      |           |       |   | 35,841 |   |   |
| Officer                                        |       | 2003       |       | 190,000                      |       | 225,000        |       |               | 6,000      |           |       |   | 16,099 |   |   |
| Patricia  A. Pilia(2)                          |       | 2005       |       | 235,000                      |       | —         |       |               | —     |           |       |   | 31,939 |   |   |
| Executive  Vice President, Secretary           |       | 2004       |       | 238,835                      |       | 60,000         |       |               | 6,000      |           |       |   | 35,841 |   |   |
|                                                |       | 2003       |       | 214,412                      |       | 150,000        |       |               | 11,000     |           |       |   | 20,981 |   |   |
| Gordon Link(3)                                 |       | 2005       |       | 240,000                      |       | 16,667         |       |               | —     |           |       |   | 31,939 |   |   |
| Senior Vice President, Chief Financial         |       | 2004       |       | 239,835                      |       | 100,000        |       |               | 8,000      |           |       |   | 35,841 |   |   |
| Officer                                        |       | 2003       |       | 247,154                      |       | 250,000        |       |               | 11,000     |           |       |   | 20,981 |   |   |
| Kai P.  Larson                                 |       | 2005       |       | 220,400                      |       | 11,667         |       |               | —     |           |       |   | 31,939 |   |   |
| Vice  President, General Counsel               |       | 2004       |       | 213,612                      |       | 75,000         |       |               | 6,000      |           |       |   | 35,841 |   |   |
|                                                |       | 2003       |       | 180,000                      |       | 250,000        |       |               | 11,000     |           |       |   | 18,883 |   |   |
|                                                |            |            |            |                              |            |                |            |                    |            |                |            |  |  |  |  |  |  |  |  |  |

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

(2)          In 2003, annual compensation for Dr. Piliaincluded $4,412 of accrued vacation paid in cash in connection with a change inthe Company’s vacation policy.

(3)          In 2003, annual compensation for Mr. Linkincluded $37,154 of accrued vacation paid in cash in connection with a changein the Company’s vacation policy.

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.

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**Option Grants in Last Fiscal Year**

Therehave been no grants of options to purchase common stock to the Named ExecutiveOfficers for the year ended December 28, 2005 as the following tableillustrates:

| ** **          | ** ** | **Number of  Securities  Underlying  Options  Granted** | ** ** | **% of Total  Options  Granted to  Employees in** | ** ** | **Exercise or  Base Price Per  Share** | ** ** | **Expiration** | ** ** | **Potential Realizable  Value at Assumed  Annual Rates of  Stock Price   Appreciation for  Option Terms ($)** | ** ** |
|---------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | ** **                                                   | ** ** | **(#)**                                                               | ** ** | **Year**                                              | ** ** | **($/sh)**     | ** ** | **Date**                                                                                                                                                        | ** ** | **    5%    ** | ** ** | **    10%    ** | ** ** |
| Leonard P.  Shaykin |       |                                                         | —     |                                                                  |       |                                                  | —     | %              |       |                                                                                                                                                            | $          | — |   |   |   | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Martin M. Batt      |       |                                                         | —     |                                                                  |       |                                                  | —     | %              |       |                                                                                                                                                            | $          | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Patricia A. Pilia   |       |                                                         | —     |                                                                  |       |                                                  | —     | %              |       |                                                                                                                                                            | $          | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Gordon Link         |       |                                                         | —     |                                                                  |       |                                                  | —     | %              |       |                                                                                                                                                            | $          | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Kai P. Larson       |       |                                                         | —     |                                                                  |       |                                                  | —     | %              |       |                                                                                                                                                            | $          | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                     |            |                                                              |            |                                                                       |            |                                                       |            |                |            |                                                                                                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

The following tablereports information, as to each of the Named Executive Officers, concerning thenumber of shares subject to both exercisable and unexercisable stock optionsheld as of December 28, 2005. 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 28, 2005:

| ** **         | ** ** | **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 |       |         | —     |            |       |                                      | —     |                               |       |   | 74,586 |   |   |   | 47,913 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Martin M. Batt     |       |         | —     |            |       |                                      | —     |                               |       |   | 7,625 |   |   |   | 13,874 |   |   |   | — |   |   |   | — |   |   |
| Patricia A. Pilia  |       |         | —     |            |       |                                      | —     |                               |       |   | 97,268 |   |   |   | 29,999 |   |   |   | — |   |   |   | — |   |   |
| Gordon Link        |       |         | —     |            |       |                                      | —     |                               |       |   | 35,835 |   |   |   | 36,165 |   |   |   | — |   |   |   | — |   |   |
| Kai P. Larson      |       |         | —     |            |       |                                      | —     |                               |       |   | 13,417 |   |   |   | 29,999 |   |   |   | — |   |   |   | — |   |   |
|                    |            |              |            |                 |            |                                           |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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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 Capital Market, less the exercise price.

**Compensation of Directors**

Under the 2004 Director’s Plan, options to purchase 1,000 shares of commonstock are granted automatically to each non-employee director who (i) iselected or reelected as a director of the Company at an annual meeting ofstockholders, (ii) continues service as a director of the Company after anannual meeting of stockholders at which the director is not subject tore-election, or (iii) is otherwise appointed as a director of the Companyin accordance with the Company’s bylaws, in each case on the business day datenext following each such annual meeting or appointment. In addition, under the2004 Director’s Plan, options to purchase 1,000 shares of common stock aregranted automatically to each non-employee director who is appointed orcontinues to serve after an annual meeting of stockholders as chair of theAudit, Compensation, Nominating and Corporate Governance and Research andDevelopment Committees of the Board of Directors on the business day nextsucceeding each such appointment or continuation of service, as the case may be.In addition, options to purchase 750 shares of common stock are automaticallygranted to each non-employee who is appointed to the Research and DevelopmentCommittee (the “RDC”) upon initial appointment to the committee, and options topurchase 300 shares of common stock are automatically granted to eachnon-employee director who continues services as a RDC 

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member after an annual meeting ofstockholders, in each case on the business day next succeeding such appointmentor continuation of service, as the case may be. Non-employee directors also maybe granted options to purchase shares of common stock in the discretion of theBoard of Directors. All such options are exercisable at an exercise price equalto the fair market value of the common stock on the date of grant and aresubject to a vesting schedule.

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 “Employment Agreements”) with Patricia Pilia, Gordon Link,and Kai Larson (collectively, the “Executive Officers”). The Shaykin EmploymentAgreement and the other Employment Agreements are referred to together as the “ExecutiveAgreements,” and Mr. Shaykin and the Executive Officers are referred totogether 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. Since enteringinto the agreement, Mr. Shaykin’s base salary has been raised to $370,000.Under the Shaykin Employment Agreement, in the event a change of control occursor is anticipated (including the sale of substantially all of the assets of theCompany) and Mr. Shaykin’s employment is terminated by the Company withoutcause (as defined in the Shaykin Employment Agreement) or by Mr. Shaykinfor good reason (as defined in the Shaykin Employment Agreement), Mr. Shaykinis to be granted (i) a payment equal to the greater of 100% of his prioryear’s bonus or 75% of his base annual salary, (ii) a payment equal to300% of his base annual salary and (iii) a payment equal to accrued,unpaid salary and bonus through the date of termination. As defined in theShaykin Employment Agreement, “good reason” includes, along with other events,the Board of Directors’ failure to grant, in each calendar year after a changein control occurs or is anticipated, a minimum annual bonus at least equal tothe average of the three years’ prior annual bonuses, if such a failure is inanticipation of or following a change in control. The sale of our paclitaxelbusiness to Mayne Pharma may be deemed to have been a sale of substantially allour assets. In connection with the sale, Mr. Shaykin advised the Companythat he has waived any requirement that a minimum annual bonus be paid to himinsofar as the sale of the paclitaxel business could be construed to constitutea change of control pursuant to the Shaykin Employment agreement.

In addition, if Mr. Shaykin’s employment isterminated by the Company without cause or by Mr. Shaykin 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. Shaykinthat were granted prior to October 1, 2001, and (iv) a bonus paymentin an amount equal to a percentage of his base salary, according 

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to the terms set forthabove. The forgoing benefits would be limited by the amount deductible forincome tax purposes under the Internal Revenue Code of 1986, as amended.

Each of the Employment Agreements provides for aninitial two-year employment term that expired on October 1, 2003, and is automaticallyrenewed on each anniversary of the date of the agreement for an additionalone-year term unless either party gives notice of termination to the otherparty at least 180 days prior to the commencement of any additional one-yearterm. No such notice of termination has been given by or to any of theExecutive Officers. The Employment Agreements provide for initial annual basesalaries for Dr. Pilia, Mr. Link and Mr. Larson of $210,000,$210,000 and $180,000, respectively. Currently, their base salaries have beenraised to $235,000, $240,000 and $220,000, respectively. Under the EmploymentAgreements, in the event a change of control occurs or is anticipated(including the sale of substantially all of the assets of the Company) and anExecutive Officer’s employment is terminated by the Company without cause or bythe Executive Officer for good reason, such Executive Officer is to be granted (i) apayment equal to the greater of 100% of his or her prior year’s bonus or 75% ofhis or her base annual salary and (ii) a payment equal to 200% of theExecutive Officer’s base annual salary. As defined in these agreements, “goodreason” includes, along with other events, the Board of Directors’ failure togrant, in each calendar year after a change in control occurs or isanticipated, a minimum annual bonus at least equal to the average of the threeyears’ prior annual bonuses, if such a failure is in anticipation of orfollowing a change in control. The sale of our paclitaxel business to MaynePharma may be deemed to have been a sale of substantially all of our assets. Inconnection with the sale, each of the Executive Officers advised the Companythat he or she has waived any requirement that a minimum annual bonus be paidhim or her insofar as the sale of the paclitaxel business could be construed toconstitute a change of control pursuant 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 the individualExecutive Officer’s base salary, according to the terms set forth above foreach named individual. The forgoing benefits would be limited by the amountdeductible for income tax purposes under the Internal Revenue Code of 1986, asamended.

The Company entered into an employment agreement withMartin Batt (the “Batt Employment Agreement”) effective October 28, 2005. Underthe agreement, Mr. Batt will be employed as the Company’s Senior VicePresident and Chief Operating Officer and will perform executive andadministrative services for a base annual salary of $270,000, and the Companymay not terminate or alter Mr. Batt’s employment status without Cause insuch a way that he is no longer eligible to receive Company benefits prior to April 15,2006. If Mr. Batt is terminated without Cause or resigns for good reason,upon compliance with certain conditions, the Company is obligated to make thefollowing payments to Mr. Batt 195 days after such termination (or suchlonger period as may be required by law): (i) 100% of Mr. Batt’s theneffective base salary; (ii) a lump sum amount in cash equal to any accruedbut unpaid salary through the date of termination and unpaid salary withrespect to any vacation days accrued but not taken as of termination; and (iii) reimbursementof Mr. Batt’s COBRA payments.

Under the Employment Agreements, the ShaykinEmployment Agreement and the Batt Employment Agreement, Executives may receivean annual bonus in such amount, if any, as the Compensation Committee (or ifthe Board has no Compensation Committee at the time, then the Board), in itsdiscretion, may award to Executives, based upon the Executive’s and the Company’sperformance during each year of the Employment Period.

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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 28, 2005, our compensation committeeconsisted of Dr. Robert Pollack (chairman), Dr. Stephen Carter,Elliot Maza, and George Gould, Esq. None of our Executive Officers serveas members of the Board of Directors or compensation committee of any entitythat has one or more Executive Officers who serve on the Board of Directors orcompensation committee.

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**Part III**

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

**EquityCompensation Plan Information**

The followingtable sets forth certain information as of December 28, 2005 concerningour common stock that may be issued upon the exercise of options or thepurchases of restricted stock under all of our equity compensation plansapproved by stockholders and equity compensation plans not approved bystockholders (all share and per share amounts for all periods presented havebeen restated to reflect the one-for-ten reverse stock split that was effectiveFebruary 6, 2006):

| **Plan Category**                                       | ** ** | ** ** | ** ** | **Number of securities  to be issued  upon exercise  of outstanding  options, warrants  and rights** | ** ** | **Weighted-average  exercise price  of outstanding options,  warrants and rights** | ** ** | **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                                  |       |       | 99,299     |                                                                                                                                         |       |                                                                                                        | $          | 9.40                                                                                                                                                                                                              |       |   |   | 84,450 |   |   |
| 2004 Non-Employee  Directors’ Stock Option Plan         |       |       | 15,350     |                                                                                                                                         |       |                                                                                                        | $          | 6.90                                                                                                                                                                                                              |       |   |   | 13,300 |   |   |
| 1994 Long-Term  Performance Incentive Plan                   |       |       | 517,541    |                                                                                                                                         |       |                                                                                                        | $          | 42.70                                                                                                                                                                                                             |       |   |   | 78,801 |   |   |
| Total Approved  Plans                                        |       |       | 632,190    |                                                                                                                                         |       |                                                                                                        | $          | 36.60                                                                                                                                                                                                             |       |   |   | 176,551 |   |   |
| Equity  compensation plans not approved by security holders: |       |       |       |                                                                                                                                         |       |                                                                                                        |       |                                                                                                                                                                                                              |       |   |   |   |   |
| Non-plan                                                     |       |       | 50         |                                                                                                                                         |       |                                                                                                        | $          | 95.00                                                                                                                                                                                                             |       |   |   | — |   |   |
| 1998 Stock Option  Plan                                      |       |       | 92,562     |                                                                                                                                         |       |                                                                                                        | $          | 37.30                                                                                                                                                                                                             |       |   |   | 39,846 |   |   |
| Total Unapproved  Plans                                      |       |       | 92,612     |                                                                                                                                         |       |                                                                                                        | $          | 37.30                                                                                                                                                                                                             |       |   |   | 39,846 |   |   |
| Total Plans                                                  |       |       | 724,802    |                                                                                                                                         |       |                                                                                                        | $          | 36.70                                                                                                                                                                                                             |       |   |   | 216,397 |   |   |

 

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

*Non-plan StockOptions*

In January 1994, theCompany granted to four outside directors 2,700 non-plan options to purchaseshares of common stock which were immediately exercisable at a price of $24.00and which expired in January 2004. In September 1997, the Companygranted to its employees 2,007 non-plan options to purchase shares of commonstock which vested over two years and which expire in September 2007. Asof December 28, 2005, 50 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, 12,500 shares were authorized for issuanceunder the 1998 Plan. In 1999, 2000, 2001 and 2002 the Board of Directorsapproved increases in the number of authorized shares. There are currently192,500 shares authorized for issuance under the 1998 Plan. Under the terms ofthe 1998 Plan, stock options 

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cannotbe granted to persons who are Tapestry officers subject to Section 16 ofthe Securities Exchange Act of 1934, as amended, (unless granted to officersnot previously employed by Tapestry, as an inducement essential to suchofficers entering into employment contracts with the Company) or to 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 6, 2006regarding 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                                                            |       |       | 159,396    | (2)                                                   |       |                       | 4.57       | % |   |
| Stephen K. Carter,  M.D.                                                       |       |       | 3,050      | (3)                                                   |       |                       |       | * |   |
| George M. Gould                                                                |       |       | 4,000      | (4)                                                   |       |                       |       | * |   |
| Arthur H.  Hayes, Jr.                                                     |       |       | 11,000     | (5)                                                   |       |                       |       | * |   |
| Elliot M. Maza                                                                 |       |       | 2,000      | (6)                                                   |       |                       |       | * |   |
| The Honorable  Richard N. Perle                                                |       |       | 13,300     | (7)                                                   |       |                       |       | * |   |
| Patricia A. Pilia                                                              |       |       | 216,583    | (8)                                                   |       |                       | 6.21       | % |   |
| Robert E. Pollack                                                              |       |       | 10,260     | (9)                                                   |       |                       |       | * |   |
| Martin M. Batt                                                                 |       |       | 19,916     | (10)                                                  |       |                       |       | * |   |
| Kai P. Larson                                                                  |       |       | 27,441     | (11)                                                  |       |                       |       | * |   |
| Gordon Link                                                                    |       |       | 56,845     | (12)                                                  |       |                       | 1.63       | % |   |
| All Directors and  Executive Officers as a Group (12 persons)        |       |       | 389,750    | (13)                                                  |       |                       | 11.18      | % |   |
| Mayne Pharma (USA) Inc.                                                        |       |       | 200,000    | (14)                                                  |       |                       | 5.74       | % |   |

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             *  Less than 1%

   (1)       Unless otherwise noted, we believe that allpersons named in the table have sole voting and investment power with respectto all shares of common stock beneficially owned by them. Percentage ofbeneficial ownership is based on 3,485,434 shares of common stock outstandingas of February 6, 2006, 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 6, 2006 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 74,586 shares of common stock issuableupon exercise of options granted to Mr. Shaykin under the 1994 Plan and14,848 shares of common stock beneficially owned through our ESOP plan as of February 6,2006. This does not include 7,500 shares held in a private foundation for whichMr. Shaykin exercises voting control. Mr. Shaykin disclaimsbeneficial ownership of such shares.

   (3)       Includes 3,050 shares of common stock issuableupon exercise of options granted to Dr. Carter under the 1994 Plan.

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   (4)       Includes 3,000 shares of common stock issuableupon exercise of options granted to Mr. Gould under the 1994 Plan and1,000 shares of common stock issuable upon exercise of options granted underthe 2004 Non-Employee Director Plan.

   (5)       Includes 11,000 shares of common stock issuableupon exercise of options granted to Dr. Hayes under the 1994 Plan.

   (6)       Includes 2,000 shares of common stock issuableupon exercise of options granted to Mr. Maza under the 2004 Non-EmployeeDirector Plan.

   (7)       Includes 11,000 shares of common stock issuableupon exercise of options granted to Mr. Perle under the 1994 Plan and1,000 shares of common stock issuable upon exercise of options granted underthe 2004 Non-Employee Director Plan.

   (8)       Includes 43,100 shares of common stock issuableupon exercise of 1994 Plan options; 14,832 shares of common stock beneficiallyowned through our ESOP plan as of February 6, 2006; and 1,080 shares ofcommon stock gifted by Dr. Pilia to relatives and certain other persons,which Dr. Pilia may be deemed to beneficially own by virtue of holdingpowers of attorney to vote and take certain other actions with respect to suchshares. Dr. Pilia disclaims beneficial ownership of the gifted shares ofcommon stock over which Dr. Pilia holds powers of attorney.

   (9)       Includes 6,400 shares of common stock issuableupon exercise of options granted to Dr. Pollack under the 1994 Plan and3,750 shares of common stock issuable upon exercise of options granted underthe 2004 Non-Employee Director Plan.

(10)   Includes 7,625 shares of common stock issuable uponthe exercise of options granted to Mr. Batt under the 1994 Plan and 10,279shares of common stock beneficially owned through our ESOP plan as of February 6,2006.

(11)   Includes 13,417 shares of common stock issuable uponthe exercise of options granted to Mr. Larson under the 1994 Plan and14,024 shares beneficially owned through our ESOP plan as of February 6,2006.

(12)   Includes 35,835 shares of common stock issuable uponthe exercise of options granted to Mr. Link under the 1994 Plan and 14,857shares of common stock beneficially owned through our ESOP plan as of February 6,2006.

(13)   Includes an aggregate of 218,089 shares of commonstock issuable upon exercise of outstanding stock options held by such persons.

(14)   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.

**Item 13**Certain Relationships and Related Transactions

Arthur H. Hayes, Jr., M.D., hasprovided certain consulting services to us. During the first half of 2005, wewere parties with MediScience Associates to a consulting agreement (the “MediScienceAgreement”) whereby Dr. Hayes, who is President and Chief OperatingOfficer of MediScience, may have provided us with consulting services in avariety of areas, including clinical research planning, strategic positioningand regulatory guidance. We were obligated to make quarterly payments toMediScience under the MediScience Agreement in the amount of $12,500. Dr. Hayeswas paid $50,000 under this agreement 

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during 2004. Duringthe second quarter of 2005 we terminated the consulting agreement. Dr. Hayeswas paid $25,000 in 2005 under the agreement.

**Item 14Principal Accountant Fees and Services**

The firm of Grant Thornton LLP (“GT”),registered public accounting firm, audited our accounts and the accounts of oursubsidiaries for the fiscal years ended December 28, 2005 and December 29,2004 and reviewed our financial statements included in our quarterly reports onForm 10-Q for 2005 and for the quarter  ended September 29, 2004. We engaged GTas our auditor in August 2004. The firm of Ernst & Young LLP (“EY”),registered public accounting firm, audited our accounts and the accounts of oursubsidiaries for the year ended December 31, 2003, and reviewed ourfinancial statements included in our quarterly reports on Form 10-Qfor 2003 and through the quarterly period ended June 30, 2004. EY had beenour auditors since 1993.

| ** **            | ** ** | **Grant Thornton** | ** ** | **Ernst & Young** | ** ** | **Total** | ** ** |
|-----------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|
| ** **            | ** ** | **2005**                | ** ** | **2004**                        | ** ** | **2005**  | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Audit Fees(1)         |       | $                       | 160,000    |                            | $          | 147,000   |       | $ | 10,000 |   | $ | 26,000 |   | $ | 170,000 |   | $ | 173,000 |   |
| Audit Related Fees(2) |       | 6,000                   |       | —                          |       | 12,000    |       | 7,000 |   | 18,000 |   | 7,000 |   |
| Tax Fees(3)           |       | —                  |       | —                          |       | 20,000    |       | 44,000 |   | 20,000 |   | 44,000 |   |
| All Other Fees        |       | —                  |       | —                          |       | —    |       | — |   | — |   | — |   |
|                  |       | $                       | 166,000    |                            | $          | 147,000   |       | $ | 42,000 |   | $ | 77,000 |   | $ | 208,000 |   | $ | 224,000 |   |

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(1)          Audit Fees consist offees for professional services rendered for the audit of our annualconsolidated financial statements and review of the interim consolidatedfinancial statements included in quarterly reports on Form 10-Q. AuditFees also include fees for professional services rendered for the audits of (i) management’sassessment of the effectiveness of internal control over financial reportingand (ii) the effectiveness of internal control over financial reporting.

(2)          Audit-Related Feesconsist of fees for assurance and related services that are reasonably relatedto the performance of the audit or review of our consolidated financialstatements and are not reported in “Audit Fees.”  In 2005 and 2004, this category included feesrelating to registration statement filings. In 2005, it also included feesrelated to our Canadian subsidiary.

(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 andEY to render the above audit and tax services were approved by our AuditCommittee prior to the engagements. All work relating to the audit of ourfinancial statements for the year ended December 28, 2005 was performed byfull-time employees of GT. Pursuant to the Audit Committee Charter, the AuditCommittee shall pre-approve all auditing services and permitted non-auditservices (including the fees and terms thereof) to be performed for the Companyby its independent auditor (subject to the de minimis exceptions for non-auditservices described in Section 10A(i)(1)(B) of the Exchange Act whichshall be approved by the Audit Committee prior to the completion of the audit).The Audit Committee may form and delegate authority to subcommittees consistingof one or more members when appropriate, including the authority to grantpre-approvals of audit and permitted non-audit services, provided thatdecisions of such subcommittee to grant pre-approvals shall be presented to thefull Audit Committee at its next scheduled meeting.

47

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**Part IV**

**Item 15Exhibits and Financial Statement Schedules**

**Financial Statements**

The Financial Statement Index is on Page F-1.

**Financial Statement Schedules**

All schedules are omitted because 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  |       | Second Amended and Restated Certificate of  Incorporation of the Company, as amended February 3, 2006(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       |
|   3.2  |       | Bylaws of the Company as amended through  August 25, 2003(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       |
|   4.1  |       | Common Stock Certificate(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |
|   4.2  |       | Amended and Restated Rights Agreement dated  September 25, 2001 between the Company and American Stock Transfer and  Trust Company, as Rights Agent(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |
|   4.3  |       | The Certificate of Incorporation and Bylaws of the  Company are included as Exhibits 3.1 - 3.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |
|   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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |
|   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(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       |
| 10.1**           |       | Company’s Amended and Restated 1994 Long-Term  Performance Incentive Plan, as amended through March 4, 2002(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |
| 10.2             |       | Company’s Amended and Restated 1998 Stock Incentive  Plan, as amended through October 15, 2002(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |
| 10.3**           |       | Company’s 2004 Equity Incentive Plan as amended and  restated effective June 10, 2005*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       |
| 10.4**           |       | Company’s 2004 Non Employee Director’s Stock Option  Plan(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       |
| 10.5**           |       | Employment Agreement effective October 1, 2001  between the Company and Leonard Shaykin(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |
| 10.6**           |       | Employment Agreement effective October 1, 2001  between the Company and Patricia Pilia(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       |
| 10.7**           |       | Employment Agreement effective October 1, 2001  between the Company and Gordon Link(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |       |
| 10.8**           |       | Employment Agreement effective October 1, 2001  between the Company and Kai Larson(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |
| 10.9**           |       | Employment Agreement effective October 28, 2005  between the Company and Martin Batt*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       |
| 10.10**          |       | Form of waiver agreement signed by Patricia A.  Pilia, Gordon Link and Kai P. Larson on September 10, 2003 and by  Leonard P. Shaykin on September 12, 2003 (together with Schedule  required by Instruction 2 to Item 601 Regulation S-K)(2)                                                                                                                                                                                                                                                                                                                                                               |       |
| 10.11            |       | Form of Director and Officer Indemnification  Agreement signed by the Company and each of Martin M. Batt, George  Gould, Esq., Arthur Hull Hayes, Jr., M.D., Kai Larson, Gordon H.  Link, Jr., Patricia A. Pilia, Ph.D., The Honorable Richard N. Perle,  Robert E. Pollack, Ph.D., and Leonard P. Shaykin on the dates set forth on  the Schedule previously filed and incorporated herein by reference, which  Schedule is amended to include the Director and Officer Indemnification  Agreement signed by Stephen Carter, M.D. on March 7, 2004 and Elliot  Maza on December 14, 2004(7) |       |
| 10.12**          |       | Form of Stock Option Agreement for certain  options granted under the Company’s 2004 Equity Incentive Plan(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       |

48

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| 10.13** |   | Form of Stock Option Agreement for options  granted under the Company’s 2004 Non-Employee Directors’ Stock Option Plan(8)                                                     |   |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.14   |   | 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(4) |   |
| 10.15** |   | Salaries and Bonuses of Named Executive Officers(9)                                                                                                                                          |   |
| 10.16** |   | Compensation of Directors(9)                                                                                                                                                                 |   |
| 21.1    |   | List of Subsidiaries(10)                                                                                                                                                                     |   |
| 23.1    |   | Consent of Grant Thornton LLP*                                                                                                                                                               |   |
| 23.2    |   | Consent of Ernst & Young LLP*                                                                                                                                                       |   |
| 24.1    |   | Power of Attorney*                                                                                                                                                                           |   |
| 31.1    |   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a) under the Securities Exchange  Act of 1934, as amended*                                             |   |
| 31.2    |   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a)/15d-14(a) under the Securities Exchange  Act of 1934, as amended*                                             |   |
| 32.1#   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  Section 1350)*                                                |   |
| 32.2#   |   | Certification of  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. Section 1350)*                                                |   |

----

             *       Filed herewith

      **       A management compensationplan

          #       This certification shallnot be deemed “filed” for purposes of Section 18 of the Exchange Act, orotherwise subject to liability pursuant to that section. Such certificationshall not be deemed to be incorporated by reference into any filing under theSecurities Act or the Exchange Act, except to the extent that the Companyspecifically incorporates it by reference

   (1)  Incorporated herein by reference to theCompany’s Current Report on Form 8-K dated February 6, 2006(File No. 0-24320)

   (2)  Incorporated herein by reference to theCompany’s Annual Report on Form 10-K for the year ended December 31,2003 (File No. 0-24320)

   (3)  Incorporated herein by reference to theRegistration Statement on Form 8-A12G/A of the Company, filed withthe Commission on October 23, 2001 (File No. 0-24320)

   (4)  Incorporated herein by reference to theCompany’s Annual Report on Form 10-K for the year ended December 29,2004 (File No. 0-24320)

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

   (6)  Incorporated herein by reference to theCompany’s Annual Report on Form 10-K for the year ended December 31,2001 (File No. 0-24320)

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

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

   (9)  Incorporated herein by reference to theCompany’s Quarterly Report on Form 10-Q for the period ending March 30,2005 (File No. 0-24320)

(10) Incorporated herein by reference to the Company’sAnnual Report on Form 10-K for the year ended December 31, 2001(File No. 0-24320)

49

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**Signatures**

Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934,the registrant has duly caused this report on Form 10-K to be signedon its behalf by the undersigned, thereunto duly authorized.
| TAPESTRY PHARMACEUTICALS, INC. |   |                                  |
|-------------------------------------|--------|---------------------------------------|
|                                |   |                                  |   |   |
| By:                                 |   | /s/ LEONARD P.  SHAYKIN               |   | February 22, 2006 |
|                                |   | 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 22, 2006 |
|---------------------------------|--------|---------------------------------------|--------|-----------------------------|
| Leonard P. Shaykin              |   | Chief  Executive Officer              |   |                        |
|                            |   | (Principal  Executive Officer)        |   |                        |
|                            |   |                                  |   |                        |
| *                               |   | Executive  Vice President,            |   | February 22, 2006      |
| Patricia A. Pilia, Ph.D.        |   | Director                              |   |                        |
|                            |   |                                  |   |                        |
| /s/ GORDON  LINK                |   | Senior  Vice President,               |   | February 22, 2006      |
| Gordon Link                     |   | Chief  Financial Officer              |   |                        |
|                            |   | (Principal  Financial Officer)        |   |                        |
|                            |   |                                  |   |                        |
| /s/ BRUCE W.  FIEDLER           |   | Vice  President, Corporate Controller |   | February 22, 2006      |
| Bruce W. Fiedler                |   | (Principal  Accounting Officer)       |   |                        |
|                            |   |                                  |   |                        |
| *                               |   | Director                              |   | February 22, 2006      |
| Stephen K. Carter, M.D.         |   |                                  |   |                        |
|                            |   |                                  |   |                        |
| *                               |   | Director                              |   | February 22, 2006      |
| George M. Gould                 |   |                                  |   |                        |
|                            |   |                                  |   |                        |
| *                               |   | Director                              |   | February 22, 2006      |
| Arthur H. Hayes, Jr., M.D. |   |                                  |   |                        |
|                            |   |                                  |   |                        |
| *                               |   | Director                              |   | February 22, 2006      |
| Elliot M. Maza                  |   |                                  |   |                        |
|                            |   |                                  |   |                        |
| *                               |   | Director                              |   | February 22, 2006      |
| The Honorable Richard N. Perle  |   |                                  |   |                        |
|                            |   |                                  |   |                        |
| *                               |   | Director                              |   | February 22, 2006      |
| Robert E. Pollack, Ph.D.        |   |                                  |   |                        |

 
| *By    |   | /s/ GORDON LINK               |   |   |   |   |
|--------|--------|-------------------------------|--------|--------|--------|--------|
|   |   | Gordon Link                   |   |   |   |   |
|   |   | pursuant to power of attorney |   |   |   |   |

 

50

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**TapestryPharmaceuticals, 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 28,  2005 and December 29, 2004                                                                                        |       | F-5      |       |
| Consolidated Statements of Operations for the years  ended December 28, 2005, December 29, 2004 and December 31,  2003                                       |       | F-6      |       |
| Consolidated Statements of Stockholders’ Equity and  Comprehensive Loss for the years ended December 28, 2005,  December 29, 2004 and December 31, 2003 |       | F-7      |       |
| Consolidated Statements of Cash Flows for the years  ended December 28, 2005, December 29, 2004 and December 31,  2003                                       |       | F-8      |       |
| Notes to Consolidated Financial Statements                                                                                                                                  |       | F-10     |       |

 

F-1

----

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

Board of Directors and Stockholders   of Tapestry Pharmaceuticals, Inc.

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl Over Financial Reporting appearing under Item 9A, that TapestryPharmaceuticals, Inc. (the Company) (a Delaware Corporation) maintainedeffective internal control over financial reporting as of December 28,2005, based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Tapestry Pharmaceuticals, Inc.’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the company’s internalcontrol over financial reporting 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 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 thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets 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 28, 2005, is fairly stated, in all materialrespects, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Also in our opinion, Tapestry Pharmaceuticals, Inc.maintained, in all material respects, effective internal control over financialreporting as of December 28, 2005, based on criteria established in *Internal Control—Integrated Framework* issued by theCommittee 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 sheets of Tapestry Pharmaceuticals, Inc.as of December 28, 2005 and December 29, 2004, and the relatedstatements of operations, stockholders’ equity and comprehensive loss, and cashflows for the each of the two years in the period ended December 28, 2005and our report dated February 9, 2006 expressed an unqualified opinion onthose financial statements and includes an explanatory paragraph as to the uncertaintyof the Company’s ability to continue as a going concern.

**GrantThornton LLP**

**Denver, ColoradoFebruary 9, 2006**

F-2

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

Board of Directors and Stockholders   of Tapestry Pharmaceuticals, Inc.

We have audited the accompanying consolidated balancesheets of Tapestry Pharmaceuticals, Inc. (a Delaware corporation) andsubsidiaries as of December 28, 2005 and December 29, 2004, and therelated consolidated statements of operations, stockholders’ equity andcomprehensive loss, and cash flows for each of the two years in the periodended December 28, 2005. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits 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, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Tapestry Pharmaceuticals, Inc. and subsidiaries as of December 28,2005 and December 29, 2004, and the results of their operations and theircash flows for each of the two years in the period ended December 28,2005, in conformity with accounting principles generally accepted in the UnitedStates of America.

The accompanying consolidated financial statementshave been prepared assuming that the Company will continue as a going concern. Asdiscussed in Note 1, the Company has no revenue and has incurred a net loss of$17,538,000 during the year ended December 28, 2005, and, as of that date,the Company has an accumulated deficit of $107,262,000 and existing cash and short-terminvestments on hand of $14,086,000. These factors, among others, as discussedin Note 1 to the financial statements, raise substantial doubt about theCompany’s ability to continue as a going concern. Management’s plans in regardto these matters are also described in Note 1. The consolidated financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Tapestry Pharmaceuticals, Inc.’sinternal control over financial reporting as of December 28, 2005, basedon criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) and our report dated February 9, 2006 expressedunqualified opinions.

**GrantThornton LLP**

**Denver, ColoradoFebruary 9, 2006**

F-3

----

**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors andStockholdersTapestry Pharmaceuticals, Inc.

We have audited the accompanying consolidatedstatements of operations, stockholders’ equity and comprehensive loss, and cashflows of Tapestry Pharmaceuticals, Inc. (formerly NaPro BioTherapeutics, Inc.)and Subsidiaries for the year ended December 31, 2003. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements 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 the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures  that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion..

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated results of operations and cash flows of TapestryPharmaceuticals, Inc. (formerly NaPro BioTherapeutics, Inc.) andSubsidiaries for the year ended December 31, 2003 in conformity with U.S.generally accepted accounting principles.

ERNST & YOUNG LLP

Denver, ColoradoFebruary 27, 2004

F-4

----

**TapestryPharmaceuticals, Inc. and SubsidiariesConsolidated Balance SheetsAs of December 28, 2005 and December 29, 2004(In thousands, except share data)**

| ** **                                                                                                                                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                                                                                     |       |     |       |     |       |
| Current assets:                                                                                                                                                |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                      |       | $        | 534        |     | $          | 1,713 |   |
| Short-term investments                                                                                                                                         |       | 13,552   |       | 29,378   |       |
| Prepaid expense and other current assets                                                                                                                       |       | 646      |       | 538      |       |
| Assets held for sale, net                                                                                                                                      |       | —   |       | 112      |       |
| Total current  assets                                                                                                                                          |       | 14,732   |       | 31,741   |       |
| Property, plant  and equipment, net                                                                                                                            |       | 608      |       | 676      |       |
| Long-term  investments                                                                                                                                         |       | —   |       | 4,631    |       |
| Investment in  ChromaDex, Inc.                                                                                                                            |       | 451      |       | 1,414    |       |
| Other assets                                                                                                                                                   |       | 683      |       | 831      |       |
| Total assets                                                                                                                                                   |       | $        | 16,474     |     | $          | 39,293 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                  |       |     |       |     |       |
| Current liabilities:                                                                                                                                           |       |     |       |     |       |
| Accounts payable and accrued liabilities                                                                                                                       |       | $        | 1,024      |     | $          | 3,119 |   |
| Accrued payroll and payroll taxes                                                                                                                              |       | 1,241    |       | 2,017    |       |
| Notes payable—current portion, net                                                                                                                        |       | 840      |       | 3,132    |       |
| Total current  liabilities                                                                                                                                     |       | 3,105    |       | 8,268    |       |
| Notes  payable—long term, net                                                                                                                             |       | 2,483    |       | 3,245    |       |
| Commitments and  contingencies                                                                                                                                 |       |     |       |     |       |
| Stockholders’ equity:                                                                                                                                     |       |     |       |     |       |
| Preferred stock, $.001 par value; 2,000,000 shares  authorized; none issued                                                                                    |       | —   |       | —   |       |
| Common stock, $.0075 par value; 100,000,000 shares  authorized; 3,480,704 issued and outstanding in 2005; and 3,343,540 shares  issued and outstanding in 2004 |       | 26       |       | 25       |       |
| Additional paid-in capital                                                                                                                                     |       | 118,278  |       | 117,580  |       |
| Deferred compensation                                                                                                                                          |       | (114     | )          | —   |       |
| Accumulated deficit                                                                                                                                            |       | (107,262 | )          | (89,724  | )          |
| Accumulated other comprehensive loss                                                                                                                           |       | (42      | )          | (101     | )          |
| Total  stockholders’ equity                                                                                                                               |       | 10,886   |       | 27,780   |       |
| Total liabilities and  stockholders’ equity                                                                                                               |       | $        | 16,474     |     | $          | 39,293 |   |

 

See accompanying notes to Consolidated Financial Statements.

F-5

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**TapestryPharmaceuticals, Inc. and SubsidiariesConsolidated Statements of OperationsYears Ended December 28, 2005, December 29, 2004, December 31,2003(In thousands, except per share data)**

| ** **                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating expenses:                                              |       |     |       |     |       |     |       |
| Research and development                                         |       | $        | 10,630     |     | $          | 13,504   |       | $ | 6,485 |   |
| General and administrative                                       |       | 5,628    |       | 7,794    |       | 8,616    |       |
| Operating loss                                                   |       | 16,258   |       | 21,298   |       | 15,101   |       |
| Other income (expense):                                          |       |     |       |     |       |     |       |
| Interest and other income                                        |       | 731      |       | 694      |       | 110      |       |
| Interest and other expense                                       |       | (557     | )          | (947     | )          | (865     | )          |
| Impairment charges                                               |       | (1,067   | )          | —   |       | —   |       |
| Net loss from  continuing operations before taxes                |       | (17,151  | )          | (21,551  | )          | (15,856  | )          |
| Provision for income taxes                                       |       | (29      | )          | (4       | )          | —   |       |
| Net loss from  continuing operations                             |       | (17,180  | )          | (21,555  | )          | (15,856  | )          |
| Discontinued operations:                                         |       |     |       |     |       |     |       |
| Income (loss)  from discontinued operations, net of income taxes |       | (358     | )          | (2,619   | )          | 53,984   |       |
| Net income (loss)                                                |       | $        | (17,538    | )        | $          | (24,174  | )          | $ | 38,128 |   |
| Income (loss) per share,  basic and diluted:                     |       |     |       |     |       |     |       |
| Continuing  operations                                           |       | $        | (5.04      | )        | $          | (6.58    | )          | $ | (5.15 | ) |
| Discontinued  operations                                         |       | $        | (0.11      | )        | $          | (0.80    | )          | $ | 17.53 |   |
| Net income (loss)                                                |       | $        | (5.15      | )        | $          | (7.38    | )          | $ | 12.38 |   |
| Basic and diluted  weighted average shares outstanding           |       | 3,408    |       | 3,274    |       | 3,080    |       |

 

See accompanying notes to Consolidated Financial Statements.

F-6

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**TapestryPharmaceuticals, Inc. and SubsidiariesConsolidated Statements of Stockholders’ Equity and Comprehensive LossYears Ended December 28, 2005, December 29, 2004, andDecember 31, 2003(In thousands, except share data)**

| ** **                                                                                        | ** ** | **Number of  Common  Shares  Issued** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Deferred  Compensation** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Treasury  Stock** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------|------------|----------------------------------|------------|----------------------------|------------|--------------------------|------------|---------------------------------------------|------------|---------------------|------------|-----------|------------|
| Balance at  December 31, 2002                                                                |       |                                       | 2,996,429  |              |       |                             | $          | 23                         |       |                     |       | $                                           | 110,632    |                |       |      | $          | — |   |   |   | $ | (103,678 | ) |   |   | $ | — |   |   |   | $ | (181 | ) |   | $ | 6,796 |   |
| Contribution of  75,000 shares of common stock at $5.80 per share to ESOP                         |       |                                       | 75,000     |              |       |                             | 1          |                       |       |                     | 434        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   |   |   |   | 435 |   |
| Issuance of common  stock for in-licensing of genomics technology                                 |       |                                       | 10,000     |              |       |                             | —     |                       |       |                     | 188        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 188 |   |
| Issuance of common  stock for payment of services                                                 |       |                                       | 4,506      |              |       |                             | —     |                       |       |                     | 45         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 45 |   |
| Issuance of stock  options in exchange for consulting services                                    |       |                                       | —     |              |       |                             | —     |                       |       |                     | 77         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 77 |   |
| Issuance of common  stock for compensation                                                        |       |                                       | 9,018      |              |       |                             | —     |                       |       |                     | 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                                                           |       |                                       | 442        |              |       |                             | —     |                       |       |                     | 4          |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 4 |   |
| Net income                                                                                        |       |                                       | —     |              |       |                             | —     |                       |       |                     | —     |                                        |       |                | —     |      |       |   | 38,128 |   |   |   | — |   |   |   | — |   |   | 38,128 |   |
| Balance at  December 31, 2003                                                                |       |                                       | 3,095,395  |              |       |                             | 24         |                       |       |                     | 111,705    |                                        |       |                | —     |      |       |   | (65,550 | ) |   |   | — |   |   |   | (181 | ) |   | 45,998 |   |
| Issuance of common  stock in connection with private placement, net of issuance costs             |       |                                       | 200,000    |              |       |                             | 1          |                       |       |                     | 4,836      |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 4,837 |   |
| Contributions of  33,564 shares, including 5,431 from treasury, to the ESOP                       |       |                                       | 28,133     |              |       |                             | —     |                       |       |                     | 610        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | 181 |   |   | 791 |   |
| Issuance of common  stock for in-licensing of genomics technology                                 |       |                                       | 10,000     |              |       |                             | —     |                       |       |                     | 91         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 91 |   |
| Issuance of common  stock for payment of interest expense                                         |       |                                       | 6,143      |              |       |                             | —     |                       |       |                     | 161        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 161 |   |
| Compensation  expense related to options issued to consultants                                    |       |                                       | —     |              |       |                             | —     |                       |       |                     | 141        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 141 |   |
| Exercise of stock  options and warrants                                                           |       |                                       | 3,869      |              |       |                             | —     |                       |       |                     | 36         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 36 |   |
| Comprehensive income (loss)                                                                       |       |                                       |       |              |       |                             |       |                       |       |                     |       |                                        |       |                |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on  investments                                                                   |       |                                       | —     |              |       |                             | —     |                       |       |                     | —     |                                        |       |                | —     |      |       |   | — |   |   |   | (101 | ) |   |   | — |   |   | (101 | ) |
| Net loss                                                                                          |       |                                       | —     |              |       |                             | —     |                       |       |                     | —     |                                        |       |                | —     |      |       |   | (24,174 | ) |   |   | — |   |   |   | — |   |   | (24,174 | ) |
| Comprehensive loss                                                                                |       |                                       |       |              |       |                             |       |                       |       |                     |       |                                        |       |                |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   | (24,275 | ) |
| Balance at  December 29, 2004                                                                |       |                                       | 3,343,540  |              |       |                             | 25         |                       |       |                     | 117,580    |                                        |       |                | —     |      |       |   | (89,724 | ) |   |   | (101 | ) |   |   | — |   |   | 27,780 |   |
| Contributions of  75,000 shares of common stock at $5.60 per share to the ESOP                    |       |                                       | 75,000     |              |       |                             | 1          |                       |       |                     | 419        |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 420 |   |
| Issuance of common  stock for in-licensing of genomics technology                                 |       |                                       | 10,000     |              |       |                             | —     |                       |       |                     | 30         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 30 |   |
| Compensation  expense related to options issued to consultants                                    |       |                                       | —     |              |       |                             | —     |                       |       |                     | 50         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 50 |   |
| Issuance of common  stock for payment of services                                                 |       |                                       | 4,730      |              |       |                             | —     |                       |       |                     | 17         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 17 |   |
| Issuance of  restricted stock for compensation                                                    |       |                                       | 42,075     |              |       |                             | —     |                       |       |                     | 151        |                                        |       |                | (151       | )         |       |   | — |   |   |   | — |   |   |   | — |   |   | — |   |
| Amortization of  restricted stock grant                                                           |       |                                       | —     |              |       |                             | —     |                       |       |                     | —     |                                        |       |                | 37         |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 37 |   |
| Exercise of stock  options and warrants                                                           |       |                                       | 5,359      |              |       |                             | —     |                       |       |                     | 31         |                                        |       |                | —     |      |       |   | — |   |   |   | — |   |   |   | — |   |   | 31 |   |
| Comprehensive income (loss)                                                                       |       |                                       |       |              |       |                             |       |                       |       |                     |       |                                        |       |                |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on  investments                                                                   |       |                                       | —     |              |       |                             | —     |                       |       |                     | —     |                                        |       |                | —     |      |       |   | — |   |   |   | 59 |   |   |   | — |   |   | 59 |   |
| Net loss                                                                                          |       |                                       | —     |              |       |                             | —     |                       |       |                     | —     |                                        |       |                | —     |      |       |   | (17,538 | ) |   |   | — |   |   |   | — |   |   | (17,538 | ) |
| Comprehensive loss                                                                                |       |                                       |       |              |       |                             |       |                       |       |                     |       |                                        |       |                |       |      |       |   |   |   |   |   |   |   |   |   |   |   |   | (17,479 | ) |
| Balance at  December 28, 2005                                                                |       |                                       | 3,480,704  |              |       |                             | $          | 26                         |       |                     |       | $                                           | 118,278    |                |       |      | $          | (114 | ) |   |   | $ | (107,262 | ) |   |   | $ | (42 | ) |   |   | $ | — |   |   | $ | 10,886 |   |

 

See accompanying notes to Consolidated Financial Statements.

F-7

----

**Tapestry Pharmaceuticals, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 28, 2005, December 29, 2004, and December 31, 2003 (In thousands, except share information)**

| ** **                                                                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating activities:                                                                                            |       |     |       |     |       |     |       |
| Net income (loss)                                                                                                |       | $        | (17,538    | )        | $          | (24,174  | )          | $ | 38,128 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities:              |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                                   |       | 263      |       | 475      |       | 2,840    |       |
| Amortization of debt  issue cost & debt discount                                                        |       | 579      |       | 630      |       | 672      |       |
| Amortization of license  fee income                                                                              |       | —   |       | —   |       | (1,027   | )          |
| Amortization of  investment premium                                                                              |       | 240      |       | 257      |       | —   |       |
| License fees paid with  common stock                                                                             |       | 30       |       | 8        |       | 16       |       |
| Retirement contributions  paid with common stock                                                                 |       | 420      |       | 791      |       | 435      |       |
| Compensation paid with  common stock and options                                                                 |       | 105      |       | 141      |       | 264      |       |
| Interest expense paid  with common stock                                                                         |       | —   |       | 30       |       | —   |       |
| Loss on disposal of  assets                                                                                      |       | 38       |       | —   |       | —   |       |
| Gain on sale of the  paclitaxel business                                                                         |       | —   |       | —   |       | (54,553  | )          |
| Gain on sale of  investments                                                                                     |       | (27      | )          | —   |       | —   |       |
| Impairment of other  assets                                                                                      |       | 1,067    |       | —   |       | —   |       |
| Asset writedowns  associated with discontinued operations                                                        |       | —   |       | 1,440    |       | —   |       |
| Changes in operating assets and liabilities:                                                                     |       |     |       |     |       |     |       |
| Accounts receivable                                                                                              |       | —   |       | 1,495    |       | 5,625    |       |
| Inventory                                                                                                        |       | —   |       | —   |       | 5,901    |       |
| Prepaid expense and other  assets                                                                                |       | (64      | )          | 247      |       | 382      |       |
| Accounts payable and  accrued liabilities                                                                        |       | (2,095   | )          | (87      | )          | 190      |       |
| Accrued payroll and  payroll taxes                                                                               |       | (776     | )          | (589     | )          | 1,461    |       |
| Net cash provided by  (used in) operating activities                                                             |       | (17,758  | )          | (19,336  | )          | 334      |       |
| Investing activities:                                                                                            |       |     |       |     |       |     |       |
| Additions to plant and  equipment                                                                                |       | (240     | )          | (161     | )          | (1,602   | )          |
| Proceeds from the sale of  genomics assets                                                                       |       | 104      |       | —   |       | —   |       |
| Proceeds from the sale of  the paclitaxel business                                                               |       | —   |       | —   |       | 66,143   |       |
| Proceeds from the sale of  assets                                                                                |       | 15       |       | —   |       | —   |       |
| Purchases of investments                                                                                         |       | (26,179  | )          | (79,429  | )          | (46,501  | )          |
| Proceeds from sale of  investments                                                                               |       | 46,481   |       | 93,563   |       | 2,000    |       |
| Investment in  ChromaDex, Inc.                                                                              |       | —   |       | —   |       | (468     | )          |
| Acquisition of assets  from Pangene Corporation                                                                  |       | —   |       | —   |       | (400     | )          |
| Net cash provided by used  in investing activities                                                               |       | 20,181   |       | 13,973   |       | 19,172   |       |
| Financing activities:                                                                                            |       |     |       |     |       |     |       |
| Proceeds from notes  payable                                                                                     |       | —   |       | —   |       | 487      |       |
| Payments of notes payable                                                                                        |       | (3,633   | )          | (78      | )          | (20,478  | )          |
| Proceeds from sale of  common stock and the exercise of common stock options and warrants, net of  issuance cost |       | 31       |       | 4,873    |       | 4        |       |
| Net cash provided by  (used in) financing activities                                                             |       | (3,602   | )          | 4,795    |       | (19,987  | )          |
| Net decrease in  cash and cash equivalents                                                                       |       | (1,179   | )          | (568     | )          | (481     | )          |
| Cash and cash  equivalents at beginning of year                                                                  |       | 1,713    |       | 2,281    |       | 2,762    |       |
| Cash and cash  equivalents at end of year                                                                        |       | $        | 534        |     | $          | 1,713    |       | $ | 2,281 |   |
| Supplemental schedule of non-cash investing and  financing activities:                                           |       |     |       |     |       |     |       |
| Issuance of 42,075 shares  of common stock for compensation                                                      |       | $        | 114        |     | $          | —   |       | $ | — |   |
| Issuance of 6,143 shares  of common stock for payment of accrued interest                                        |       | —   |       | 131      |       | —   |       |
| Issuance of 10,000 shares  of common stock per year for prepayment of license fee                           |       | —   |       | 83       |       | 172      |       |
| Transfer of fixed assets  for investment in ChromaDex, Inc.                                                 |       | —   |       | —   |       | 946      |       |
| Settlement of convertible  debentures by issuance of note payable, net of discount                               |       | 3,375    |       | —   |       | —   |       |
| Plantation cost harvested to inventory                                                                           |       | —   |       | —   |       | 719      |       |

 

See accompanying notes to Consolidated Financial Statements.

F-8

----

**Tapestry Pharmaceuticals, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Continued) Years Ended December 28, 2005, December 29, 2004, and December 31, 2003 (In thousands, except share information)**

 

| ** **                  | ** ** | **December 28,** | ** ** | **December 29,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| Cash paid for  interest     |       |                  | $          | 137,000               |       |                  |       | $ | 168,000 |   |   |   | $ | 1,576,000 |   |   |
| Cash paid for income  taxes |       |                  | —     |                  |       |                  | $          | 650,000 |   |   |   | — |   |   |

 

See accompanying notes to Consolidated Financial Statements.

F-9

----

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

**Note1. Basis of Presentation and Summary of Significant Accounting Policies**

**Description of Business**

Tapestry Pharmaceuticals, Inc. together with itssubsidiaries (referred to herein as “Tapestry” or the “Company”) is apharmaceutical company focused on the development of proprietary therapies forthe treatment of cancer. It is also 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/aFaulding Pharmaceutical Co.)  (“MaynePharma”), a subsidiary of Mayne Group Limited, for $71.7 million in cash,minus an inventory adjustment of $4.6 million (see Note 2). Exceptfor the sale of the paclitaxel business, the Company has incurred net lossessince inception and may incur additional losses for the foreseeable future. Nearlyall of Tapestry’s product sales have been from the paclitaxel business. Tapestrywas incorporated as a Washington corporation in 1991, and reincorporated as aDelaware corporation in 1993.

**Liquidity**

The Companyhas no revenue and has incurred a loss of approximately $17.5 million in2005 and has an accumulated deficit of $107.3 million as of December 28,2005. The Company’s capital requirements for research and development,including the cost of clinical trials, have been and will continue to be significant.As of December 28, 2005, the Company had cash and short-term investmentstotaling $14.1 million. These factors raise substantial doubt about theCompany’s ability to continue as a going concern. In July 2005, managementinstituted a cost reduction program that included a reduction in labor andfringe costs. As of December 28, 2005, the Company had a working capitalbalance of $11.6 million compared to a working capital balance of $23.5 millionat December 29, 2004. Through December 28, 2005, the Company hasfunded its capital requirements primarily with the net proceeds of publicofferings of common stock of approximately $21.1 million, with privateplacements of equity securities of approximately $67.5 million, with theexercise of warrants and options of $8.0 million, net debt of $3.3 million,and with the sale of the paclitaxel business resulting in gross proceeds of$71.7 million.

On February 2, 2006,the Company entered into a Purchase Agreement (referred to herein as “PurchaseAgreement”) with a number of Investors (referred to herein as “Investors”) thatprovides for the sale of common stock and warrants to purchase common stock forgross proceeds of $25.5 million not including any proceeds from exerciseof the warrant. The Purchase Agreement is expected to close in April 2006subject to stockholder approval and other customary closing conditions. In theevent that the proposed financing does not close, and without implementingfurther cost reductions, raising additional capital from other sources orobtaining substantial cash inflows from potential partners for our productcandidates, we anticipate that our existing capital resources will not enableus to continue operations for the next twelve months. Should we be unable toraise the needed capital, we may be required to discontinue, shutdown or ceaseoperations. The accompanying consolidated financial statements do not includeany adjustments that might be necessary if the Company is unable to continue asa going concern.

F-10

----

**Reverse Stock Split**

The Company implemented a 1-for-10reverse stock split of its common stock effective for trading on February 6,2006. All share and per share amounts for all periods presented have beenrestated to reflect this reverse stock split. See “Note 16 Subsequent Events”for further information on the reverse stock split.

**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 oneyear. Investments with maturities beyond one year may be classified asshort-term based on their highly liquid nature and because such investmentsrepresent the investment of cash that is available for current operations. TheCompany’s investments are classified as available-for-sale, and are reported atfair value on the balance sheet date. Interest income is recognized when earned.The unrealized gains and losses are reported as a component of accumulatedother comprehensive loss. The Company’s investment 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.

**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 the carryingvalue exceeds the fair value of the asset. See Note 4 and 12.

**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.

F-11

----

**Intangible Assets**

Intangible assets consist solely of acquiredintellectual property and are amortized using the straight-line method overtheir estimated period of benefit, ranging from five to fifteen years. TheCompany annually evaluates the recoverability of intangible assets and takesinto account events or circumstances that warrant revised estimates of usefullives or that indicate that an impairment exists.

At December 28, 2005and December 29, 2004, the Company had no intangible assets with net bookvalue. At December 31, 2003 intangible assets had a net book value of $1.3 millionnet of accumulated amortization of $122,000. Amortization expense was $0,$93,000, and $122,000 for the years ended December 28, 2005, December 29,2004, and December 31, 2003, respectively. In connection with thepreparation of its financial statements for 2004, the Company determined thatits intangible assets relating to acquired patents used in the Genomicsdivision were impaired and recorded an impairment loss of $1.1 million. SeeNote 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 25, compensation expense is recorded over thevesting period only if the fair value of the underlying stock on the issue dateexceeds the exercise price on the issue date. Equity instruments granted tonon-employees are accounted for under the fair value method, in accordance withSFAS 123 and related interpretations.

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 2005, 2004, and 2003,respectively: risk-free interest rate ranges of 3.58% to 4.27%, 2.51% to3.81%, and 1.98% to 3.35%; no expected dividend; volatility factor of 1.132 to1.233, 1.028 to 1.270, and 1.187 to 1.228, and generally an estimated expectedlife range of three to six years.

Forpurposes of pro forma disclosures, the Company amortizes to expense theestimated fair value of the options over the options’ vesting period. Tapestry’spro forma information is as follows (in thousands, except per share amounts):

| ** **                                                                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income (loss)  as reported                                                                                                  |       | $        | (17,538    | )        | $          | (24,174  | )          | $ | 38,128 |   |
| Add: Compensation  expense in net income (loss)                                                                                 |       | 50       |       | 141      |       | 77       |       |
| Deduct: Total  stock based employee compensation expense determined under fair value based method  for all awards, net of taxes |       | (2,954   | )          | (3,947   | )          | (3,957   | )          |
| Pro forma net  income (loss)                                                                                                    |       | $        | (20,442    | )        | $          | (27,980  | )          | $ | 34,248 |   |
| Basic and diluted  income (loss) per share—as reported                                                                     |       | $        | (5.15      | )        | $          | (7.38    | )          | $ | 12.38 |   |
| Pro forma basic and  diluted income (loss) per share                                                                            |       | $        | (6.00      | )        | $          | (8.55    | )          | $ | 11.12 |   |

 

Tapestry accounts foroptions issued to consultants using the provisions of SFAS 123. Expenserecognized in 2005, 2004, and 2003 was $50,000, $141,000, and $77,000,respectively.

F-12

----

**Revenue Recognition**

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

**Domesticand Foreign Sales, Operations and Significant Customers**

All sales related todiscontinued operations, see Note 2.

**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**

Basic earnings per share is measured as the income orloss available to common stockholders divided by the weighted averageoutstanding common shares for the period. Diluted earnings per share is similarto basic earnings per share but presents the dilutive effect on a per sharebasis of potential common shares (e.g. stock options, warrants and convertiblesecurities) as if they had been converted at the beginning of the periodspresented. Potential common shares that have an antidilutive effect areexcluded from diluted earnings per share. Net loss per common share is computedusing the weighted average number of shares of common stock outstanding. Potentialcommon shares from stock options, warrants and convertible securities have beenexcluded from the computation of diluted earnings per share due to net lossesfrom continuing operations in 2005, 2004, and 2003 as their effect isantidilutive.

Securities that couldpotentially dilute basic earnings per share that were not included in thecomputation of diluted earnings per share because to do so would beantidilutive, amounted to 724,802, 831,696, and 736,361 shares at December 28,2005, December 29, 2004, and December 31, 2003, 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 2005 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 28,** | ** ** | **December 29,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2003**              | ** ** |
| Net income  (loss), as reported                          |       |                  | $          | (17,538               | )          |                  |       | $ | (24,174 | ) |   |   | $ | 38,128 |   |   |
| Unrealized gain  (loss) on available-for-sale securities |       |                  | 179        |                  |       |                  | (101       | ) |   |   | — |   |   |
| Reclassification  adjustment for losses incl in net loss |       |                  | (120       | )                     |       |                  | —     |   |   |   | — |   |   |
| Comprehensive net income  (loss)                         |       |                  | $          | (17,479               | )          |                  |       | $ | (24,275 | ) |   |   | $ | 38,128 |   |   |

 

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**Estimates and Assumptions**

The preparation of theCompany’s consolidated financial statements in conformity with accountingprinciples generally accepted in the United States requires the Company’smanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenue andexpenses during the reporting period. Significant estimates are used whendetermining useful lives for depreciation and amortization, assessing the needfor impairment charges, accounting for income taxes, and various others items. TheCompany evaluates these estimates and judgments on an ongoing basis and basesits estimates on historical experience, current conditions and various otherassumptions that are believed to be reasonable under the circumstances. Theresults of these estimates form the basis for making judgments about thecarrying values of assets and liabilities as well as identifying and assessingthe accounting treatment with respect to commitments and contingencies. Actualresults may differ from these estimates under different assumptions orconditions.

**Recent Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) reissued Statement of Financial Accounting Standard (“SFAS”)No. 123, *Accounting for Stock-Based Compensation*as SFAS No. 123(R), *Share Based Compensation*.This statement replaces SFAS No. 123, amends SFAS No. 95, *Statement of Cash Flows*, and supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, *Accountingfor Stock Issued to Employees*. SFAS No. 123(R) requirescompanies to apply a fair-value based measurement method in accounting forshare-based payment transactions with employees and to record compensationexpense for all share-based awards granted, and to awards modified, repurchasedor cancelled after the required effective date. Compensation expense foroutstanding awards for which the requisite service had not been rendered as ofthe effective date will be recognized over the remaining service period usingthe compensation cost calculated for pro forma disclosure purposes under SFAS No. 123,adjusted for expected forfeitures. Additionally, SFAS No. 123(R) willrequire entities to record compensation expense for employee stock purchaseplans that may not have previously been considered compensatory under theexisting rules. SFAS No. 123(R) will be effective for the firstinterim or annual period beginning after December 15, 2005, therefore, theCompany will be adopting SFAS No. 123(R) commencing with the quarterended Mach 29, 2006. The Company will be adopting the provisions of SFAS No. 123(R) usinga modified prospective application. If we had included the cost of employee stock optioncompensation in our financial statements, our net loss for the fiscal yearsended December 28, 2005 and December 29, 2004 would have increased by$2,954,000 and $3,947,000, respectively, and our net income would havedecreased by $3,957,000 for the fiscal year ended December 31, 2003. Accordingly,the adoption of SFAS 123(R) is expected to have a material effect on ourfinancial statements.

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

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**Reclassifications**

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

**Note2. Discontinued Operations**

*Closure of theGenomics Division*

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

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

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.

Assetsheld for sale, at December 28, 2005 and December 29, 2004, whichrelate to the discontinued operations of the Genomics business were as follows(in thousands):

| ** **                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Property, plant  and equipment, net |       |     | $          | —   |       |   | $ | 112 |   |
| Other assets                        |       |     | —     |     |       | — |   |
| Assets held for sale,  net          |       |     | $          | —   |       |   | $ | 112 |   |

 

Net losses related to theGenomics division that are included in discontinued operations totaled$358,000, $5.7 million and $6.6 million in 2005, 2004 and 2003,respectively. No material revenue was previously recognized in this division.

*Sale of PaclitaxelBusiness*

On December 12, 2003, the Company sold itsworldwide generic injectable paclitaxel business to Mayne Pharma (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 $4.6 millionto reflect the Company’s actual inventory as of the closing. The sale resultedin a gain of $54.6 million before taxes (net of a $183,000 tax provisionrelating to utilization of net operating losses created by stock optionexercises), and $54.1 million after taxes. Approximately $21.9 millionof the proceeds of the purchase price was paid to Abbott Laboratories to retireall outstanding debt, interest and payables the Company owed to Abbott. Theassets sold to Mayne Pharma included paclitaxel manufacturing assets, yewplantations, domestic and international issued and pending paclitaxel patents,a worldwide registration dossier, worldwide development and supply agreements,inventories and settlement of accounts receivable. The Company retained all ofits intellectual property not used in connection with the business sold. Thistransaction with Mayne Pharma provided that the Company was entitled to aportion of the cash proceeds received in connection with a patent infringementlawsuit against Mylan Laboratories, Inc. This lawsuit was settled in July 2004and the Company received $3.0 million as its share of the proceeds.

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Thepaclitaxel business has been reported as a discontinued operation and resultsfrom prior years have been reclassified to reflect this. Summary results of thepaclitaxel business’s operations were (in thousands):

| ** **    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------|------------|----------|------------|----------|------------|----------|------------|
| Product sales |       |     | $          | —   |       |     | $          | — |   | $ | 25,532 |   |
| Net income    |       |     | $          | —   |       |     | $          | 3,088 |   | $ | 6,442 |   |

 

Paclitaxel income in 2004 consisted of the $3.0 millionpatent infringement settlement with Mylan Laboratories and a $250,000 businessinterruption insurance claim filed and collected in 2004 for losses sustainedin the third quarter of 2003 from a hurricane that disrupted operations of acontract manufacturer employed by Tapestry, offset by taxes owed in connectionwith the operation of the Company’s yew plantations.

In connection with thesale of the paclitaxel business in 2003, Tapestry’s Board of Directors granteda total of 125,000 stock options to officers of the Company and certainconsultants under the 1994 Stock Option Plan at an exercise price of $15.50 pershare. Consultants received a total of 9,000 of these stock options. Theoptions vest no later than September 2, 2008. The options may vest earlierif the Company’s closing stock price, on a rolling 20-day average,exceeds $15.50. If the rolling 20-day average closing stock price exceeds$15.50 by 30%, then 16.67% of the options vest. Likewise, if the 20-dayrolling average closing stock price exceeds $15.50 by 60%, 90%, 120% and 200%,then in each case an additional 16.67% of the options vest. The Companyaccounted for this transaction in accordance with APB 25 for employees and inaccordance with SFAS 123 for consultants (see Note 8).

*Mayne PharmaAgreement*

In 1992, the Companyentered into a 20-year exclusive agreement with F.H. Faulding &Co., Ltd. (“Faulding”), a large Australian pharmaceutical company for theclinical development, sale, marketing and distribution of paclitaxel. In October 2001,Faulding was acquired by Mayne Nickless Limited, an Australian based healthcare provider and logistics operator. In a separate agreement for Europe, datedMarch 2001, the Company was responsible for regulatory filings andsupplied paclitaxel exclusively to Mayne Pharma to formulate and finish theproduct. The Company shared equally the net sales of the product in Europe. Underthe agreement, Mayne Pharma paid an up-front licensing fee to Tapestry of $7.5 million.The Company deferred the $7.5 million, $5.5 million of which wasbeing amortized 80% over the first five years to license fee income and theremaining 20% over the remaining seven years of the license. The remainingdeferred balance of $5.1 million at December 12, 2003 was recognizedas part of the gain from the sale of the paclitaxel business described 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). With the saleof the paclitaxel business in 2003, land was classified as other assets. SeeNote 4.

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Propertyand equipment consists of the following (in thousands):

| ** **                                      | ** ** | **December 28,  2005** | ** ** | **December 29,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Furniture,  fixtures and office equipment       |       |                        | $          | 545                         |       |   |   | $ | 678 |   |   |
| Laboratory  equipment                           |       |                        | 652        |                        |       |   | 589 |   |   |
| Leasehold  improvements                         |       |                        | 56         |                        |       |   | 38 |   |   |
| Construction in  progress                       |       |                        | 21         |                        |       |   | 22 |   |   |
|                                            |       |                        | 1,274      |                        |       |   | 1,327 |   |   |
| Less accumulated  depreciation and amortization |       |                        | (666       | )                           |       |   | (651 | ) |   |
| Property, plant and  equipment, net             |       |                        | $          | 608                         |       |   |   | $ | 676 |   |   |

 

**Note 4. Other Assets**

Deposits as of December 28, 2005 and December 29,2004 primarily consist of rent deposits for our three facilities. In 2005, aportion of our deposit at our New York office was returned per the terms of ourlease. Land, valued at $718,000, had previously been purchased and held forexpansion of the Company’s paclitaxel manufacturing facilities. In accordancewith Statement of Financial Accounting Standards No. 144 (“SFAS 144”), *Accounting for the Impairment of Long-Lived Assets*, theCompany recognized an impairment charge on the carrying value of its land of$104,000 to revalue it to an estimated fair market value of $614,000.

Otherassets consist of the following (in thousands):

| ** **       | ** ** | **December 28,  2005** | ** ** | **December 29,  2004** | ** ** |
|------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Deposits         |       |                        | $          | 69                          |       |   |   | $ | 106 |   |   |
| Notes receivable |       |                        | —     |                        |       |   | 7 |   |   |
| Land             |       |                        | 614        |                        |       |   | 718 |   |   |
| Other assets     |       |                        | $          | 683                         |       |   |   | $ | 831 |   |   |

 

**Note 5. Notes Payable**

Notespayable as of December 28, 2005 and December 29, 2004 consists of thenote agreement resulting from the February 18, 2005 settlement oflitigation with TL Ventures (see Note 6). Current and long-term portions ofnotes payable, excluding the discount on the TL Ventures note and debt issuancecosts, are as follows (in thousands):

| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Notes payable                |       | $        | 4,120      |     | $          | 7,763 |   |
| Less current  portion        |       | (1,320   | )          | (3,636   | )          |
| Notes payable—long term |       | $        | 2,800      |     | $          | 4,127 |   |

 

Theunamortized discount and debt issuance costs on the TL Ventures note were$797,000 and $0 at December 28, 2005 and $1,295,000 and $91,000 at December 29,2004. The discount reduces the current portion of the note by $480,000 and thelong-term portion by $317,000. Notes payable have the following minimum futurepayments (in thousands):

| 2006  |   | $     | 1,320  |   |
|-------|--------|-------|--------|--------|
| 2007  |   | 1,800 |   |
| 2008  |   | 1,000 |   |
| Total |   | $     | 4,120  |   |

 

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**Note 6. Convertible Debentures**

In February 2002, the Company sold privately $8.0 millionprincipal of five-year, 4% debentures convertible into common stock at $150 pershare to TL Ventures V, L.P. and one of its affiliated funds. The net proceedswere $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 to beamortized over the term of the debentures. The Company filed a registrationstatement with the Securities and Exchange Commission to register the resale ofthe common stock issuable upon conversion of the debentures and common stockissuable in lieu of cash interest on the debentures. The Company could pay thedebenture interest in cash or common stock at its option. In 2002, the Companypaid the interest in stock. In 2003, the Company paid the interest in cash, andin 2004 made payments 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 $8.0 millionof Company 4% convertible subordinated debentures redeemed. The Companydisputed this position. On September 8, 2003, TL Ventures Funds reassertedits position and informed the Company that, if it could not resolve this issuepromptly, it intended to pursue legal remedies. On September 11, 2003,Tapestry filed a complaint in a case captioned *NaProBioTherapeutics, Inc. v. TL Ventures V L.P. and TL Ventures V InterfundL.P.,*Case No. 2003-CV-1812, District Court,Boulder County, Colorado. In Tapestry’s complaint, the Company 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 Ventures V 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, the Company entered into anagreement with TL Ventures providing for a complete settlement of thelitigation, a mutual release of claims and the payment of approximately$3,184,000 in cash and the issuance by the Company of promissory notes in an aggregateamount of $4,670,000 in exchange for delivery of the debentures to the Companyfor cancellation. The notes do not bear interest, are not convertible and arepayable in monthly installments $110,000 in 2006 and $150,000 in 2007, with afinal payment of $1,000,000 due on January 31, 2008. Accrued interest ofapproximately $134,000 was included in the cash payment made with the closing. TheCompany recorded a discount on the note attributable to the fair value ofinterest in the amount of $1,295,000 and the discount was allocated between thecurrent and long-term portions of the note. An interest rate of 18.0% was usedto impute the discount. The Company recorded the obligation resulting from thesettlement on its balance sheet as of December 29, 2004 (see Note 5). Nogain or loss was recognized in connection with the settlement.

**Note 7. Stockholders’ Equity**

**Stockholder Rights Plan**

In November 1996, the Company adopted aStockholder Rights Plan and distributed a dividend of one right to purchase oneone-hundredth of a share of a new series of junior participatingpreferred stock, Series B, for each share of common stock. The StockholderRights Plan was amended and restated in September 2001. The objective ofthe Stockholder Rights Plan is to secure for stockholders the long term valueof their investment and to protect stockholders from coercive takeover attemptsby strongly encouraging anyone seeking to acquire the Company to negotiate withits Board of Directors. The adoption of the Stockholder Rights Plan was not inresponse to any hostile takeover proposal.

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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, a numberof shares of common stock having market value of twice the Right’s exerciseprice or a number of the acquiring company’s common shares having a marketvalue at the time of twice the Rights’ exercise price. For example, in theevent of an acquisition of greater than 20% of the Company’s stock withoutapproval of its Board of Directors, the Company’s stockholders (other than the20% acquirer) would have the right to purchase $120 worth of stock for $60. Astockholder would have one such right for each share of stock held at the timethe 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. TheRights will expire on November 8, 2006.

**Private Placements**

In February 2002, the Company sold privately$8.0 million of common stock issued at $90 per share to TL Ventures V,L.P. and one of its affiliated funds. The net proceeds were $7.8 million.See Note 6 for information concerning the convertible debentures that wereacquired by TL Ventures at the same time as this placement transaction closed.

On March 26, 2004, the Company sold 200,000shares of common stock at $26.00 per share to two investors. Advisory fees andlegal fees were paid in connection with the transaction. The net proceeds fromthe transaction were $4.9 million.

During 2005, 2004 and2003, the Company issued 10,000 shares per year in connection with a 20-yeargene editing technology license. The shares were valued at $3.00 per share,$9.10 per share and $18.80 per share, respectively, which were the closingmarket prices on the dates of the issuance. In December 2005, the Companyterminated this technology license agreement. The license requires the Companyto provide for research and patent funding commitments and payments in commonstock. See “Note 13, Technology License,” for additional information.

**Nasdaq Delisting Notice**

Our common stock is listedon the Nasdaq Capital Market. In order to maintain that listing, we mustsatisfy minimum financial and other requirements. On February 25, 2005, wereceived notice from the Nasdaq Stock Market, Inc. that the minimum bidprice of our common stock had fallen below $1.00 per share for 30 consecutivebusiness days and that our common stock was, therefore, subject to delistingfrom the Nasdaq Capital Market. At August 24, 2005, since we did meet theNasdaq Capital Market initial listing criteria (other than the minimum bidprice requirement), we received a second and final grace period from Nasdaqending February 21, 2006. We implemented a one-for-ten reverse split ofour common stock effective for trading on February 6, 2006, complied withthe minimum bid price requirement for a minimum of 10 consecutive business daysprior to February 21, 2006, and as of February 21, 2006, the lastsale price of our common stock on the Nasdaq Capital Market was $3.11 pershare.

**Restricted Stock**

In September 2005,the Company initiated a retention incentive program for non-executive employeesthat consisted of a grant of approximately 42,075 shares of restricted stock ofthe Company’s common stock under its equity incentive plans to vest at futuredates, as well as a cash component related to the individual tax effects of theprogram. The stock component of the program includes 19,842 shares to vest onSeptember 6, 2006 and 22,223 additional shares to vest onSeptember 6, 2007, contingent upon 

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participantsbeing employed by the Company on those dates. The total value of the commonstock component of the program is $151,000 based on the value of the underlyingcommon stock at the date of grant. During 2005, $37,000 of expense related tothe program was recognized. The remaining expense associated with the programwill be recognized over the vesting period, through September 2007.

**Stock Options**

As of December 28,2005, the Company had reserved 1,113,723 shares of common stock for issuance ofcommon stock options; 724,802 of which are associated with issued andoutstanding options. The remaining 216,397 are available to be issued.

**Note8. Common Stock Options and Warrants**

Thefollowing summarizes warrant activity:

| ** **                                                                                | ** ** | **Warrants** | ** ** | **Exercise  Price** | ** ** | **Expiration  Dates**   | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------|------------|---------------------|------------|-------------------------|------------|
| Outstanding at  December 31, 2002                                                    |       |         | 11,100     |                |       | 18.80 - 87.50 |       |   | 2003 |   |   |
| Expirations                                                                               |       |         | (11,100    | )                   |       | 18.80 - 87.50 |       |   | 2003 |   |   |
| Outstanding at  December 31, 2003, December 29, 2004 and December 28, 2005 |       |         | —     |                |       | $                       | —     |   |   |   |   |   |
|                                                                                           |            |              |            |                     |            |                         |            |  |  |  |  |  |

 

**Non-plan Stock Options**

In January 1994, theCompany granted to four outside directors options to purchase 2,700 shares ofcommon stock that were immediately exercisable and expired inJanuary 2004. In September 1997, the Company granted to its employeesoptions to purchase 2,007, shares of common stock, which vested over a two yearperiod and that expire in September 2007. As of December 28, 2005,options to purchase 50 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 14,666 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 66 or more shares was eight years, and the term of options forfewer than 66 shares was five years. Options for 66 shares or more vest 25%after each anniversary date of the grant, and options for fewer than 66 shares vest50% after each anniversary date of the grant. The exercise price for stockoptions issued under the Plan was equal to the fair market value of theCompany’s common 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 37,500 shares for issuance. Stockholders subsequently approvedincreases in the number of authorized shares. There are currently 660,000shares authorized for issuance under the 1994 Plan. The 1994 Plan provides forgranting to employees and other key individuals who perform services for theCompany the following types of incentive awards: stock options, stock appreciationrights, restricted stock, performance grants and other types of awards that theCompensation Committee deems to be consistent with the purposes of the 1994Plan. In April 2004, in accordance with the terms of the 1994 Plan, theCompany’s Board of Directors 

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extendedthe termination date of the 1994 Plan for an additional five years throughJuly 2009 for the purpose of granting awards thereunder, other thanincentive stock options, and suspended provisions relating to the granting ofoptions to non-employee directors.

**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, restrictedstock, performance grants, or any other type of award deemed by the Board ofDirectors or its designated committee to employees and other individuals whoperform services for the Company. The 1998 Plan provides for option grantsdesignated as nonqualified stock options or incentive stock options.Originally, 12,500 shares were authorized for issuance under the 1998 Plan. TheBoard of Directors approved increases in the number of authorized shares inamendments to the 1998 Plan made through 2002. There are currently 192,500shares authorized for issuance under the 1998 Plan. Under the terms of the 1998Plan, stock options cannot be granted to persons who are Tapestry officerssubject to Section 16 of the Securities Exchange Act of 1934, as amended,(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 200,000 shares forissuance thereunder. The 2004 Equity Incentive Plan was amended effectiveJune 2005 to increase the number of shares to 400,000. Under the terms ofthe 2004 EIP Plan, stock options cannot be granted to Tapestry non-employeedirectors. Options granted under the 2004 EIP Plan are subject to vesting, andexpire ten years from the date of grant. Vesting is determined at the time ofthe grant, which is typically four years. The exercise price for stock optionsissued under the 2004 EIP Plan is equal to the fair market value of theCompany’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 authorizes40,000 shares of common stock for issuance. Options granted automatically underthe 2004 Directors’ Plan vest after the first anniversary date of the grant,and expire ten years from the date of grant. Options may also be granted underthe 2004 Director’s Plan at the discretion of the Board on such terms as theBoard determines, subject to limitations of the 2004 Director’s Plan. Theexercise price for stock options issued under the 2004 Directors’ Plan is equalto the fair market value of the Company’s common stock on the date of grant. Eachperson who is not an employee and (i) who is elected or re-elected as adirector by the stockholders at any annual meeting of stockholders, (ii) whocontinues as a director following an annual meeting of stockholders at whichsuch director is not subject to re-election or (iii) is appointed as adirector in accordance with Company bylaws following an 

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annual meeting, upon suchelection or appointment, will receive, as of the business day following thedate of each such election or appointment, a non-qualified option to purchase1,000 shares of common stock. The 2004 Directors’ Plan also provides for annualautomatic grants of options to purchase 1,000 shares to the chairs of the Boardof Directors’ Audit, Compensation, Nominating and Corporate Governance, andResearch and Development committees. The 2004 Directors’ Plan provides for anautomatic grant of non-qualified stock options to purchase 750 shares of commonstock to members of the Research and Development committee upon their initialappointment to the committee, and an automatic grant of non-qualified stockoptions to purchase 300 shares of common stock to a Research and Developmentcommittee member who continues to serve on the committee after an annualmeeting of stockholders. Non-employee directors may also be granted options topurchase shares of common stock at the discretion of the Board of Directors. Allsuch 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.

Thefollowing summarizes stock option activity and balances:

| ** **             | ** ** | **Non-Plan** | ** ** | **1993 Plan** | ** ** | **1994 Plan** | ** ** | **1998 Plan** | ** ** | **2004  EIP Plan** | ** ** | **2004  Directors’  Plan** | ** ** | **Total** | ** ** |
|------------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|
| Authorized             |       |         | 21,223     |               |       |               | 14,666     |               |       |                    | 660,000    |                            |       |      | 192,500    |   |   | 200,000 |   |   | 40,000 |   |   | 1,113,723 |   |
| Less:                  |       |         |       |               |       |               |       |               |       |                    |       |                            |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Exercised              |       |         | 19,508     |               |       |               | 13,323     |               |       |                    | 43,962     |                            |       |      | 18,354     |   |   | — |   |   | — |   |   | 81,825 |   |
| Expired                |       |         | 1,625      |               |       |               | 1,343      |               |       |                    | 2,202      |                            |       |      | —     |   |   | — |   |   | — |   |   | 3,825 |   |
| Stock grants           |       |         | 40         |               |       |               | —     |               |       |                    | 17,495     |                            |       |      | 41,739     |   |   | 16,250 |   |   | 11,350 |   |   | 86,874 |   |
| Issued and unexercised |       |         | 50         |               |       |               | —     |               |       |                    | 517,541    |                            |       |      | 92,562     |   |   | 99,300 |   |   | 15,350 |   |   | 724,802 |   |
| Available to be issued |       |         | —     |               |       |               | —     |               |       |                    | 78,800     |                            |       |      | 39,845     |   |   | 84,450 |   |   | 13,300 |   |   | 216,397 |   |

 

| ** **                             | ** ** | **Stock  Options** | ** ** | **Exercise  Price**                  | ** **     | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------------------------------|----------------|----------------------------------------|------------|
| Outstanding at  December 31, 2002 |       | 553,746            |       | $                                    | 7.20 - $121.00 |                                   |       | 51.70 |   |   |
| Granted                                |       | 165,100            |       | 3.10 -     21.50 |           |                                   | 15.00      |   |   |
| Forfeited                              |       | (19,959            | )          | 10.00 -   121.00           |           |                                   | 53.30      |   |   |
| Exercised                              |       | (442               | )          | 10.00                                |           |                                   | 10.00      |   |   |
| Outstanding at  December 31, 2003 |       | 698,445            |       | 3.10 -   117.50            |           |                                   | 42.60      |   |   |
| Granted                                |       | 166,305            |       | 9.30 -     28.00 |           |                                   | 13.10      |   |   |
| Forfeited                              |       | (33,172            | )          | 3.60 -     92.50 |           |                                   | 31.40      |   |   |
| Exercised                              |       | (3,868             | )          | 4.80 -     20.00 |           |                                   | 9.30       |   |   |
| Outstanding at  December 29, 2004 |       | 827,710            |       | 3.10 -   117.50            |           |                                   | 37.30      |   |   |
| Granted                                |       | 47,060             |       | 2.90 -     12.20 |           |                                   | 6.30       |   |   |
| Forfeited                              |       | (144,534           | )          | 3.20 -   117.50            |           |                                   | 31.50      |   |   |
| Exercised                              |       | (5,434             | )          | 3.20 -     10.00 |           |                                   | 5.90       |   |   |
| Outstanding at  December 28, 2005 |       | 724,802            |       | $                                    | 2.90 - $112.50 |                                   |       | $ | 36.70 |   |   |
|                                        |            |                    |            |                                      |                |                                        |            |  |  |  |  |

 

F-22

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Theweighted-average fair value of options granted during 2005, 2004, and2003 was $5.30, $10.50, and $13.00, 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** | ** ** |
| $  2.90  - $  15.40 |       |                         | 175,969    |                         |       |   | 7.41 |   |   |   | $ | 9.30 |   |   |   | 73,630 |   |   |   | $ | 9.60 |   |   |
| $15.50 - $  19.50             |       |                         | 169,969    |                         |       |   | 5.76 |   |   |   | $ | 16.50 |   |   |   | 107,925 |   |   |   | $ | 17.00 |   |   |
| $19.80 - $  30.90             |       |                         | 133,672    |                         |       |   | 4.65 |   |   |   | $ | 23.90 |   |   |   | 118,246 |   |   |   | $ | 24.00 |   |   |
| $32.50 - $  65.00             |       |                         | 40,627     |                         |       |   | 5.21 |   |   |   | $ | 55.10 |   |   |   | 39,252 |   |   |   | $ | 55.30 |   |   |
| $66.10 - $  78.80             |       |                         | 114,454    |                         |       |   | 5.03 |   |   |   | $ | 71.30 |   |   |   | 74,457 |   |   |   | $ | 74.10 |   |   |
| $80.00 - $117.50                        |       |                         | 90,111     |                         |       |   | 5.46 |   |   |   | $ | 95.10 |   |   |   | 25,024 |   |   |   | $ | 94.10 |   |   |
| $  2.90 -  $117.50            |       |                         | 724,802    |                         |       |   | 5.77 |   |   |   | $ | 36.70 |   |   |   | 438,534 |   |   |   | $ | 35.20 |   |   |
|                                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 9. Retirement Plans**

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 2005, 2004 or 2003. 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 that is allocatedto all eligible employees based on their allowable pay. These contributionsvest 25% each year starting with the employees second year of employment. For2005, 2004 and 2003 the Company contributed 75,000, 33,564 and 75,000, sharesto the ESOP and recorded compensation expense of $420,000, $791,000 and$435,000, respectively. The Company’s 2004 contribution included 5,431 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.

F-23

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**Note 10. Income Taxes**

As of December 28,2005, 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                                |       | 21,075        |       |                  | 910        |   |   |
| 2025                                |       | 16,018        |       |                  | 426        |   |   |
|                                |       | $             | 100,757    |                  |       | $ | 3,863 |   |   |
|                                     |            |               |            |                       |            |  |  |  |  |  |  |

 

The Tax Reform Act of 1986 contains provisions thatlimit the utilization of net operating loss and tax credit carryforwards ifthere has been a “change of ownership” as described in Section 382 of theInternal Revenue Code. Such a change of ownership may limit the utilization ofthe Company’s net operating loss and tax credit carryforwards, and may betriggered by the sales of securities by Tapestry. The Company has had a studyprepared analyzing the losses through December 31, 2003 and it isManagement’s belief that there will be no limitation on the use of our netoperating losses or research and development credits due to the potentiallimitations under Section 382 through that period; however, under theterms of the proposed financing described in “Note 16 Subsequent Events,” it is likely that a limiton the utilization of the Company’s net operating loss and tax creditcarryforwards would be triggered upon the completion of the proposed financing.

Of the $100,757,448 of net operating losses listedabove, $3,535,000 resulted from the exercise of stock options and, as a result,the tax effect of utilizing that portion of the net operating losses would becredited directly to stockholder’s equity.

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

| ** **                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                        |       |     |       |     |       |
| Tax net operating  loss carryforward         |       | $        | 37,784     |     | $          | 32,278 |   |
| Research and  development credits            |       | 3,863    |       | 2,559    |       |
| Depreciation                                 |       | 29       |       | (63      | )          |
| Alternative  minimum tax credit carryforward |       | 467      |       | 467      |       |
| Other                                        |       | 935      |       | 116      |       |
| Total deferred tax assets                    |       | 43,078   |       | 35,357   |       |
| Valuation  allowance                         |       | (43,078  | )          | (35,357  | )          |
| Net deferred tax  assets                     |       | $        | —     |     | $          | — |   |

 

F-24

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Variationsfrom the federal statutory rate are as follows:

| ** **                                           | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory  income tax rate                   |       | 35.00    | %          | 35.00    | %          | 35.00    | %          |
| Effect of  permanent differences                     |       | (1.98    | )          | 0.03     |       | 0.06     |       |
| State income tax  rate net of federal benefit        |       | 3.25     |       | 3.08     |       | 3.07     |       |
| Effect of foreign  operations                        |       | (1.47    | )          | (2.58    | )          | (3.58    | )          |
| Valuation  allowance                                 |       | (34.95   | )          | (35.55   | )          | (34.55   | )          |
| Effective income tax  rate for continuing operations |       | (0.15    | )%         | (0.02    | )%         | 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.These charges consist of costs that were incurred to exit an activity or cancelan existing 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 DisposalActivities.”  This statement addressessignificant issues regarding the recognition, measurement and reporting ofcosts that are associated with exit and disposal activities, includingrestructuring activities that were previously accounted for pursuant to theguidance 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 waseffective for exit or disposal activities that were initiated afterDecember 31, 2002. The adoption of SFAS 146 did not have a material effecton the Company’s financial position or results of operations.

Associatedwith the restructuring of the Company’s operations, the Companyrecognized charges during 2003, 2004 and 2005 as follows:

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 of11 employees in manufacturing, 4 employees in research and development and5 employees in general and 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.

Facility closing costs in 2003 were associated withterminating a lease for one of the Company’s corporate facilities in Boulder,Colorado and consisted of a lease termination fee, accelerated depreciation ofleasehold 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 toChromaDex, Inc., as discussed in Note 12, was also part of the Company’srestructuring.

During the third quarter of 2005, the Company incurredseverance costs of $299,000 associated with the elimination of 2 general andadministrative executives, 5 other general and administrative employees and 15 researchand development positions (including one consultant).

F-25

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Thefollowing table summarizes the components of the restructuring charges, thepayments and non-cash charges, and the remaining accrual as of December 28,2005, December 29, 2004 and December 31, 2003 (in thousands):

| ** **                                          | ** ** | **Employee  Severance and  Termination  Costs** | ** ** | **Facility  Closure  Costs** | ** ** | **Total  Restructuring  Charges** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| 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 |   |   |
| Total  restructuring charges December 28, 2005 |       |                                                 | 299        |                         |       | —                            |       |   | 299 |   |   |
| Payments in 2005                                    |       |                                                 | (468       | )                            |       | (203                              | )          |   | (671 | ) |   |
| Accrual balance  December 28, 2005             |       |                                                 | $          | 37                           |       |                              | $          | — |   |   | $ | 37 |   |   |

 

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

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

The Company accounts forits investment in ChromaDex under the cost method for equity investments. Accordingly,the Company performs periodic valuation analyses on the carrying value of thisinvestment. In the quarter ended September 29, 2005, the Companyrecognized an impairment charge related to this asset of $963,000, therebyrevaluing it from $1.4 million to $451,000. This charge was based on newfinancial information made available by ChromaDex at that time. The Company hasperformed a subsequent valuation analysis for the quarter ended December 28,2005 and believes that the current valuation of $451,000 is fair value.

**Note 13. Technology License**

In December of 2005,we terminated our technology license agreement 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 provided for research andpatent funding commitments and payments in common stock. As of December 28,2005, the Company has issued 45,750 shares of common stock under the license tothe 

F-26

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Universityof Delaware, 7,125 shares to Thomas Jefferson University and 7,125 shares toThe Samuel Roberts Noble Foundation, Inc., each of which had an ownershipinterest in the licensed intellectual property.

**Note14. Commitments and Contingencies**

**Operating Leases**

TheCompany has executed noncancellable operating lease agreements for office,research and production facilities, and equipment. As of December 28,2005, future minimum lease payments under noncancellable operating leaseagreements are as follows (in thousands):

| 2006  |   | $   | 303    |   |
|-------|--------|-----|--------|--------|
| 2007  |   | 141 |   |
| 2008  |   | 11  |   |
| 2009  |   | 1   |   |
| Total |   | $   | 456    |   |

 

Tapestry has renewalclauses in some of these leases that range from one to ten years. Rent expensefor the years ended December 28, 2005, December 29, 2004, and December 31,2003 was $574,000, $953,000, and $1,737,000, respectively.

**Legal Proceedings**

The Company is currentlyin arbitration through the American Arbitration Association with the licensorof certain patents and patent applications relating to pharmaceuticalformulations containing Vitamin E TPGS. The Company licensed these patent applicationsin 1998. The inventor/licensor claims that the Company has failed in itsobligation to develop the licensed technology and is demanding return of thepatents. The Company denies this claim, and in addition alleges that theinventor/licensor committed fraud in inducing the Company to enter into thelicense agreement. The Company is seeking as yet unspecified damages againstthe inventor/licensor. The Company does not believe that this arbitration willhave any material adverse effect upon the Company.

**Note 15. Related Party Transactions**

The Company paid ChromaDex (see Note 12) $313,000,$379,000 and $142,000 during 2005, 2004 and 2003, respectively, for supportservices and the Company’s share of rent, utilities, supplies and maintenancecosts in connection with its sublease of ChromaDex’s research facility. TheCompany had accounts payable balances to ChromaDex of $31,000, $23,000 and$89,000, at December 28, 2005, December 29, 2004 and December 31,2003, respectively.

One of Tapestry’s directors, Arthur H.Hayes, Jr., M.D., has provided certain consulting services to the Company.The Company had a consulting agreement with MediScience Associates (the “MediScienceAgreement”) whereby Dr. Hayes, who is President and Chief OperatingOfficer of MediScience, provided us with consulting services in a variety ofareas, including clinical research planning, strategic positioning andregulatory guidance. The Company terminated this consulting agreement duringthe second quarter of 2005. Dr. Hayes was paid $25,000 and $50,000 underthis agreement during 2005 and 2004, respectively.

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**Note 16. Subsequent Events**

**Reverse Split**

On February 3, 2006, the Company filed anamendment to its Restated Certificate of Incorporation effecting a one for tenreverse stock split of all issued and outstanding shares of the Company’scommon stock (the “Reverse Split”), effective as of 5:01 p.m. Eastern Timeon February 3, 2006 (the “Effective Time”).

The Company’s common stock began trading on the NasdaqCapital Market on a reverse split basis as of the opening of trading on February 6,2006. For a period of 20 trading days, shares of the Company’s common stockwill trade under the ticker symbol “TPPHD.” After 20 trading days, trading will resume under the ticker “TPPH.”  The Reverse Split reduced, as of theEffective Time, the Company’s total number of outstanding shares of commonstock from approximately 34,857,500 shares to approximately 3,485,750 shares,subject to adjustment for fractional shares. The Reverse Split did not changethe number of authorized shares of the Company’s common stock and fractionalshares were not issued as a result of the Reverse Split.

All share and per shareamounts for all periods presented have been restated to reflect this reversestock split.

**Financing**

On February 2, 2006, the Company entered into aPurchase Agreement with certain investors that provides for the sale of commonstock and warrants to purchase common stock to the Investors for gross proceedsto the Company of $25.5 million. Pursuant to the terms of the PurchaseAgreement, the Company will issue to the Investors, subject to the approval ofthe Company’s stockholders, (i) an aggregate of 12,750,000 shares of theCompany’s common stock at a purchase price per share equal to $2.00 (after givingeffect to the Reverse Split), and (ii) warrants to purchase an aggregateof 12,750,000 shares of the Company’s common stock (subject to adjustment inaccordance with the terms thereof) at an exercise price of $2.40 per share(subject to certain anti-dilution protections set forth therein) (the “Warrants”).The issuance of the shares of the Company’s common stock and the Warrants andthe other actions contemplated by the Purchase Agreement are collectivelyreferred to herein as the “Transaction.”

The Transaction is subject to stockholder approval andother customary closing conditions. The Purchase Agreement provides that,following the closing, one of the investors, Special Situations Fund III, L.P.(“SSF”) will have the right to designate two members for election to theCompany’s Board of Directors, so long as SSF and/or one or more of itsaffiliates continues to beneficially own at least 25% of the number of sharesof common stock and shares of common stock underlying the Warrants acquired byit under the Purchase Agreement. Upon such designation, the Company would beobligated to use its commercially reasonable efforts to cause the designateddirectors to be elected to the Company’s Board of Directors.

Pursuant to the Purchase Agreement, the Company willbe required to use the net proceeds from the Transaction solely to fund thedevelopment of the Company’s TPI 287 compound in accordance with a budget forcalendar years 2006 and 2007 to be adopted by the board of directors of theCompany prior to the closing. Any amendment or variance with respect to suchaspect of the budget will require the prior written approval of a majority ofthe independent members of the Board of Directors.

Pursuant to the Purchase Agreement, from and after theclosing, each Investor that owns at least 50% of the shares of common stockacquired by it under the Purchase Agreement would have preemptive subscriptionrights in respect of any future issuance by the Company of its equitysecurities, subject to certain exceptions. If the Company decided to issue anyequity securities not subject to such exceptions, then it would be required toprovide notice to such Investors and offer to sell a pro rata amount of such 

F-28

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securities to suchInvestors, on the same terms it proposes to sell such securities to otherparties, based on each Investor’s pro rata ownership of the Company’soutstanding common stock acquired under the Purchase Agreement or upon exerciseof the Warrant held by such Investor.

The Company will issue to the investors for noadditional consideration, warrants to purchase an aggregate of 522,815 sharesof common stock (subject to adjustment as set forth therein) (the “AlternativeWarrants”). The Alternative Warrants become exercisable only if one of theevents specified in the following clauses (i) through (iv) (each a “TriggerEvent”) occurs: (i) the stockholders of the Company fail to approve theTransaction, (ii) the Company terminates its obligations to effect theclosing pursuant to the terms of the Purchase Agreement and the Company hasreceived an alternative investment proposal prior to such time which has notbeen withdrawn, (iii) the Company enters into an agreement governing theconsummation of an alternative investment with any person other than theInvestors prior to the termination of the Purchase Agreement in accordance withthe terms of the Purchase Agreement or (iv) the stockholders’ meetingshall not have occurred prior to May 2, 2006 and the Company shall havebreached its obligations under the Purchase Agreement with respect thereto. Inthe event that a Trigger Event has not occurred prior to or in connection withthe termination of the Purchase Agreement (in whole or with respect to anyparticular Investor) or the closing shall occur, then all outstanding AlternativeWarrants held by all Investors or, in the case of a termination with respect toa particular Investor, that Investor, shall terminate and be of no furtherforce and effect. The Alternative Warrants in the aggregate will represent theright to acquire shares of common stock representing 15% of the Company’sissued and outstanding shares of common stock determined as of February 2,2006. The Alternative Warrants will be immediately exercisable following theoccurrence of a Trigger Event, have a per share exercise price equal to $0.01(subject to adjustment as set forth in such warrants) and will remainexercisable for five years following the closing.

The Warrants to be issued at the closing will beimmediately exercisable when issued, will have an exercise price per share of$2.40 and will remain exercisable for five years following the closing. One-halfof such Warrants will be exercisable on a cashless basis. The Company hasagreed to enter into a Registration Rights Agreement with the Investors atclosing, pursuant to which the Company would be required to file with theSecurities and Exchange Commission a registration statement for the resale ofthe shares of common stock and the shares of common stock underlying theWarrants within thirty days following the closing. The Company also will enterinto a substantially similar registration rights agreement with the Investorsat the time of the issuance of the Alternative Warrants requiring the Companyto file a registration statement for the resale of the shares of common stockissuable upon exercise of the Alternative Warrants.

In order to induce the Investors to enter into thePurchase Agreement, certain officers and directors of the Company have enteredinto a Lock-Up Agreement (the “Lock-Up Agreement”) pursuant to which they haveagreed, among other things, to refrain from engaging in trading activity in theCompany’s common stock until the earliest to occur of (i) the first datefollowing termination of the Purchase Agreement, (ii) 90 days after theeffective date of a registration statement filed in accordance with theRegistration Rights Agreement or (iii) with respect to any such officer ordirector, the first date following termination of such individual’s employmentby or directorship with the Company that is six months following the lastopposite-way transaction that occurred prior to such termination of employmentor directorship.

The foregoing is a summaryof the terms of the Transaction. For additional details refer to the PurchaseAgreement, the form of Registration Rights Agreement, the form of Warrant andAlternative Warrant and the Lock-Up Agreement. The Purchase Agreement, the formof Registration Rights Agreement, the form of Warrant and Alternative Warrantand the Lock-Up Agreement are included as exhibits to the Company’s periodicreports filed with the SEC.

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**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,the gene isolation and service business is included in discontinued operationsin the Consolidated Statements of Operations (see Note 2). There were nomaterial product sales during 2004.

| **Years Ended**                        | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|-----------|------------|
| ***2005***                                  |       |       |       |               |       |                |       |               |       |                |       |
| Net loss from  continuing operations        |       | $          | (4,383     | )                  | $          | (4,287              | )          | $                  | (5,498     | )                   | $          | (3,012    | )          | $ | (17,180 | ) |
| Loss from  discontinued operations          |       | (181       | )          | (127               | )          | (43                 | )          | (7                 | )          | (358                | )          |
| Net loss                                    |       | (4,564     | )          | (4,414             | )          | (5,541              | )          | (3,019             | )          | (17,538             | )          |
| Basic and diluted  net loss per share       |       | (1.36      | )          | (1.29              | )          | (1.62               | )          | (0.87              | )          | (5.15               | )          |
| ***2004***                                  |       |       |       |               |       |                |       |               |       |                |       |
| Net loss from  continuing operations        |       | $          | (3,980     | )                  | $          | (5,280              | )          | $                  | (6,957     | )                   | $          | (5,338    | )          | $ | (21,555 | ) |
| Income (loss)  from 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       |       | (1.60      | )          | (1.92              | )          | (1.43               | )          | (2.41              | )          | (7.38               | )          |

 

 

F-30

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**INDEX TO EXHIBITS**

|   3.1  |   | Second  Amended and Restated Certificate of Incorporation of the Company, as amended  February 3,2006(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   3.2  |   | Bylaws  of the Company as amended through August 25, 2003(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|   4.1  |   | Common  Stock Certificate(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
|   4.2  |   | Amended  and Restated Rights Agreement dated September 25, 2001 between the  Company and American Stock Transfer and Trust Company, as Rights Agent(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|   4.3  |   | The  Certificate of Incorporation and Bylaws of the Company are included as  Exhibits 3.1 - 3.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
|   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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
|   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(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |
| 10.1**      |   | Company’s  Amended and Restated 1994 Long-Term Performance Incentive Plan, as amended  through March 4, 2002(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10.2        |   | Company’s  Amended and Restated 1998 Stock Incentive Plan, as amended through  October 15, 2002(2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 10.3**      |   | Company’s  2004 Equity Incentive Plan as amended and restated effective June 10,  2005*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| 10.4**      |   | Company’s  2004 Non Employee Director’s Stock Option Plan(5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 10.5**      |   | Employment  Agreement effective October 1, 2001 between the Company and Leonard  Shaykin(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
| 10.6**      |   | Employment  Agreement effective October 1, 2001 between the Company and Patricia  Pilia(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10.7**      |   | Employment  Agreement effective October 1, 2001 between the Company and Gordon Link(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| 10.8**      |   | Employment  Agreement effective October 1, 2001 between the Company and Kai Larson(6)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
| 10.9**      |   | Employment  Agreement effective October 28, 2005 between the Company and Martin  Batt*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
| 10.10**     |   | Form of  waiver agreement signed by Patricia A. Pilia, Gordon Link and Kai P. Larson  on September 10, 2003 and by Leonard P. Shaykin on September 12,  2003 (together with Schedule required by Instruction 2 to Item 601 Regulation  S-K)(2)                                                                                                                                                                                                                                                                                                                                                                        |   |
| 10.11       |   | Form  of Director and Officer Indemnification Agreement signed by the Company and  each of Martin M. Batt, George Gould, Esq., Arthur Hull Hayes, Jr.,  M.D., Kai Larson, Gordon H. Link, Jr., Patricia A. Pilia,  Ph.D., The Honorable Richard N. Perle, Robert E. Pollack, Ph.D., and  Leonard P. Shaykin on the dates set forth on the Schedule previously  filed and incorporated herein by reference, which Schedule is amended to  include the Director and Officer Indemnification Agreement signed by Stephen  Carter, M.D. on March 7, 2004 and Elliot Maza on December 14, 2004(7) |   |
| 10.12**     |   | Form of  Stock Option Agreement for certain options granted under the Company’s 2004  Equity Incentive Plan(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
| 10.13**     |   | Form of  Stock Option Agreement for options granted under the Company’s 2004  Non-Employee Directors’ Stock Option Plan(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10.14       |   | 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(4)                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
| 10.15**     |   | Salaries  and Bonuses of Directors(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 10.16**     |   | Compensation  of Directors(9)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
| 21.1        |   | List  of Subsidiaries(10)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 23.1        |   | Consent  of Grant Thornton LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 23.2        |   | Consent  of Ernst & Young LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 24.1        |   | Power  of Attorney*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |
| 31.1        |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under  the Securities Exchange Act of 1934, as amended*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
| 31.2        |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under  the Securities Exchange Act of 1934, as amended*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |

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

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             *  Filed herewith

      **  A management compensation plan

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

   (1)       Incorporated herein by reference to the Company’sCurrent Report on Form 8-K dated February 6, 2006 (File No. 0-24320)

   (2)       Incorporated herein by reference to the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003(File No. 0-24320)

   (3)       Incorporated herein by reference to the RegistrationStatement on Form 8-A12G/A of the Company, filed with the Commissionon October 23, 2001 (File No. 0-24320)

   (4)       Incorporated herein by reference to the Company’sAnnual Report on Form 10-K for the year ended December 29, 2004(File No. 0-24320)

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

   (6)       Incorporated herein by reference to the Company’sAnnual Report on Form 10-K for the year ended December 31, 2001(File No. 0-24320)

   (7)       Incorporated herein by reference to the Company’sAnnual Report on Form 10-K/A for the year ended December 31,2002, filed on August 8, 2003 (File No. 0-24320)

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

   (9)       Incorporated herein by reference to theCompany’s Quarterly Report on Form 10-Q for the period ended March 30,2005 (File No. 0-24320)

(10) Incorporated herein by reference to the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2001 (File No. 0-24320)

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